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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 1-7784
CenturyTel, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 CenturyTel Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (318) 388-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act)
[X] Yes [ ] No
As of October 31, 2004, there were 134,571,043 shares of common stock
outstanding.
CenturyTel, Inc.
TABLE OF CONTENTS
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income--Three Months and Nine
Months Ended September 30, 2004 and 2003 3
Consolidated Statements of Comprehensive Income--Three
Months and Nine Months Ended September 30, 2004 and 2003 4
Consolidated Balance Sheets--September 30, 2004 and
December 31, 2003 5
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 2004 and 2003 6
Consolidated Statements of Stockholders' Equity--
Nine Months Ended September 30, 2004 and 2003 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21-22
Item 4. Controls and Procedures 23
Part II. Other Information:
Item 1. Legal Proceedings 24
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 24
Item 6. Exhibits and Reports on Form 8-K 25
Signature 25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months Nine months
ended September 30, ended September 30,
- ---------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES $ 603,879 600,264 1,801,138 1,765,007
- ---------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of services and products (exclusive of
depreciation and amortization) 191,000 190,193 562,775 552,013
Selling, general and administrative 108,153 94,561 302,426 272,900
Depreciation and amortization 113,857 124,729 371,600 376,159
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 413,010 409,483 1,236,801 1,201,072
- ---------------------------------------------------------------------------------------------------------------
OPERATING INCOME 190,869 190,781 564,337 563,935
- ---------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (52,174) (54,360) (157,806) (165,909)
Income from unconsolidated cellular entity 1,929 1,736 6,114 4,895
Other income (expense) (822) (1,076) (2,329) (1,034)
- ---------------------------------------------------------------------------------------------------------------
Total other income (expense) (51,067) (53,700) (154,021) (162,048)
- ---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 139,802 137,081 410,316 401,887
Income tax expense 53,610 46,102 157,561 139,622
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 86,192 90,979 252,755 262,265
===============================================================================================================
BASIC EARNINGS PER SHARE $ .64 .63 1.82 1.83
===============================================================================================================
DILUTED EARNINGS PER SHARE $ .63 .63 1.81 1.82
===============================================================================================================
DIVIDENDS PER COMMON SHARE $ .0575 .055 .1725 .165
===============================================================================================================
AVERAGE BASIC SHARES OUTSTANDING 134,885 143,897 138,512 143,370
===============================================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 135,737 145,171 139,324 144,481
===============================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months Nine months
ended September 30, ended September 30,
- ---------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 86,192 90,979 252,755 262,265
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Minimum pension liability adjustment,
net of ($208), $226, $1,008 and ($2,236) tax 387 (420) (1,871) 4,152
Unrealized gain (loss) on investments, net of $602
and ($341) tax (1,117) - 634 -
Derivative instruments:
Net gain (loss) on derivatives hedging the
variability of cash flows, net of $36 tax - - - (67)
Less: reclassification adjustment for losses
included in net income, net of ($487) tax - - - 905
- ---------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 85,462 90,559 251,518 267,255
===============================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2004 2003
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 168,975 203,181
Accounts receivable, less allowance of $20,890 and $23,679 242,764 236,187
Materials and supplies, at average cost 5,965 9,229
Other 13,132 14,342
- ---------------------------------------------------------------------------------------------------------------
Total current assets 430,836 462,939
- ---------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 7,333,871 7,184,155
Accumulated depreciation (3,998,332) (3,728,674)
- ---------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 3,335,539 3,455,481
- ---------------------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 3,430,302 3,425,001
Other 593,657 552,431
- ---------------------------------------------------------------------------------------------------------------
Total investments and other assets 4,023,959 3,977,432
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,790,334 7,895,852
===============================================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 121,156 72,453
Accounts payable 144,977 113,274
Accrued expenses and other liabilities
Salaries and benefits 51,573 55,497
Income taxes 9,207 43,082
Other taxes 65,963 35,532
Interest 53,266 64,247
Other 42,767 42,686
Advance billings and customer deposits 51,177 44,612
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 540,086 471,383
- ---------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 2,900,964 3,109,302
- ---------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 941,539 836,651
- ---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000 shares,
issued and outstanding 134,447,421 and 144,364,168 shares 134,447 144,364
Paid-in capital 287,802 576,515
Accumulated other comprehensive loss, net of tax (1,237) -
Retained earnings 2,978,758 2,750,162
Unearned ESOP shares - (500)
Preferred stock - non-redeemable 7,975 7,975
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,407,745 3,478,516
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 7,790,334 7,895,852
===============================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months
ended September 30,
2004 2003
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 252,755 262,265
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 371,600 376,159
Income from unconsolidated cellular entity (6,114) (4,895)
Deferred income taxes 75,408 68,022
Changes in current assets and current liabilities:
Accounts receivable (7,248) 27,823
Accounts payable 31,742 53,932
Accrued income and other taxes 25,181 27,927
Other current assets and other current
liabilities, net (3,783) 18,749
Increase in other noncurrent assets (26,474) (18,280)
Decrease in other noncurrent liabilities (4,696) (4,790)
Retirement benefits 23,000 25,597
Other, net 4,423 (4,087)
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 735,794 828,422
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (253,597) (256,459)
Acquisitions, net of cash acquired (2,000) (37,945)
Investment in debt security (25,000) -
Distribution from unconsolidated cellular entity 6,259 1,104
Other, net (6,368) (5,184)
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (280,706) (298,484)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments of debt (168,411) (406,231)
Proceeds from settlement of interest rate hedge contract - 22,315
Proceeds from issuance of common stock 18,186 28,911
Repurchase of common stock (318,381) -
Cash dividends (24,159) (23,986)
Other, net 3,471 3,336
- ---------------------------------------------------------------------------------------------
Net cash used in financing activities (489,294) (375,655)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (34,206) 154,283
Cash and cash equivalents at beginning of period 203,181 3,661
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 168,975 157,944
=============================================================================================
Supplemental cash flow information:
Income taxes paid $ 95,836 68,108
=============================================================================================
Interest paid (net of capitalized interest of $490 and $49) $ 168,297 174,037
=============================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine months
ended September 30,
2004 2003
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 144,364 142,956
Issuance of common stock through dividend reinvestment,
incentive and benefit plans 976 1,221
Repurchase of common stock (10,893) -
- ---------------------------------------------------------------------------------------------
Balance at end of period 134,447 144,177
- ---------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 576,515 537,804
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 17,210 27,690
Repurchase of common stock (307,488) -
Amortization of unearned compensation and other 1,565 639
- ---------------------------------------------------------------------------------------------
Balance at end of period 287,802 566,133
- ---------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX
Balance at beginning of period - (36,703)
Change in other comprehensive loss, net of tax (1,237) 4,990
- ---------------------------------------------------------------------------------------------
Balance at end of period (1,237) (31,713)
- ---------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 2,750,162 2,437,472
Net income 252,755 262,265
Cash dividends declared
Common stock - $.1725 and $.165 per share, respectively (23,860) (23,687)
Preferred stock (299) (299)
- ---------------------------------------------------------------------------------------------
Balance at end of period 2,978,758 2,675,751
- ---------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (500) (1,500)
Release of ESOP shares 500 750
- ---------------------------------------------------------------------------------------------
Balance at end of period - (750)
- ---------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 7,975 7,975
- ---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,407,745 3,361,573
==============================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
(1) Basis of Financial Reporting
The consolidated financial statements of CenturyTel, Inc. and its
subsidiaries (the "Company") include the accounts of CenturyTel, Inc.
("CenturyTel") and its majority-owned subsidiaries. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to rules and regulations of the Securities and Exchange
Commission; however, in the opinion of management, the disclosures made are
adequate to make the information presented not misleading. The consolidated
financial statements and footnotes included in this Form 10-Q should be read in
conjunction with the consolidated financial statements and other information
included in the Company's annual report on Form 10-K for the year ended December
31, 2003. Certain 2003 amounts have been reclassified to be consistent with the
Company's 2004 presentation. See Note 6 for additional information.
The unaudited financial information for the three months and nine months
ended September 30, 2004 and 2003 has not been audited by independent certified
public accountants; however, in the opinion of management, all adjustments
necessary to present fairly the results of operations for the three-month and
nine-month periods have been included therein. All adjustment are of a normal
recurring nature unless otherwise disclosed. The results of operations for the
first nine months of the year are not necessarily indicative of the results of
operations which might be expected for the entire year.
(2) Goodwill and Other Intangible Assets
The following information relates to the Company's goodwill and other
intangible assets as of September 30, 2004 and December 31, 2003:
Sept. 30, Dec. 31,
2004 2003
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Goodwill $ 3,430,302 3,425,001
Intangible assets subject to amortization
Customer base (15 year amortization period)
Gross carrying amount $ 22,700 22,700
Accumulated amortization $ (3,377) (2,242)
----------- ---------
Net carrying amount $ 19,323 20,458
=========== =========
Contract rights (3 year amortization period)
Gross carrying amount $ 4,187 -
Accumulated amortization $ (116) -
----------- ---------
Net carrying amount $ 4,071 -
=========== =========
Intangible asset not subject to amortization - franchise costs $ 35,300 35,300
- ---------------------------------------------------------------------------------------------
As of September 30, 2004, the Company completed the annual impairment test
of goodwill required under Statement of Financial Accounting Standards No. 142
and has determined its goodwill is not impaired.
In the third quarter of 2004, the Company entered into a three-year
agreement with EchoStar Communications Corporation ("EchoStar") to provide
co-branded satellite television services to the Company's customers. As part of
the transaction, the Company invested $25.0 million in an EchoStar convertible
subordinated debt security, which had a fair value at date of issuance of
approximately $20.8 million and matures in 2011. The remaining $4.2 million paid
was established as an intangible asset attributable to the Company's contractual
rights to provide video service and will be amortized over a three-year period.
Total amortization expense related to the customer base and contract
rights assets for the first nine months of 2004 was $1.3 million and is expected
to be $2.9 million annually for each of the subsequent three years and $1.5
million annually thereafter through year five.
(3) Postretirement Benefits
The Company sponsors health care plans that provide postretirement
benefits to all qualified retired employees.
Net periodic postretirement benefit cost for the three months and nine
months ended September 30, 2004 and 2003 included the following components:
Three months Nine months
ended September 30, ended September 30,
- ------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 1,316 1,659 4,624 4,977
Interest cost 3,639 4,893 12,783 14,679
Expected return on plan assets (616) (636) (1,848) (1,908)
Amortization of unrecognized actuarial loss 1,123 465 3,369 1,395
Amortization of unrecognized prior service cost (938) (657) (2,814) (1,971)
- -----------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 4,524 5,724 16,114 17,172
===========================================================================================================
The Company contributed $11.0 million to its postretirement plan in the
first nine months of 2004 and expects to contribute approximately $14 million
for the full year.
(4) Retirement Plans
CenturyTel and certain subsidiaries sponsor defined benefit pension plans
for substantially all employees. CenturyTel also sponsors an Outside Directors'
Retirement Plan (a frozen plan that accrues no additional benefits) and a
Supplemental Executive Retirement Plan to provide directors and officers,
respectively, with supplemental retirement, death and disability benefits.
Net periodic pension expense for the three months and nine months ended
September 30, 2004 and 2003 included the following components:
Three months Nine months
ended September 30, ended September 30,
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 3,702 3,410 11,872 9,035
Interest cost 5,800 6,273 18,995 16,619
Expected return on plan assets (7,076) (5,860) (21,228) (15,526)
Settlements - - 1,093 -
Recognized net losses 1,472 1,916 5,438 5,076
Net amortization and deferral 61 105 481 279
- -----------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 3,959 5,844 16,651 15,483
===========================================================================================================
Currently, the Company's contributions to its retirement plans for 2004
are expected to be between $5-7 million.
(5) Stock-based Compensation
The Company accounts for its employee stock compensation plans using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," as allowed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Options have been granted at a price either equal to
or exceeding the then-current market price. Accordingly, the Company has not
recognized compensation cost in connection with issuing stock options.
If compensation cost for CenturyTel's options had been recognized in
accordance with SFAS 123, the Company's net income and earnings per share on a
pro forma basis for the three months and nine months ended September 30, 2004
and 2003 would have been as follows:
Three months Nine months
ended September 30, ended September 30,
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 86,192 90,979 252,755 262,265
Less: Total stock-based employee compensation
expense determined under fair value based
method, net of tax $ (2,090) (3,030) (7,717) (9,910)
- -----------------------------------------------------------------------------------------------------------
Pro forma net income $ 84,102 87,949 245,038 252,355
===========================================================================================================
Basic earnings per share
As reported $ .64 .63 1.82 1.83
Pro forma $ .62 .61 1.77 1.76
Diluted earnings per share
As reported $ .63 .63 1.81 1.82
Pro forma $ .62 .61 1.76 1.75
- -----------------------------------------------------------------------------------------------------------
(6) Business Segments
The Company is an integrated communications company engaged primarily in
providing an array of communications services to its customers, including local
exchange, long distance, Internet access, data and fiber transport services. The
Company strives to maintain its customer relationships by, among other things,
bundling its service offerings to provide its customers with a complete offering
of integrated communications services. Effective in the first quarter of 2004,
as a result of the Company's increased focus on integrated bundle offerings and
the varied discount structures associated with such offerings, the Company
determined that its results of operations would be more appropriately reported
as a single reportable segment under the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Therefore, the results of operations for 2004 reflect the
presentation of a single reportable segment.
The Company's operating revenues for its products and services include the
following components:
Three months Nine months
ended September 30, ended September 30,
- -----------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 179,793 179,136 537,993 534,509
Network access 237,522 252,757 723,994 747,307
Long distance 49,743 45,207 140,059 130,968
Data 69,570 62,008 203,367 180,816
Fiber transport and CLEC 19,113 13,530 54,866 28,461
Other 48,138 47,626 140,859 142,946
- ------------------------------------------------------------------------------------------------------------------
Total operating revenues $ 603,879 600,264 1,801,138 1,765,007
==================================================================================================================
Local service revenues are derived from the provision of local exchange
telephone services in the Company's service areas.
Network access revenues primarily relate to (i) services provided by the
Company to long distance carriers, wireless carriers and other carriers and
customers in connection with the use of the Company's facilities to originate
and terminate their interstate and intrastate voice and data transmissions and
(ii) the receipt of universal service support funds which allows the Company to
recover a portion of its costs under federal and state cost recovery mechanisms.
Long distance revenues relate to the provision of retail long distance
services to its customers.
Data revenues include revenues primarily related to the provision of
Internet access services (both dial-up and digital subscriber line ("DSL")
services) and the provision of data transmission services over special circuits
and private lines.
Fiber transport and CLEC revenues include revenues from the Company's
fiber transport, competitive local exchange carrier ("CLEC") and security
monitoring businesses.
Other revenues include revenues related to (i) leasing, selling,
installing and maintaining customer premise telecommunications equipment and
wiring, (ii) providing billing and collection services for long distance
carriers and (iii) participating in the publication of local directories.
Results of operations for 2003 have been conformed to the Company's 2004
presentation of a single reportable segment. In connection with this change, the
Company has, among other things, (i) eliminated certain 2003 revenues arising
out of previously-reported intersegment transactions (which reduced operating
expenses by a like amount and therefore had no impact on operating income), (ii)
reclassified certain 2003 revenues to conform to the new revenue components and
(iii) reclassified depreciation expense related to certain service subsidiaries
of the Company from operating expenses of its regulated operations to
depreciation expense.
(7) Commitments and Contingencies
AT&T filed a petition with the Federal Communications Commission ("FCC")
in December 2003 challenging certain provisions of the Telecommunications Act of
1996 that allow local exchange carriers ("LECs") to file access tariffs on a
streamlined basis and, if certain criteria are met, deems those tariffs lawful.
Certain of the Company's telephone subsidiaries file interstate tariffs directly
with the FCC using this streamlined filing approach. As a result of recent court
rulings, tariffs that have been "deemed lawful" in effect nullify an
interexchange carrier's ability to seek refunds should the earnings from the
tariffs ultimately result in earnings above the authorized rate of return
prescribed by the FCC. As of September 30, 2004, the amount of the Company's
earnings in excess of the authorized rate of return reflected as a liability for
the combined 2001/2002 and 2003/2004 monitoring periods aggregated approximately
$80 million. The ability to request refunds related to (i) the 2001/2002
monitoring period lapses on September 30, 2005 and (ii) the 2003/2004 monitoring
period lapses on September 30, 2007. The Company will continue to monitor the
legal status of the "deemed lawful" tariff issue, and may recognize as revenue a
significant portion of the over-earnings as the legal status becomes more
certain. Although it is possible the Company could benefit favorably upon
resolution of this issue, there is no assurance that a favorable outcome will
occur.
The Company is involved in certain legal proceedings discussed in Part I,
Item 3, of the Company's Annual Report on Form 10-K for the year ended December
31, 2003. From time to time, the Company is involved in other proceedings
incidental to its business, including administrative hearings of state public
utility commissions relating primarily to rate making and competition, actions
relating to employee claims, grievance hearings before labor regulatory
agencies, and miscellaneous third party tort actions.
(8) Depreciation Adjustment
The third quarter of 2004 included a reduction in depreciation expense of
$13.2 million to adjust the balances of certain over-depreciated property, plant
and equipment accounts. As a result of such decrease in depreciation expense,
operating revenues were also negatively impacted in the third quarter of 2004 by
approximately $3.5 million due to a decrease in amounts the Company estimates it
will collect through the partial recovery of operating expenses under revenue
sharing arrangements with other telephone companies.
Item 2.
CenturyTel, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") included herein should be read in conjunction with MD&A and
the other information included in the Company's annual report on Form 10-K for
the year ended December 31, 2003. The results of operations for the three months
and nine months ended September 30, 2004 are not necessarily indicative of the
results of operations which might be expected for the entire year.
CenturyTel, Inc. and its subsidiaries (the "Company") is an integrated
communications company engaged primarily in providing local exchange, long
distance, Internet access and data services to customers in 22 states. The
Company currently derives its revenues from providing (i) local exchange
telephone services, (ii) network access services, (iii) long distance services,
(iv) data services, which includes both dial-up and DSL Internet services, as
well as special access and private line services, (v) fiber transport,
competitive local exchange and security monitoring services and (vi) other
related services. The Company has recently entered into agreements to provide
co-branded satellite television service and to resell wireless service as part
of its bundled product and service offerings, but these arrangements are not
expected to contribute material revenues in the near term. For additional
information on the Company's revenue sources, see footnote 6 to the Company's
financial statements included in Item 1 of Part I of this quarterly report.
In addition to historical information, this management's discussion and
analysis includes certain forward-looking statements that are based on current
expectations only, and are subject to a number of risks, uncertainties and
assumptions, many of which are beyond the control of the Company. Actual events
and results may differ materially from those anticipated, estimated or projected
if one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect. Factors that could affect actual results include
but are not limited to: the timing, success and overall effects of competition
from a wide variety of competitive providers; the risks inherent in rapid
technological change; the effects of ongoing changes in the regulation of the
communications industry; the Company's ability to effectively manage its growth,
including integrating newly-acquired businesses into the Company's operations
and hiring adequate numbers of qualified staff; possible changes in the demand
for, or pricing of, the Company's products and services; the Company's ability
to successfully introduce new product or service offerings on a timely and
cost-effective basis, including satellite television and wireless services; the
Company's ability to collect its receivables from financially troubled
communications companies; other risks referenced from time to time in this
report or other of the Company's filings with the Securities and Exchange
Commission; and the effects of more general factors such as changes in interest
rates, in tax rates, in accounting policies or practices, in operating, medical
or administrative costs, in general market, labor or economic conditions, or in
legislation, regulation or public policy. These and other uncertainties related
to the business are described in greater detail in Item 1 to the Company's Form
10-K for the year ended December 31, 2003. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. The Company undertakes no obligation to update any of its
forward-looking statements for any reason.
RESULTS OF OPERATIONS
Three months Ended September 30, 2004 Compared
to Three months Ended September 30, 2003
Net income was $86.2 million and $91.0 million for the third quarter of
2004 and 2003, respectively. Diluted earnings per share was $.63 for both the
third quarters of 2004 and 2003.
Three months
ended September 30,
- ---------------------------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
Operating income $ 190,869 190,781
Interest expense (52,174) (54,360)
Income from unconsolidated cellular entity 1,929 1,736
Other income (expense) (822) (1,076)
Income tax expense (53,610) (46,102)
- ---------------------------------------------------------------------------------------------
Net income $ 86,192 90,979
=============================================================================================
Basic earnings per share $ .64 .63
=============================================================================================
Diluted earnings per share $ .63 .63
=============================================================================================
Average basic shares outstanding 134,885 143,897
=============================================================================================
Average diluted shares outstanding 135,737 145,171
=============================================================================================
Operating income increased $88,000 due to a $3.6 million (0.6%) increase
in operating revenues which was substantially offset by a $3.5 million increase
in operating expenses. Operating expenses were favorably impacted and operating
revenues were negatively impacted in the third quarter of 2004 due to a
reduction in depreciation expense. See Note 8 of Notes to Consolidated Financial
Statements ("Note 8") and Operating Expenses below for additional information.
As previously disclosed, the Company anticipates its net income for 2004
will be lower than 2003 as a result of (i) lower intrastate toll usage, (ii)
lower Universal Service Fund revenues, (iii) declines in access lines, (iv)
incremental amortization and operating expenses related to the development of
its new billing and customer care system, and (v) an increase in its effective
income tax rate. See below for additional information.
Operating Revenues
Three months
ended September 30,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 179,793 179,136
Network access 237,522 252,757
Long distance 49,743 45,207
Data 69,570 62,008
Fiber transport and CLEC 19,113 13,530
Other 48,138 47,626
- -------------------------------------------------------------------------------
$ 603,879 600,264
===============================================================================
The $657,000 (0.4%) increase in local service revenues is primarily due a
$2.7 million increase due to the provision of enhanced calling features to more
customers, which was substantially offset by a $2.4 million decrease due to a
decline in the number of access lines.
The number of access lines operated by the Company declined 14,000 (0.6%)
during the third quarter of 2004 compared to a decline of 8,700 (0.4%) in the
third quarter of 2003. The Company believes the decline in the number of access
lines during 2004 and 2003 is primarily due to the displacement of traditional
wireline telephone services by other competitive services, including the
Company's DSL product offering. Based on current conditions, the Company expects
access lines to decline approximately 2.5% in 2004.
Network access revenues decreased $15.2 million (6.0%) in the third
quarter of 2004 primarily due to (i) a $7.7 million decrease due to lower levels
of prior year revenue settlement agreements, (ii) a $2.7 million decrease in
revenues from the federal Universal Service Fund primarily due to an increase in
the nationwide average cost per loop factor used by the FCC to allocate funds
among all recipients, and (iii) a $3.7 million decrease in intrastate revenues
due to a reduction in intrastate minutes of use (partially due to the
displacement of minutes by wireless, electronic mail and other optional calling
services). The Company believes that intrastate minutes will continue to
decline, although the magnitude of such decrease is uncertain.
For additional information concerning the above-mentioned decreases in
revisions of prior year revenue settlement arrangements, see Nine Months Ended
September 30, 2004 compared to Nine Months Ended September 30, 2003 - Operating
Revenues.
The $4.5 million (10.0%) increase in long distance revenues was due to
growth in the Company's retail long distance operations. A $6.7 million revenue
increase due to a 14.9% increase in the average number of long distance lines
served and increased minutes of use was partially offset by a $2.2 million
decrease caused by lower average rates charged by the Company.
Data revenues increased $7.6 million (12.2%) due primarily to a $5.6
million increase in Internet revenues due to growth in the number of customers,
principally due to the expansion of the Company's DSL product offering.
Fiber transport and CLEC revenues increased $5.6 million (41.3%),
substantially all of which is attributable to growth in the Company's recently
acquired fiber transport operations (which are operated under the name
LightCore), of which approximately $3.0 million is associated with assets
acquired in December 2003.
Operating Expenses
Three months
ended September 30,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars in thousands)
Cost of services and products (exclusive of
depreciation and amortization) $ 191,000 190,193
Selling, general and administrative 108,153 94,561
Depreciation and amortization 113,857 124,729
- -------------------------------------------------------------------------------
$ 413,010 409,483
===============================================================================
Cost of services and products increased $807,000 (0.4%) primarily due to
(i) a $2.7 million increase in expenses associated with operating the Company's
recently acquired fiber transport operations and (ii) a $2.8 million increase in
customer service and retention expenses. Such increases were partially offset by
a $2.5 million decrease in access expenses and a $1.8 million decrease in the
cost of providing retail long distance service primarily due to a decrease in
the average cost per minute of use.
Selling, general and administrative expenses increased $13.6 million
(14.4%) primarily due to (i) a $10.7 million increase in operating taxes, of
which $8.6 million related to a charge in the third quarter of 2004 arising from
various operating tax audits; (ii) a $3.2 million increase in marketing
expenses; and (iii) a $1.1 million increase in expenses attributable to the
Company's efforts to comply with the Sarbanes-Oxley internal control
requirements. Such increases were partially offset by a $2.6 million decrease in
bad debt expense.
Depreciation and amortization decreased $10.9 million (8.7%) in the third
quarter of 2004 compared to the third quarter of 2003. The third quarter of 2004
included a reduction in depreciation expense of $13.2 million to adjust certain
over-depreciated accounts. See Note 8 for additional information. Such decrease
was partially offset by a $2.3 million increase primarily due to higher levels
of plant in service (partially offset by reductions due to fully depreciated
assets).
Interest Expense
Interest expense decreased $2.2 million (4.0%) in the third quarter of
2004 compared to the third quarter of 2003 primarily due to a decrease in
average debt outstanding.
Other Income (Expense)
Other income (expense) was $822,000 of expense for the third quarter of
2004, compared to $1.1 million of expense for the third quarter of 2003. The
third quarter of 2004 included a $1.5 million charge related to the impairment
of a nonoperating investment. Minority interest expense decreased $1.1 million
due to the Company's fourth quarter 2003 purchase of additional equity in
certain minority-owned subsidiaries.
Income Tax Expense
The effective income tax rate was 38.3% and 33.6% for the three months
ended September 30, 2004 and 2003, respectively. In the third quarter of 2003,
the Company recorded a federal income tax benefit of $5.4 million due to the
settlement of various issues in connection with the completion of an income tax
audit. Such benefit was partially offset by a $5.2 million increase in state
income tax expense ($3.4 million, net of the related reduction in federal taxes)
recorded in the third quarter of 2003 as a result of clarification of the
application of a state income tax statute to the Company's operations in such
state (which expense reflects the retroactive application of the tax to prior
periods). The remainder of the increase in the effective income tax rate in 2004
is due to an increase in the Company's effective state income tax rate.
RESULTS OF OPERATIONS
Nine months Ended September 30, 2004 Compared
to Nine months Ended September 30, 2003
Net income was $252.8 million and $262.3 million for the first nine months
of 2004 and 2003, respectively. Diluted earnings per share for the nine months
ended September 30, 2004 was $1.81 compared to $1.82 during the first nine
months of 2003.
Nine months
ended September 30,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
Operating income $ 564,337 563,935
Interest expense (157,806) (165,909)
Income from unconsolidated cellular entity 6,114 4,895
Other income (expense) (2,329) (1,034)
Income tax expense (157,561) (139,622)
- -------------------------------------------------------------------------------
Net income $ 252,755 262,265
===============================================================================
Basic earnings per share $ 1.82 1.83
===============================================================================
Diluted earnings per share $ 1.81 1.82
===============================================================================
Average basic shares outstanding 138,512 143,370
===============================================================================
Average diluted shares outstanding 139,324 144,481
===============================================================================
Operating income increased $402,000 as a $36.1 million (2.0%) increase in
operating revenues was substantially offset by a $35.7 million (3.0%) increase
in operating expenses. Operating expenses were favorably impacted and operating
revenues were negatively impacted in the third quarter of 2004 due to a
reduction in depreciation expense. See Note 8 and Operating Expenses below for
additional information.
As previously disclosed, the Company anticipates its net income for 2004
will be lower than 2003 as a result of (i) lower intrastate toll usage, (ii)
lower Universal Service Fund revenues, (iii) declines in access lines, (iv)
incremental amortization and operating expenses related to the development of
its new billing and customer care system, and (v) an increase in its effective
income tax rate. See below for additional information.
Operating Revenues
Nine months
ended September 30,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 537,993 534,509
Network access 723,994 747,307
Long distance 140,059 130,968
Data 203,367 180,816
Fiber transport and CLEC 54,866 28,461
Other 140,859 142,946
- -------------------------------------------------------------------------------
$ 1,801,138 1,765,007
===============================================================================
The $3.5 million (0.7%) increase in local service revenues is primarily
due a $9.2 million increase due to the provision of enhanced calling features to
more customers which was partially offset by a $5.7 million decrease due to a
decline in the number of access lines.
The number of access lines operated by the Company declined 39,600 (1.7%)
during the first nine months of 2004 compared to a decline of 19,900 (0.8%) in
the first nine months of 2003. The Company believes the decline in the number of
access lines during 2004 and 2003 is primarily due to the displacement of
traditional wireline telephone services by other competitive services, including
the Company's DSL product offering. Based on current conditions, the Company
expects access lines to decline approximately 2.5% in 2004.
Network access revenues decreased $23.3 million (3.1%) in the first nine
months of 2004 primarily due to a $12.8 million decrease in intrastate revenues
due to a reduction in intrastate minutes of use (partially due to the
displacement of minutes by wireless, electronic mail and other optional calling
services). The Company believes that intrastate minutes will continue to
decline, although the magnitude of such decrease is uncertain. The decline in
network access revenues was also impacted by a $7.0 million decrease in revenues
from the federal Universal Service Fund primarily due to an increase in the
nationwide average cost per loop factor used by the FCC to allocate funds among
all recipients. This trend of lower Universal Service Fund revenues is also
expected to continue, as described further below under "Other Matters".
Certain of the Company's interstate network access and data revenues are
based on tariffed access charges filed directly with the FCC; the remainder of
such revenues is derived from revenue sharing arrangements with other LECs
administered by the National Exchange Carrier Association. In the second quarter
of 2004, the Company revised certain estimates for recognizing interstate
revenues. Previously, the Company initially recognized interstate revenues at a
rate of return lower than the authorized rate of return prescribed by the FCC to
allow for potential decreases in demand or other factor changes which could
decrease the achieved rate of return over the respective monitoring periods. As
the monitoring periods progressed, the Company recorded additional revenues
ratably up to the achieved rate of return. In the second quarter of 2004, the
Company began generally recognizing such interstate network access revenues at
the authorized rate of return, unless the actual achieved rate of return was
lower than authorized. As a result, in the second quarter of 2004 the Company
recognized approximately $8.5 million of incremental nonrecurring revenues. In
addition, in the second quarter of 2004 the Company recognized a $4.6 million
nonrecurring reduction in network access revenues due to an adjustment of prior
years universal service revenues. In the third quarter of 2004, the Company
recorded a $3.5 million reduction in operating revenues related to prior periods
in connection with a reduction in depreciation expense (see Note 8 for
additional information).
The $9.1 million (6.9%) increase in long distance revenues was due to
growth in the Company's retail long distance operations. A $16.7 million revenue
increase due to a 15.0% increase in the average number of long distance lines
served and increased minutes of use was partially offset by a $7.6 million
decrease caused by lower average rates charged by the Company.
Data revenues increased $22.6 million (12.5%) due primarily to a $15.2
million increase in Internet revenues due to growth in the number of customers,
principally due to the expansion of the Company's DSL product offering, and a
$8.3 million increase in special access revenues due to an increase in the
number of special circuits and an increase in the partial recovery of increased
operating expenses through revenue sharing arrangements with other telephone
companies.
Fiber transport and CLEC revenues increased $26.4 million (92.8%),
substantially all of which is attributable to the Company's acquisitions of
fiber transport assets (which are operated under the name LightCore) in June and
December 2003.
Other revenues decreased $2.1 million (1.5%) during the first nine months
of 2004 primarily due to a $4.2 million decrease in directory revenues due to
the expiration of the Company's rights to share in the revenues of yellow-page
directories published in certain markets acquired from Verizon Communications,
Inc. in 2002. Such decrease was partially offset by a $1.0 million increase in
rental revenues.
Operating Expenses
Nine months
ended September 30,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars in thousands)
Cost of services and products (exclusive of
depreciation and amortization) $ 562,775 552,013
Selling, general and administrative 302,426 272,900
Depreciation and amortization 371,600 376,159
- -------------------------------------------------------------------------------
$ 1,236,801 1,201,072
===============================================================================
Cost of services and products increased $10.8 million (1.9%) primarily
due to (i) a $12.1 million increase in expenses associated with operating the
Company's fiber transport assets acquired in June and December 2003; (ii) a $7.1
million increase in plant operations expenses; (iii) a $5.3 million increase in
expenses associated with the Company's Internet operations due to an increase in
the number of customers; and (iv) a $5.9 million increase in customer service
and retention related expenses. Such increases were partially offset by an $11.2
million decrease in access expenses (which included a one-time credit of $3.1
million recorded in the first nine months of 2004) and an $8.5 million decrease
in the cost of providing retail long distance service primarily due to a
decrease in the average cost per minute of use and a decrease in circuit costs.
Selling, general and administrative expenses increased $29.5 million
(10.8%) primarily due to (i) an $8.4 million increase in operating taxes
attributable to an $8.6 million charge in the third quarter of 2004 arising from
various operating tax audits; (ii) an $8.0 million increase in marketing
expenses; (iii) a $6.9 million increase in salaries and benefits; (iv) a
nonrecurring $5.0 million reduction in bad debt expense recorded in the first
quarter of 2003 due to the partial recovery of amounts previously written off
related to the bankruptcy of MCI (formerly WorldCom); and (v) a $3.5 million
increase in expenses associated with the Company's LightCore operations. Such
increases were partially offset by a $7.3 million decrease in bad debt expense
during the first nine months of 2004 (exclusive of the MCI recovery mentioned
above).
Depreciation and amortization decreased $4.6 million (1.2%) in the first
nine months of 2004 compared to the first nine months of 2003. The first nine
months of 2004 included a reduction in depreciation expense of $13.2 million to
adjust certain over-depreciated accounts. See Note 8 for additional information.
Depreciation expense for 2004 was also reduced by $6.3 million due to certain
assets becoming fully depreciated. Such decreases were partially offset by an
$11.6 million increase due to higher levels of plant in service, a $3.1 million
adjustment in 2004 related to depreciation of fixed assets related to the
Company's new billing system, and a $2.8 million increase in depreciation due to
the assets acquired in connection with the Company's LightCore operations.
Interest Expense
Interest expense decreased $8.1 million (4.9%) in the first nine months
of 2004 compared to the first nine months of 2003 due primarily to a decrease in
average debt outstanding.
Income From Unconsolidated Cellular Entity
Income from unconsolidated cellular entity increased $1.2 million in the
first nine months of 2004 due to increased profitability of the cellular
partnership in which the Company owns a 49% minority interest.
Other Income (Expense)
Other income (expense) was $2.3 million of expense for the first nine
months of 2004, compared to $1.0 million of expense for the first nine months of
2003. The first nine months of 2004 included a $3.6 million prepayment expense
paid in connection with the redemption of $100 million aggregate principal
amount of the Company's Series B senior notes in May 2004 and a $1.5 million
charge related to the impairment of a nonoperating investment. Such expenses
were partially offset by a $1.6 million increase in interest income due to
higher cash balances.
Income Tax Expense
The effective income tax rate was 38.4% and 35.3% for the nine months
ended September 30, 2004 and 2003, respectively. In the third quarter of 2003,
the Company recorded a federal income tax benefit of $5.4 million due to the
settlement of various issues in connection with the completion of an income tax
audit. Such benefit was partially offset by a $5.2 million increase in state
income tax expense ($3.4 million, net of the related reduction in federal taxes)
recorded in the third quarter of 2003 as a result of clarification of the
application of a state income tax statute to the Company's operations in such
state (which expense reflects the retroactive application of the tax to prior
periods). The remainder of the increase in the effective income tax rate in
2004 is primarily due to an increase in the Company's effective state income
tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to fund its operating and capital expenditures. The Company's
operations have historically provided a stable source of cash flow which has
helped the Company continue its long-term program of capital improvements.
Net cash provided by operating activities was $735.8 million during the
first nine months of 2004 compared to $828.4 million during the first nine
months of 2003. The Company's accompanying consolidated statements of cash flows
identify major differences between net income and net cash provided by operating
activities for each of these periods. For additional information relating to the
operations of the Company, see Results of Operations.
Net cash used in investing activities was $280.7 million and $298.5
million for the nine months ended September 30, 2004 and 2003, respectively.
Payments for property, plant and equipment were $253.6 million in the first nine
months of 2004 compared to $256.5 million during the first nine months of 2003.
Budgeted capital expenditures for 2004 total $400 million. In June 2003, the
Company acquired the assets of a fiber transport business for $39.4 million cash
(of which $35.6 million was paid at acquisition and the remainder was previously
paid as a deposit in 2002). In the third quarter of 2004, the Company entered
into a three-year agreement with EchoStar Communications Corporation
("EchoStar") to provide co-branded satellite television services to the
Company's customers. As part of the transaction, the Company invested $25.0
million in an EchoStar convertible subordinated debt security.
Net cash used in financing activities was $489.3 million during the first
nine months of 2004 compared to $375.7 million during the first nine months of
2003. The Company repurchased 10.9 million shares of common stock for $318.4
million in the first nine months of 2004 in accordance with its $400 million
stock repurchase program approved in February 2004. See Part II, Item 2, of this
quarterly report for additional information. Payments of debt were $237.8
million less during the first nine months of 2004 compared to the first nine
months of 2003. In May 2004, the Company prepaid its $100 million, 8.25%, Series
B senior notes, due 2024. The Company incurred a $4.6 million pre-tax expense (a
$3.6 million prepayment premium and a $1.0 million write-off of related deferred
debt costs) in the second quarter of 2004 associated with this prepayment.
The following table contains certain information concerning the Company's
material contractual obligations as of September 30, 2004.
Payments due by period
- --------------------------------------------------------------------------------------------------
Total contractual Less than After
obligations Total 1 year 1-3 years 4-5 years 5 years
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Long-term debt,
including current
maturities and capital
lease obligations $3,022,120 121,156 924,153 (1) 305,424 1,671,387
- --------------------------------------------------------------------------------------------------
(1) Includes $165 million aggregate principal amount of the Company's
convertible debentures, Series K, due 2032, which can be put to the
Company at various dates beginning in 2006 and $500 million aggregate
principal amount of the Company's senior notes, Series J, due 2007,
which the Company is committed to remarket beginning in February 2005.
As of September 30, 2004, the Company had $533 million of undrawn
committed bank lines of credit and the Company's telephone subsidiaries had
available for use $123 million of commitments for long-term financing from the
Rural Utilities Service and the Rural Telephone Bank. The Company has a
commercial paper program that authorizes it to have outstanding up to $1.5
billion in commercial paper at any one time; however, borrowings are effectively
limited to the amount available under its credit facility. At September 30,
2004, the Company had no commercial paper outstanding under such program. The
Company is in compliance with all of its debt covenants. At September 30, 2004,
the Company held $169.0 million of cash and cash equivalents.
OTHER MATTERS
Accounting for the Effects of Regulation
The Company currently accounts for its regulated telephone operations
(except for the properties acquired from Verizon in 2002) in accordance with the
provisions of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" ("SFAS 71"). While the ongoing
applicability of SFAS 71 to the Company's regulated telephone operations is
being monitored due to the changing regulatory, competitive and legislative
environments, the Company believes that SFAS 71 still applies. However, it is
possible that changes in regulation or legislation or anticipated changes in
competition or in the demand for regulated services or products could result in
the Company's telephone operations not being subject to SFAS 71 in the near
future. In that event, implementation of Statement of Financial Accounting
Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the
Discontinuance of Application of FASB Statement No. 71," would require the
write-off of previously established regulatory assets and liabilities. SFAS 101
further provides that the carrying amounts of property, plant and equipment are
to be adjusted only to the extent the assets are impaired and that impairment
shall be judged in the same manner as for nonregulated enterprises.
When and if the Company's regulated operations no longer qualify for the
application of SFAS 71, the Company does not expect to record an impairment
charge related to the carrying value of the property, plant and equipment of its
regulated telephone operations. Additionally, upon the discontinuance of SFAS
71, the Company would be required to revise the lives of its property, plant and
equipment to reflect the estimated useful lives of the assets. The Company does
not expect such revisions in asset lives, or the elimination of other regulatory
assets and liabilities, to have a material unfavorable impact on the Company's
results of operations. The Company is in the process of determining the
existence of a regulatory liability associated with Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations",
including whether or not such regulatory liability can be quantified with
reasonable accuracy.
Regulatory Matters
In 2003, the Federal Communications Commission ("FCC") opened a broad
intercarrier compensation proceeding with the ultimate goal of creating a
uniform mechanism to be used by the entire telecommunications industry for
payments between carriers originating, terminating, carrying or delivering
telecommunications traffic. On August 13, 2004, the Intercarrier Compensation
Forum (a group of telecommunications industry participants) submitted to the FCC
a plan for intercarrier compensation and universal service reform. The plan, as
submitted, calls for a restructuring of rates to begin on July 1, 2005 and
within three years would unify compensation regimes governing interstate and
intrastate access charges. The FCC has also received several other intercarrier
compensation proposals from other industry groups. The Company is involved in
this proceeding and will continue to monitor the implications of these plans to
its operations as network access revenues represent a major component of the
Company's total consolidated revenues.
On August 16, 2004, the Federal-State Joint Board on Universal Service
released a notice requesting comments on the FCC's current rules for the
provision of high-cost support for rural telephone companies, which is currently
scheduled to expire on June 30, 2006. For the nine months ended September 30,
2004, support payments from the Universal Service High Cost Loop Fund
constituted 7.9% of the Company's total consolidated revenues. The Company will
be actively involved in this proceeding.
Recent FCC-mandated changes in the administration of the universal
service support programs temporarily suspended the disbursement of funds under
the E-rate (Schools and Libraries Universal Service Support Mechanism) program,
and, more significantly, created questions that these administrative changes
could similarly delay the disbursement of funds to rural LECs from the Universal
Service High Cost Loop Fund.
Development of Billing System
In October 2004, the Company completed the conversion of virtually all of
its customers to its new integrated billing and customer care system. The costs
to develop such system have been accounted for in accordance with Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). The capitalized costs of the system
aggregated $195.9 million (before accumulated amortization) at September 30,
2004 and will be amortized over a 20-year period. During the nine months ended
September 30, 2004, the Company incurred additional costs, including (i) $3.0
million of customer service related and data conversion costs which were
expensed as incurred and (ii) $8.4 million of capitalized hardware costs which
will be amortized over a three-year period. (These amounts exclude recurring
costs to maintain and support the new system.) The Company anticipates incurring
an additional $10-15 million of costs (of which approximately $4 million will be
expensed) in the next six months in order to complete the project. There is no
assurance that the system will be completed in accordance with this schedule or
budget, or that the system will function as anticipated.
Other Anticipated Events
Based on recent FCC filings, the Company anticipates that the average
industry costs used to determine universal service support payments will be
higher in 2005, which is expected to reduce the Company's 2005 support receipts
by approximately $10-15 million compared to 2004 levels.
The Company also anticipates that its diluted earnings will be negatively
impacted in 2005 by approximately $.05-.09 per share due to losses from rolling
out its new satellite television and wireless reseller services.
The Company currently anticipates, subject to market conditions and the
availability of other investment opportunities, to complete its $400 million
share repurchase program and to evaluate transactions that could mitigate the
dilutive effect of the Company's $500 million in Equity Units that are currently
scheduled to settle in May 2005.
Please see the factors listed above at the beginning of MD&A that could
cause the Company's actual results to differ materially from those described
above.
Item 3.
CenturyTel, Inc.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
its long-term debt obligations. The Company has estimated its market risk using
sensitivity analysis. Market risk is defined as the potential change in the fair
value of a fixed-rate debt obligation due to a hypothetical adverse change in
interest rates. Fair value on long-term debt obligations is determined based on
a discounted cash flow analysis, using the rates and maturities of these
obligations compared to terms and rates currently available in the long-term
financing markets. The results of the sensitivity analysis used to estimate
market risk are presented below, although the actual results may differ from
these estimates.
At September 30, 2004, the fair value of the Company's long-term debt was
estimated to be $3.3 billion based on the overall weighted average rate of the
Company's long-term debt of 6.5% and an overall weighted maturity of 10 years
compared to terms and rates currently available in long-term financing markets.
Market risk is estimated as the potential decrease in fair value of the
Company's long-term debt resulting from a hypothetical increase of 65 basis
points in interest rates (ten percent of the Company's overall weighted average
borrowing rate). Such an increase in interest rates would result in
approximately a $140.6 million decrease in fair value of the Company's long-term
debt at September 30, 2004. As of September 30, 2004, after giving effect to
interest rate swaps currently in place, approximately 83% of the Company's
long-term debt obligations were fixed rate.
The Company seeks to maintain a favorable mix of fixed and variable rate
debt in an effort to limit interest costs and cash flow volatility resulting
from changes in rates. From time to time, the Company uses derivative
instruments to (i) lock-in or swap its exposure to changing or variable interest
rates for fixed interest rates or (ii) to swap obligations to pay fixed interest
rates for variable interest rates. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes. Management
periodically reviews the Company's exposure to interest rate fluctuations and
implements strategies to manage the exposure.
At September 30, 2004, the Company had outstanding four fair value
interest rate hedges associated with the full $500 million aggregate principal
amount of its Series L senior notes, due 2012, that pay interest at a fixed rate
of 7.875%. These hedges are "fixed to variable" interest rate swaps that
effectively convert the Company's fixed rate interest payment obligations under
these notes into obligations to pay variable rates that range from the six-month
London InterBank Offered Rate ("LIBOR") plus 3.229% to the six-month LIBOR plus
3.67%, with settlements being paid and rates being reset in arrears each six
months through the expiration of the hedges in August 2012. At September 30,
2004, the Company realized an average rate under these hedges of 6.11%. Interest
expense was reduced by $8.8 million during the first nine months of 2004 as a
result of these hedges. The aggregate fair market value of these hedges was $6.2
million at September 30, 2004 and is reflected both as a liability and as a
decrease in the Company's underlying long-term debt on its September 30, 2004
consolidated balance sheet. With respect to each of these hedges, market risk is
estimated as the potential change in the fair value of the hedge resulting from
a hypothetical 10% increase in the forward rates used to determine the fair
value. A hypothetical 10% increase in the forward rates would result in a $15.5
million decrease in the fair value of these hedges at September 30, 2004, and
would also increase the Company's interest expense.
In the third quarter of 2004, the Company entered into an agreement which
effectively locked-in the LIBOR interest rate (at 2.455% plus applicable
spreads) through February 2005 for $250 million of the above-mentioned $500
million principal amount of its Series L notes previously hedged. The fair value
of this transaction was $180,000 and is reflected as an asset and as income as
of and for the periods ended September 30, 2004.
Certain shortcomings are inherent in the method of analysis presented in
the computation of fair value of financial instruments. Actual values may differ
from those presented if market conditions vary from assumptions used in the fair
value calculations. The analysis above incorporates only those risk exposures
that existed as of September 30, 2004.
Item 4.
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
provide reasonable assurances that information required to be disclosed by the
Company in the reports it files under the Securities Exchange Act of 1934 is
timely recorded, processed, summarized and reported as required. The Company's
Chief Executive Officer, Glen F. Post, III, and the Company's Chief Financial
Officer, R. Stewart Ewing, Jr., have evaluated the Company's disclosure controls
and procedures as of September 30, 2004. Based on the evaluation, Messrs. Post
and Ewing concluded that the Company's disclosure controls and procedures have
been effective in providing reasonable assurance that they have been timely
alerted of material information required to be filed in this quarterly report.
The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events and contingencies, and there can be no
assurance that any design will succeed in achieving its stated goals.
PART II. OTHER INFORMATION
CenturyTel, Inc.
Item 1. Legal Proceedings
-----------------
For information on the Company's legal proceedings, see footnote 7 to the
Company's financial statements included in Item 1 of Part I of this quarterly
report.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
-----------------------------------------------------------
of Equity Securities
--------------------
On February 3, 2004, the Company announced that its board of directors
approved a repurchase program that authorizes the Company to repurchase up to an
aggregate of $400 million of either its common stock or equity units prior to
December 31, 2005. The following table reflects the Company's repurchases of its
common stock during the third quarter of 2004, all of which were effected in
open-market transactions in accordance with the above-described program.
Total Approximate
Number of Dollar Value
Shares of Shares (or
Purchased as Units) that
Part of Publicly May Yet Be
Total Number Announced Purchased
of Shares Average Price Plans or Under the Plans
Period Purchased Paid Per Share Programs or Programs
- ---------------------------------------------------------------------------------------------------------
July 1 - July 31, 2004 - $ - - $ 116,366,731
August 1 - August 31, 2004 - $ - - $ 116,366,731
September 1 - September 30, 2004 1,030,600 $ 33.45 1,030,600 $ 81,891,014
--------- ---------
Total 1,030,600 $ 33.45 1,030,600 $ 81,891,014
========= =========
In late September 2004, the Company repurchased an additional 265,200
shares of common stock at an average price of $33.97 that were not settled until
early October and are therefore not reflected in the table above or the
Company's financial statements included elsewhere herein.
The Company did not repurchase any of its equity units during the third
quarter of 2004.
As part of its repurchase program, in March 2004 the Company entered into
a purchase plan with a broker in accordance with Rule 10b5-1 issued under the
Securities Exchange Act of 1934. This plan authorizes the broker to effect
repurchases under the repurchase program on the Company's behalf during the
Company's self-imposed trading "blackout periods" prior to its quarterly
earnings announcements, provided that the terms and conditions in the plan are
met. Unless terminated earlier, the 10b5-1 plan will lapse December 31, 2004,
subject to extension by the parties.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
--------
11 Computations of Earnings Per Share.
31.1 Registrant's Chief Executive Officer certification pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Registrant's Chief Financial Officer certification pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Registrant's Chief Executive Officer and Chief Financial
Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
-------------------
The following item was reported in the Form 8-K filed July 29, 2004:
Item 12. Results of Operations and Financial Condition - News
release announcing second quarter 2004 operating results.
The following item was reported in the Form 8-K filed August 27, 2004:
Item 8.01. Other Events - News release announcing a
strategic partnership between the Registrant and
EchoStar Communications Corporation that will allow
Registrant to provide a co-branded satellite
television service in Registrant's existing markets.
The following item was reported in the Form 8-K filed September 21,
2004:
Item 8.01. Other Events - News release announcing the Registrant
had entered into a reseller arrangement with Cingular
Wireless to offer wireless voice and text messaging
services.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CenturyTel, Inc.
Date: November 9, 2004 /s/ Neil A. Sweasy
-----------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)