UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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 (IRS 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
Berlin Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Berlin Stock Exchange
Corporate Units issued May 2002 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Stock Options
(Title of class)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark if the Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes [X] No[ ]
The aggregate market value of voting stock held by non-affiliates (affiliates
being for these purposes only directors, executive officers and holders of more
than five percent of the Company's outstanding voting securities) was $4.0
billion as of June 30, 2004. As of February 28, 2005, there were 132,644,803
shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be furnished in connection with
the 2005 annual meeting of shareholders are incorporated by reference in Part
III of this Report.
PART I
Item 1. Business
General. CenturyTel, Inc. ("CenturyTel") and its subsidiaries (the
"Company") is an integrated communications company engaged primarily in
providing local exchange, long distance, Internet access and broadband 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. All of the Company's operations
are conducted within the continental United States.
At December 31, 2004, the Company's local exchange telephone subsidiaries
operated approximately 2.3 million telephone access lines, primarily in rural
areas and small to mid-size cities in 22 states, with over 70% of these lines
located in Wisconsin, Missouri, Alabama, Arkansas and Washington. According to
published sources, the Company is the eighth largest local exchange telephone
company in the United States based on the number of access lines served.
The Company also provides competitive local exchange carrier, security
monitoring, and other communications and business information services in
certain local and regional markets.
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. The Company anticipates such
offerings will dilute its earnings for 2005 by approximately $.04 to $.07 per
share.
For information on the amount of revenue derived by the Company's various
lines of services, see "Operations-Services" below and Item 7 of this report.
Recent acquisitions. In June 2003, the Company acquired the assets of
Digital Teleport, Inc., a regional communications company providing wholesale
data transport services to other communications carriers over its fiber optic
network located in Missouri, Arkansas, Oklahoma and Kansas, for $39.4 million
cash. In addition, in December 2003, the Company acquired additional fiber
transport assets in Arkansas, Missouri and Illinois from Level 3 Communications,
Inc. for approximately $15.8 million cash. For additional information, see
"Operations - Services - Fiber Transport and CLEC."
On August 31, 2002, the Company purchased assets utilized in serving
approximately 350,000 telephone access lines in the state of Missouri from
Verizon Communications, Inc. ("Verizon") for approximately $1.179 billion cash.
On July 1, 2002, the Company purchased assets utilized in serving approximately
300,000 telephone access lines in the state of Alabama from Verizon for
approximately $1.022 billion cash. The assets purchased in these transactions
included (i) the franchises authorizing the provision of local telephone
service, (ii) related property and equipment comprising Verizon's local exchange
operations in predominantly rural markets throughout Alabama and Missouri and
(iii) Verizon's assets used to provide digital subscriber line ("DSL") and other
high speed data services within the purchased exchanges. The acquired assets did
not include Verizon's cellular, personal communications services ("PCS"), long
distance, dial-up Internet, or directory publishing operations in these areas.
On February 28, 2002, the Company purchased from KMC Telecom Holdings,
Inc. ("KMC") its fiber network and customer base operations in Monroe and
Shreveport, Louisiana, which allows the Company to offer broadband and
competitive local exchange services to customers in these markets.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired assets utilized to provide local exchange telephone service to over
490,000 telephone access lines from Verizon in four separate transactions for
approximately $1.5 billion in cash. Under these transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related assets in Arkansas for approximately $842
million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra")
purchased approximately 127,000 telephone access lines and related
assets in Missouri for approximately $297 million cash. At closing, the
Company made a preferred equity investment in Spectra of approximately
$55 million (which represented a 57.1% interest) and financed
substantially all of the remainder of the purchase price. In the first
quarter of 2001, the Company purchased an additional 18.6% interest in
Spectra for $47.1 million. In the fourth quarter of 2003 and the first
quarter of 2004, the Company purchased the remaining 24.3% interest in
Spectra for an aggregate of $34.0 million in cash.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related assets in Wisconsin for approximately
$197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related assets
in Wisconsin for approximately $172 million in cash. The Company owns
89% of TelUSA, which was organized to acquire and operate these
Wisconsin properties. At closing, the Company made an equity investment
in TelUSA of approximately $37.8 million and financed substantially all
of the remainder of the purchase price.
In August 2000, the Company acquired the assets of CSW Net, Inc., a
regional Internet service provider that offers dial-up and dedicated Internet
access, and web site and domain hosting to more than 18,000 customers in 28
communities in Arkansas.
In February 2005, the Company signed a definitive asset purchase agreement
to acquire metro fiber networks in 16 markets from KMC for $65 million cash,
subject to purchase price adjustments. The networks to be acquired include
almost 1,000 lit route miles of fiber optic cable located in small to medium
cities in 11 states. The Company expects to complete this purchase in mid-2005,
subject to the receipt of various consents, regulatory approvals and various
other closing conditions.
The Company continually evaluates the possibility of acquiring additional
communications assets in exchange for cash, securities or both, and at any given
time may be engaged in discussions or negotiations regarding additional
acquisitions. The Company generally does not announce its acquisitions or
dispositions until it has entered into a preliminary or definitive agreement.
Although the Company's primary focus will continue to be on acquiring interests
that are proximate to its properties or that serve a customer base large enough
for the Company to operate efficiently, other communications interests may also
be acquired and these acquisitions could have a material impact upon the
Company.
Recent Dispositions. On August 1, 2002, the Company sold substantially all
of its wireless operations principally to an affiliate of ALLTEL Corporation
("Alltel") for an aggregate of approximately $1.59 billion in cash. In
connection with this transaction, the Company divested its (i) interests in its
majority-owned and operated cellular systems, which at June 30, 2002 served
approximately 783,000 customers and had access to approximately 7.8 million pops
(the estimated population of licensed cellular telephone markets multiplied by
the Company's proportionate equity interest in the licensed operators thereof),
(ii) minority cellular equity interests representing approximately 1.8 million
pops at June 30, 2002, and (iii) licenses to provide PCS covering 1.3 million
pops in Wisconsin and Iowa. As a result, the Company's wireless operations are
reflected as discontinued operations in the Company's accompanying consolidated
financial statements.
In the second quarter of 2001, the Company sold to Leap Wireless
International, Inc. 30 PCS operating licenses for an aggregate of $205 million.
The Company received approximately $118 million of the purchase price in cash at
closing and collected the remainder in installments through the fourth quarter
of 2001.
Where to find additional information. The Company makes available free of
charge on its website (www.centurytel.com) filings made with the Securities and
Exchange Commission ("SEC") on Forms 10-K, 10-Q and 8-K as soon as reasonably
practicable after such filings are made with the SEC.
The Company also makes available free of charge on its website its
Corporate Governance Guidelines, its Corporate Compliance Program and the
charters of its audit, compensation, risk evaluation, and nominating and
corporate governance committees. The Company will furnish printed copies of
these materials upon the request of any shareholder.
Other. As of December 31, 2004, the Company had approximately 6,800
employees, of which approximately 1,800 were members of 13 different bargaining
units represented by the International Brotherhood of Electrical Workers and the
Communications Workers of America. In 2005, the contracts governing
approximately 71% of the union workforce lapse and are scheduled to be
renegotiated. The Company believes that relations with its employees continue to
be generally good.
CenturyTel was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous 15 to
20 years. CenturyTel's principal executive offices are located at 100 CenturyTel
Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.
OPERATIONS
According to published sources, the Company is the eighth largest local
exchange telephone company in the United States, based on the approximately 2.3
million access lines it served at December 31, 2004. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominantly rural areas and small to mid-sized
cities in 22 states. The following table sets forth certain information with
respect to the Company's access lines as of December 31, 2004 and 2003.
December 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
- --------------------------------------------------------------------------------
Wisconsin (1) 466,021 20% 478,134 20%
Missouri 458,724 20 472,884 20
Alabama 275,093 12 283,501 12
Arkansas 256,130 11 264,787 11
Washington 182,990 8 186,329 8
Michigan 108,030 5 111,104 5
Louisiana 101,353 4 103,726 4
Colorado 94,139 4 95,726 4
Ohio 80,287 3 82,995 3
Oregon 74,020 3 75,530 3
Montana 64,145 3 64,863 3
Texas 43,697 2 46,397 2
Minnesota 30,046 1 30,469 1
Tennessee 26,728 1 27,084 1
Mississippi 24,137 1 24,420 1
New Mexico 6,428 * 6,512 *
Wyoming 5,905 * 5,669 *
Idaho 5,807 * 5,974 *
Indiana 5,346 * 5,401 *
Iowa 2,053 * 2,082 *
Arizona 1,995 * 2,000 *
Nevada 552 * 531 *
- --------------------------------------------------------------------------------
2,313,626 100% 2,376,118 100%
================================================================================
* Represents less than 1%.
(1) As of December 31, 2004 and 2003, approximately 57,700 and 59,130,
respectively, of these lines were owned and operated by CenturyTel's
89%-owned affiliate.
As indicated in the following table, the Company has experienced growth in
its operations over the past five years, a substantial portion of which was
attributable to the third quarter 2002 and third quarter 2000 acquisitions of
telephone properties from Verizon and the internal growth of its long distance
and Internet access businesses.
Year ended or as of December 31,
- ------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Access lines 2,313,626 2,376,118 2,414,564 1,797,643 1,800,565
% Residential 75% 76 76 76 76
% Business 25% 24 24 24 24
Long distance lines 1,067,817 931,761 798,697 564,851 433,846
% Residential 81% 80 80 79 79
% Business 19% 20 20 21 21
Internet customers 262,085 215,548 179,440 144,817 108,700
% Dial-up service 49% 65 73 84 95
% Retail DSL service 51% 35 27 16 5
Operating revenues $ 2,407,372 2,367,610 1,971,996 1,679,504 1,402,357
Capital expenditures $ 385,316 377,939 386,267 435,515 391,069
- ------------------------------------------------------------------------------------------
As discussed further below, the Company's access lines (exclusive of
acquisitions) have declined in recent years, and are expected to continue to
decline. To offset these declines, the Company hopes to expand its telephone
operations by (i) acquiring additional telephone properties, (ii) providing
service to new customers, (iii) increasing network usage, (iv) further
penetrating its existing customer base with existing services and (v) providing
additional services which may be made possible by advances in technology,
improvements in the Company's infrastructure and the bundling of integrated
services. See "Services" and "Regulation and Competition."
Services
The Company derives revenue 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
following table reflects the percentage of operating revenues derived from these
respective services:
2004 2003 2002
- ----------------------------------------------------------------------------
Local service 29.7% 30.1 29.0
Network access 40.1 42.3 44.9
Long distance 7.8 7.3 7.4
Data 11.5 10.4 9.1
Fiber transport and CLEC 3.1 1.8 1.1
Other 7.8 8.1 8.5
- ----------------------------------------------------------------------------
100.0% 100.0 100.0
============================================================================
Local service. Local service revenues are derived from providing local
exchange telephone services in the Company's service areas, including basic
dial-tone service through the Company's regular switched network. Access lines
declined 2.6% in 2004, 1.6% in 2003 and 1.1% in 2002 (exclusive of the 2002
Verizon acquisitions). The Company believes these declines in the number of
access lines were 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 between 2.5 and 3.5% for 2005.
The use of digital switches, high-speed data circuits and related software
has been an important component of the Company's growth strategy because it
allows the Company to offer enhanced voice services (such as call forwarding,
conference calling, caller identification, selective call ringing and call
waiting) and data services (such as data private line, digital subscriber line,
frame relay and local area/wide area networks) and to thereby increase
utilization of existing access lines. In 2004 the Company continued to expand
the availability of enhanced services offered in certain service areas.
Network access. 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 support funds which allows the
Company to recover a portion of its costs under federal and state cost recovery
mechanisms (see - "Regulation and Competition - High-cost support funds, revenue
sharing arrangements and related matters" below). Certain of the Company's
interstate network access revenues are based on tariffed access charges
prescribed by the Federal Communications Commission ("FCC"); the remainder of
such revenues are derived under revenue sharing arrangements with other local
exchange carriers ("LECs") administered by the National Exchange Carrier
Association ("NECA"), a quasi-governmental non-profit organization formed by the
FCC in 1983 for such purposes.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on tariffed access charges, which are subject to state regulatory
commission approval. Additionally, certain of the Company's intrastate network
access revenues, along with intrastate and intra-LATA (Local Access and
Transport Areas) long distance revenues, are derived through revenue sharing
arrangements with other LECs.
The Telecommunications Act of 1996 allows local exchange carriers to file
access tariffs on a streamlined basis and, if certain criteria are met, deems
those tariffs lawful. 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. Certain of the Company's telephone subsidiaries file
interstate tariffs directly with the FCC using this streamlined filing approach.
As of December 31, 2004, the amount of the Company's earnings in excess of the
authorized rate of return reflected as a liability on the balance sheet for the
combined 2001/2002 and 2003/2004 monitoring periods aggregated approximately
$63 million. The settlement period 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 any pending or future proceedings that could impact its entitlement to
these funds, and may recognize as revenue some or all of the over-earnings at
the end of the settlement period or as the legal status becomes more certain.
Long distance. Long distance revenues relate to the provision of retail
long distance services which the Company began marketing to its local exchange
customers in 1996. At December 31, 2004, the Company provided long distance
services to nearly 1.1 million lines. The Company anticipates that most of its
long distance service revenues will be provided as part of an integrated bundle
with the Company's other service offerings, including its local exchange
telephone service offering.
Data. Data revenues include revenues primarily related to the provision of
Internet access services (both dial-up and DSL services) and the provision of
data transmission services over special circuits and private lines. The Company
began offering traditional dial-up Internet access services to its telephone
customers in 1995. In late 1999, the Company began offering DSL Internet access
services, a high-speed premium-priced data service. As of December 31, 2004,
approximately 71% of the Company's access lines were DSL-enabled. At December
31, 2004, the Company provided Internet access services to over 262,000
customers, approximately 128,500 of which received traditional dial-up services
and approximately 133,500 of which received retail DSL services. During 2004,
the Company added over 57,000 retail DSL connections.
Fiber transport and CLEC. Fiber transport and CLEC revenues include
revenues from the Company's fiber transport, competitive local exchange carrier
("CLEC") and security monitoring businesses.
In late 2000, the Company began offering competitive local exchange
telephone services as part of a bundled service offering to small to
medium-sized businesses in Monroe and Shreveport, Louisiana. On February 28,
2002, the Company purchased the fiber network and customer base of KMC's
operations in Monroe and Shreveport, Louisiana, which allowed the Company to
offer broadband and competitive local exchange services to customers in these
markets.
During the second quarter of 2001, the Company began selling capacity to
other carriers and businesses over a 700-mile fiber optic ring that the Company
constructed in southern and central Michigan. In June 2003, the Company acquired
the assets of Digital Teleport, Inc., a regional communications company
providing wholesale data transport services to other communications carriers
over its fiber optic network located in Missouri, Arkansas, Oklahoma and Kansas,
for $39.4 million cash. The Company has used the network to sell services to new
and existing customers and to reduce the Company's reliance on third party
transport providers. In addition, in December 2003, the Company acquired
additional fiber transport assets in Arkansas, Missouri and Illinois from Level
3 Communications, Inc. for approximately $15.8 million cash to provide services
similar to those described above. The Company operates its fiber transport
assets under the name LightCore. As of December 31, 2004, LightCore's network
encompassed more than 8,700 route miles of lit fiber in the central United
States. For a description of a pending acquisition of additional network assets,
see "-Recent Acquisitions" above.
The Company offers 24-hour burglary and fire monitoring services to
approximately 8,700 customers in select markets in Louisiana, Arkansas,
Mississippi, Texas and Ohio.
Other. 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 third parties and
(iii) participating in the publication of local directories. The Company also
provides printing, database management and direct mail services and cable
television services.
Certain large communications companies for which the Company currently
provides billing and collection services continue to indicate their desire to
reduce their billing and collection expenses, which has resulted and may
continue to result in reductions of the Company's billing and collection
revenues.
From time to time, the Company also makes investments in other domestic or
foreign communications companies, the most significant of which is an interest
in a start-up satellite service company.
For further information on regulatory, technological and competitive
changes that could impact the Company's revenues, see "-Regulation and
Competition" and "Special Considerations."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") or the Rural Telephone Bank
("RTB"), both of which are federal agencies that have historically provided
long-term financing to telephone companies at relatively attractive interest
rates. Approximately 23% of the Company's telephone plant is pledged to secure
obligations of the Company's telephone subsidiaries to the RUS and RTB. For
additional information regarding the Company's financing, see the Company's
consolidated financial statements included in Item 8 herein.
Regulation and Competition Relating to Incumbent Local Exchange Operations
Traditionally, LECs operated as regulated monopolies having the exclusive
right and responsibility to provide local telephone services. (These LECs are
sometimes referred to below as "incumbent LECs" or "ILECs"). Consequently, most
of the Company's intrastate telephone operations have traditionally been
regulated extensively by various state regulatory agencies (generally called
public service commissions or public utility commissions) and its interstate
operations have been regulated by the FCC. As discussed in greater detail below,
passage of the Telecommunications Act of 1996 (the "1996 Act"), coupled with
state legislative and regulatory initiatives and technological changes,
fundamentally altered the telephone industry by reducing the regulation of LECs
and attracting a substantial increase in the number of competitors and capital
invested in existing and new services. CenturyTel anticipates that these trends
towards reduced regulation and increased competition will continue.
State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions which typically have the power to grant and revoke
franchises authorizing companies to provide communications services. Most
commissions have traditionally regulated pricing through "rate of return"
regulation that focuses on authorized levels of earnings by LECs. Most of these
commissions also (i) regulate the purchase and sale of LECs, (ii) prescribe
depreciation rates and certain accounting procedures, (iii) oversee
implementation of several federal telecommunications laws and (iv) regulate
various other matters, including certain service standards and operating
procedures.
In recent years, state legislatures and regulatory commissions in most of
the 22 states in which the Company operates have either reduced the regulation
of LECs or have announced their intention to do so, and it is expected that this
trend will continue. Wisconsin, Missouri, Alabama, Arkansas and several other
states have implemented laws or rulings which require or permit LECs to opt out
of "rate of return" regulation in exchange for agreeing to alternative forms of
regulation which typically permit the LEC greater freedom to establish local
service rates in exchange for agreeing not to charge rates in excess of
specified caps. As discussed further below, subsidiaries operating over 60% of
the Company's access lines in various states have agreed to be governed by
alternative regulation plans, and the Company continues to explore its options
for similar treatment in other states. The Company believes that reduced
regulatory oversight of certain of the Company's telephone operations may allow
the Company to offer new and competitive services faster than under the
traditional regulatory process. For a discussion of legislative, regulatory and
technological changes that have introduced competition into the local exchange
industry, see "-Developments Affecting Competition."
Alternative regulation plans govern some or all of the access lines
operated by the Company in Wisconsin, Missouri, Alabama and Arkansas, which are
the Company's four largest state markets. The following summary describes the
alternative regulation plans applicable to the Company in these states.
o Approximately 70% of the Company's Wisconsin access lines are regulated
under various alternative regulation plans. Each of these alternative regulation
plans has a five-year term and permits the Company to adjust local rates within
specified parameters if it meets certain quality-of-service and
infrastructure-development commitments. These plans also include initiatives
designed to promote competition. The Company's Wisconsin access lines acquired
in mid-2000 continue to be regulated under "rate of return" regulation.
o All of the Company's Missouri LECs are regulated under a price-cap
regulation plan (effective in 2002) whereby basic service rates are adjusted
annually based on an inflation-based factor; non-basic services may be increased
up to 8% annually. The plan also allows LECs to rebalance local basic service
rates up to four times in the first four years of such regulation as a result of
access rate or toll reductions. Based on its annual filing effective September
2004, the Company estimates a $2.2 million annual reduction in revenues as a
result of recent declines in the inflation-based factor. If the inflation-based
factor continues to decline, the Company's revenues will continue to be
negatively impacted.
o Since 1995, the Company's Alabama telephone properties acquired from
Verizon in 2002 have been subject to an alternative regulation plan. Under this
plan, local rates were frozen initially for five years, after which time such
rates could be raised by an amount equal to consumer price index increases less
1%; non-basic service rates could be increased up to 10% per year. The Alabama
alternative regulation plan will be replaced in 2005 by the Alabama
Telecommunications Regulation Plan. Under this plan, residential and business
basic local service rates will remain at existing levels for two years, after
which time rates can be increased up to five percent per year up to a maximum
capped level. Rates for all other retail services may be adjusted depending on
the tier designation established under the plan.
o The Company's Arkansas LECs, excluding the properties acquired from
Verizon in 2000, are regulated under an alternative regulation plan adopted in
1997, which initially froze basic local and access rates for three years, after
which time such rates can be adjusted based on an inflation-based factor. Other
local rates can be adjusted without commission approval; however, such rates are
subject to commission review if certain petition criteria are met.
Notwithstanding the movement toward alternative regulation, LECs operating
approximately 38% of the Company's total access lines continue to be subject to
"rate of return" regulation for intrastate purposes. These LECs remain subject
to the powers of state regulatory commissions to conduct earnings reviews and
adjust service rates, either of which could lead to revenue reductions.
FCC regulation. The FCC regulates interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other communications
companies by the Company for use of its network in connection with the
origination and termination of interstate voice and data transmissions.
Additionally, the FCC has prescribed certain rules and regulations for telephone
companies, including a uniform system of accounts and rules regarding the
separation of costs between jurisdictions and, ultimately, between interstate
services. LECs must obtain FCC approval to use certain radio frequencies, or to
transfer control of any such licenses.
Effective January 1, 1991, the FCC adopted price-cap regulation
relating to interstate access rates for the Regional Bell Operating Companies.
All other LECs may elect to be subject to price-cap regulation. Under price-cap
regulation, limits imposed on a company's interstate rates are adjusted
periodically to reflect inflation, productivity improvement and changes in
certain non-controllable costs. The Company has not elected price-cap regulation
for its incumbent operations. However, the properties acquired from Verizon in
2002 have continued to operate under price-cap regulation based upon a waiver
from rules that historically required a purchaser of price-cap properties to
convert all of its properties to price-cap regulation. In February 2004, the FCC
amended its rules to permit purchasers of price-cap regulated properties to
either retain price-cap regulation for the acquired properties or migrate such
properties to rate-of-return regulation.
In 2001, the FCC modified its interstate access charge rules and
universal service support system for rate of return LECs. This order, among
other things, (i) increased the caps on the subscriber line charges ("SLC") to
the levels paid by most subscribers nationwide; (ii) allowed limited SLC
deaveraging, which enhanced the competitiveness of rate of return carriers by
giving them pricing flexibility; (iii) lowered per minute rates collected for
federal access charges; (iv) created a new explicit universal service support
mechanism that replaced other implicit support mechanisms in a manner designed
to ensure that rate structure changes do not affect the overall recovery of
interstate access costs by rate of return carriers serving high cost areas and
(v) preserved the historic 11.25% authorized interstate return rate for rate of
return LECs. The effect of this order on the Company was revenue neutral for
interstate purposes, but did result in a reduction in intrastate revenues in
Arkansas and Ohio (where intrastate access rates must mirror the interstate
access rates).
In 2003, the 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. The FCC has
received intercarrier compensation proposals from several industry groups, and
on February 10, 2005 solicited comments on all proposals previously submitted to
it. The Company is involved in this proceeding and will continue to monitor the
implications of these plans to its operations.
As discussed further below, certain providers of competitive
communications services are currently not required to compensate ILECs for the
use of their networks.
All forms of federal support available to ILECs are currently available
to any local competitor that qualifies as an "eligible telecommunications
carrier." This support could encourage additional competitors to enter the
Company's high-cost service areas, and, as discussed further below, place
financial pressure on the FCC's support programs.
Universal service support funds, revenue sharing arrangements and related
matters. A significant number of the Company's telephone subsidiaries recover a
portion of their costs from programs administered by the federal Universal
Service Fund (the "USF") and from similar state "universal support" mechanisms.
Disbursements from these programs traditionally have allowed LECs serving small
communities and rural areas to provide communications services on terms and at
prices reasonably comparable to those available in urban areas. The aggregate
amount of revenues received from such support programs was $365.2 million in
2004 (or 15.2% of 2004 consolidated revenues) and $370.5 million in 2003 (or
15.6% of 2003 consolidated revenues). Included in such amounts are receipts from
(i) the High Cost Loop support program of $187.9 million for 2004 and $199.2
million for 2003 and (ii) various state support programs of $35.8 million for
2004 and $33.3 million for 2003.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that provides relatively predictable
levels of support to rural local exchange carriers, including substantially all
of the Company's local exchange carriers. Based on recent FCC filings, the
Company anticipates its 2005 revenues from the USF High Cost Loop support
program will be approximately $10-15 million lower than 2004 levels due to
increases in the nationwide average cost per loop factor used to allocate funds
among all recipients.
Wireless and other competitive service providers continue to seek
eligible telecommunications carrier ("ETC") status in order to be eligible to
receive USF support, which, coupled with changes in usage of telecommunications
services, have placed stresses on the USF's funding mechanism. These
developments have placed additional financial pressure on the amount of money
that is necessary and available to provide support to all eligible service
providers, including support payments the Company receives from the High Cost
Loop support program. As a result of the continued increases in the nationwide
average cost per loop factor (caused by limited growth in the size of the High
Cost Loop support program and increases in requests for support from the USF),
the Company believes the aggregate level of payments it receives from the USF
will continue to decline in the near term under the FCC's current rules.
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 support program. In December 2004, Congress passed a bill
that granted the USF a one-year exemption from the federal law that impacted the
E-rate program. Congress has since introduced a bill to grant a permanent
exemption to the USF from such federal law.
In late 2002, the FCC requested that the Federal-State Joint Board
("FSJB") on Universal Service review various FCC rules governing high cost
universal service support, including rules regarding eligibility to receive
support payments in markets served by LECs and competitive carriers. On February
7, 2003, the FSJB issued a notice for public comment on whether present rules
fulfill their purpose and whether or not modifications are needed. On February
27, 2004, the FSJB sent the FCC a series of recommendations concerning the
process of designating ETCs and suggestions for gaining better control over the
disbursement of high-cost universal service support in markets where one or more
ETCs are present. The FSJB declined to recommend that the FCC modify the
methodology used to calculate support in study areas with multiple ETCs, instead
recommending an overall review of the high-cost support mechanism for rural and
non-rural carriers.
On August 16, 2004, the FSJB released a notice requesting comments on the
FCC's current rules for the provision of high-cost support for rural companies,
including comments on whether eligibility requirements should be amended in a
manner that would adversely affect larger rural LECs such as the Company. The
FCC has taken various other steps in anticipation of restructuring universal
service support mechanisms, including opening a docket that will change the
method of funding contributions. The FCC is expected to act before its current
rules are scheduled to expire on June 30, 2006. Congress is also exploring
various universal service issues ranging from targeted universal service
legislation to re-writing the 1996 Act. The Company has been and will continue
to be active in monitoring these developments.
In January 2003, the Louisiana Public Service Commission staff began
reviewing the feasibility of converting the $42 million Louisiana Local Optional
Service Fund ("LOS Fund") into a state universal service fund. Currently, the
LOS Fund is funded primarily by BellSouth, which proposes to expand the base of
contributors into the LOS Fund. The Company currently receives approximately $21
million from the LOS Fund each year. Although the Commission staff has
recommended to transfer the fund's $42 million to a state universal service
fund, there can be no assurance that the Commission will adopt this
recommendation or that funding will remain at current levels.
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "- State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
Substantially all of the Company's LECs (except for the properties
acquired from Verizon in 2002) concur with the common line tariff and certain of
the Company's LECs concur with the traffic sensitive tariffs filed by the NECA;
such LECs participate in the access revenue sharing arrangements administered by
the NECA for interstate services. All of the intrastate network access revenues
of the Company's LECs are based on access charges, cost separation studies or
special settlement arrangements. See "- Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. Long distance carriers
have also aggressively pursued regulatory or legislative changes that would
reduce access rates. See "-Services - Network Access" above for additional
information.
Developments affecting competition. The communications industry continues
to undergo fundamental changes which are likely to significantly impact the
future operations and financial performance of all communications companies.
Primarily as a result of regulatory and technological changes, competition has
been introduced and encouraged in each sector of the telephone industry in
recent years. As a result, the Company increasingly faces competition from
providers seeking to use the Company's network and from providers offering
competitive services.
The 1996 Act, which obligates LECs to permit competitors to interconnect
their facilities to the LEC's network and to take various other steps that are
designed to promote competition, imposes several duties on a LEC if it receives
a specific request from another entity which seeks to connect with or provide
services using the LEC's network. In addition, each incumbent LEC is obligated
to (i) negotiate interconnection agreements in good faith, (ii) provide
"unbundled" access to all aspects of the LEC's network, (iii) offer resale of
its telecommunications services at wholesale rates and (iv) permit competitors
to collocate their physical plant on the LEC's property, or provide virtual
collocation if physical collocation is not practicable. During 2003, the FCC
released new rules outlining the obligations of incumbent LECs to lease to
competitors elements of their circuit-switched networks on an unbundled basis at
prices that substantially limited the profitability of these arrangements to
incumbent LECs. On March 2, 2004, a federal appellate court vacated significant
portions of these rules, including the standards used to determine which
unbundled network elements must be made available to competitors. In response to
this court decision, on February 4, 2005, the FCC released rules (effective
March 11, 2005) that require incumbent LECs to lease a network element only in
those situations where competing carriers genuinely would be impaired without
access to such network element, and where the unbundling would not interfere
with the development of facilities-based competition. These rules are further
designed to remove unbundling obligations over time as competing carriers deploy
their own networks and local exchange competition increases.
Under the 1996 Act's rural telephone company exemption, approximately 50%
of the Company's telephone access lines are exempt from certain of the 1996
Act's interconnection requirements unless and until the appropriate state
regulatory commission overrides the exemption upon receipt from a competitor of
a bona fide request meeting certain criteria. States are permitted to adopt laws
or regulations that provide for greater competition than is mandated under the
1996 Act. Management believes that competition in its telephone service areas
has increased and will continue to increase as a result of the 1996 Act and the
FCC's interconnection rulings. While competition through use of the Company's
network is still limited in most of its markets, the Company expects to receive
additional interconnection requests in the future from a variety of resellers
and facilities-based service providers.
In addition to these changes in federal regulation, all of the 22 states
in which the Company provides telephone services have taken legislative or
regulatory steps to further introduce competition into the LEC business.
As a result of these regulatory developments, ILECs increasingly face
competition from competitive local exchange carriers ("CLECs"), particularly in
high population areas. CLECs provide competing services through reselling the
ILECs' local services, through use of the ILECs' unbundled network elements or
through their own facilities. The number of companies which have requested
authorization to provide local exchange service in the Company's service areas
has increased in recent years, especially in the Company's Verizon markets
acquired in 2002 and 2000. The Company anticipates that similar action may be
taken by other competitors in the future, especially if all forms of federal
support available to ILECs continue to remain available to these competitors.
Technological developments have led to the development of new services
that compete with traditional LEC services. Technological improvements have
enabled cable television companies to provide traditional circuit-switched
telephone service over their cable networks, and several national cable
companies have aggressively pursued this opportunity. Recent improvements in the
quality of "Voice-over-Internet Protocol" ("VoIP") service have led several
large cable television and telephone companies, as well as start-up companies,
to substantially increase their offerings of VoIP service to business and
residential customers. VoIP providers route calls over the Internet, without use
of ILEC's circuit switches and, in certain cases, without use of ILEC's networks
to carry their communications traffic. VoIP providers use existing broadband
networks to deliver flat-rate, all distance calling plans that may be priced
below those currently charged for traditional local and long distance telephone
services for several reasons, including lower network cost structures and the
current ability of VoIP providers to use ILECs' networks without paying access
charges. However, the service must be purchased in addition to the cost of the
broadband connection. In December 2003, the FCC initiated rulemaking that is
expected to address the effect of VoIP on intercarrier compensation, universal
service and emergency services. On March 10, 2004, the FCC released a notice of
proposed rulemaking seeking comment on the appropriate regulatory treatment of
VoIP service and related issues. Although the FCC's rulemaking regarding
VoIP-enabled services remains pending, the FCC has adopted orders establishing
broad guidelines for the regulation of such services, including an April 2004
order in which the FCC ruled that the IP-telephony service of AT&T, which
converts voice calls to IP format for routing over the public switched telephone
network, is a regulated telecommunications service subject to interstate access
charges. In addition, in November 2004, the FCC ruled that Internet-based
services provided by Vonage Holdings Corporation should be subject to federal
rather than state jurisdiction. Several state commissions have filed appeals of
this decision to various federal appellate courts. Also pending at the FCC is a
petition filed by Level 3 Communications, Inc. asking the FCC to forbear from
imposing interstate or intrastate access charges on Internet-based calls that
originate or terminate on the public switched telephone network. There can be no
assurance that future rulemaking will be on terms favorable to ILECs, or that
VoIP providers will not successfully compete for the Company's customers.
Wireless telephone services increasingly constitute a significant source
of competition with LEC services, especially as wireless carriers expand and
improve their network coverage and continue to lower their prices. As a result,
some customers have chosen to completely forego use of traditional wireline
phone service and instead rely solely on wireless service. The Company
anticipates this trend will continue, particularly if wireless service rates
continue to decline and the quality of wireless service improves. Technological
and regulatory developments in cellular telephone, personal communications
services, digital microwave, satellite, coaxial cable, fiber optics, local
multipoint distribution services and other wired and wireless technologies are
expected to further permit the development of alternatives to traditional
landline services. In September 2004, the Company announced it had entered into
a reseller arrangement with Cingular Wireless that will allow the Company to
provide wireless voice and text messaging services as part of its integrated
service offering. The Company currently offers such bundled service to select
markets and plans to expand its offering to the majority of its markets in
2005.
In addition to facing direct competition from those providers described
above, ILECs increasingly face competition from alternate communication systems
constructed by long distance carriers, large customers or alternative access
vendors. These systems, which have become more prevalent as a result of the 1996
Act, are capable of originating or terminating calls without use of the ILECs'
networks or switching services. Other potential sources of competition include
noncarrier systems that are capable of bypassing ILECs' local networks, either
partially or completely, through substitution of special access for switched
access or through concentration of telecommunications traffic on a few of the
ILECs' access lines. The Company anticipates that all these trends will continue
and lead to increased competition with the Company's LECs.
In November 2003, the FCC adopted rules requiring companies to allow their
customers to keep their wireline or wireless phone number when switching to
another service provider (generally referred to as "local number portability").
For several years, customers have been able to retain their numbers when
switching their local service between wireline carriers. The new rules now
require local number portability between wireline and wireless carriers. This
requirement went into effect November 24, 2003 for wireline carriers in the top
100 Metropolitan Statistical Areas ("MSAs"). The requirement went into effect
May 24, 2004 for wireline carriers operating in markets smaller than the top 100
MSAs. Local number portability may increase the number of customers who choose
to completely forego the use of traditional wireline phone service. To date, the
costs to comply with the requirements of local number portability, net of the
amount that is recoverable through the ratemaking process, have not had a
material impact on the Company's results of operations.
Significant competitive factors in the local telephone industry include
pricing, packaging of services and features, quality of service and meeting
customer needs such as simplified billing and timely response to service calls.
As the telephone industry increasingly experiences competition, the size
and resources of each respective competitor may increasingly influence its
prospects. Many companies currently providing or planning to provide competitive
communication services have substantially greater financial and marketing
resources than the Company, and several are not subject to the same regulatory
constraints as the Company.
The Company anticipates that the traditional operations of LECs will
continue to be impacted by continued regulatory and technological developments
affecting the ability of LECs to provide new services and the capability of long
distance companies, CLECs, wireless companies, cable television companies, VoIP
providers and others to provide competitive LEC services. Competition relating
to traditional LEC services has thus far affected large urban areas to a greater
extent than rural, suburban and small urban areas such as those in which the
Company operates. The Company intends to actively monitor these developments, to
observe the effect of emerging competitive trends in larger markets and to
continue to evaluate new business opportunities that may arise out of future
technological, legislative and regulatory developments.
As previously mentioned, 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. The Company
anticipates that its diluted earnings will be negatively impacted in 2005 by
approximately $.04 to $.07 per share primarily due to expenses associated with
rolling out these new services.
While the Company expects its operating revenues in 2005 to continue to
experience downward pressure due to continued access line losses and reduced
network access revenues, the Company expects its consolidated revenues to
increase in 2005 primarily due to increased demand for its long distance, fiber
transport, DSL and other nonregulated product offerings (including its new video
and wireless initiatives mentioned above).
Regulation and Competition Relating to Other Operations
Long Distance Operations. The Company offers intraLATA, intrastate and
interstate long distance services. State public service commissions generally
regulate intraLATA toll calls within the same LATA and intraLATA toll calls
between different LATAs located in the same state. Federal regulators have
jurisdiction over interstate toll calls. Recent state regulatory changes have
increased competition to provide intra-LATA toll services in the Company's local
exchange markets. Competition for intrastate and interstate long distance
services has been intense for several years, and focuses primarily on price and
pricing plans, and secondarily on customer service, reliability and
communications quality. Traditionally, the Company's principal competitors for
providing long distance services were AT&T, MCI, Sprint, regional phone
companies and dial-around resellers. Increasingly, however, the Company has
experienced competition from newer sources, including wireless and high-speed
broadband providers, and as a result of technological substitutions, including
VoIP and electronic mail.
Data Operations. In connection with its data business, the Company
faces competition from Internet service providers, satellite companies and cable
companies which offer both dial-up Internet access services and high-speed
broadband services. Many of these providers are subject to less rigorous
regulatory scrutiny than the Company's subsidiaries. The FCC is currently
conducting several rulemakings considering the regulatory treatment of broadband
services, the outcomes of which could significantly impact the competitive
position of the Company and its competitors.
Fiber Transport Operations. When the Company's fiber transport
networks are used to provide intrastate telecommunications services, the Company
must comply with state requirements for telecommunications utilities, including
state tariffing requirements. To the extent the Company's facilities are used to
provide interstate communications, the Company is subject to federal regulation
as a non-dominant common carrier. Due largely to excess capacity, the fiber
transport industry is highly competitive. The Company's primary competitors are
from other communications companies, many of whom operate networks and have
resources much larger than those of the Company.
CLEC Operations. Competitive local exchange carriers are subject to
certain reporting and other regulatory requirements by the FCC and state public
service commissions, although the degree of regulation is much less substantial
than that imposed on ILECs operating in the same markets. Local governments also
frequently require competitive local exchange carriers to obtain licenses or
franchises regulating the use of rights-of-way necessary to install and operate
their networks. In each of its CLEC markets, the Company faces competition from
the ILEC, which traditionally has long-standing relationships with its
customers. Over time, the Company may also face competition from one or more
other CLECs, or from other communications providers who can provide comparable
services.
OTHER DEVELOPMENTS
The Company recently implemented a new integrated billing and customer
care system. The capitalized costs of the system aggregated $207 million (before
accumulated amortization) at December 31, 2004 and are being amortized over a
20-year period. Virtually all of the Company's customers were converted to the
new system in late 2004. In early 2005, the Company implemented software
upgrades and other changes to enhance the productivity and efficiency of the
system, the cost of which was not material.
In November 2004, the Company completed its previously announced $400
million share repurchase program. In February 2005, the Company's board of
directors approved an additional stock repurchase program, authorizing the
Company to repurchase up to an aggregate of $200 million of either its common
stock or convertible equity units through December 2005. In addition, the
Company currently expects, subject to market conditions and the availability
of other investment opportunities, to pursue 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.
SPECIAL CONSIDERATIONS
Risk Factors
We face competition, which could adversely affect us.
As a result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive, and we expect
these trends to continue. The number of companies that have requested
authorization to provide traditional local exchange service in our markets has
increased in recent years, and we anticipate that others will take similar
action in the future. Recent technological developments have led several
competitors to substantially increase their service offerings, often at prices
substantially below those charged for traditional phone services. Wireless
telephone services increasingly constitute a significant source of competition
with LEC services, especially as wireless owners expand and improve their
network coverage and continue to lower their prices.
We expect competition to intensify as a result of new competitors and
the development of new technologies, products and services. We cannot predict
which future technologies, products or services will be important to maintain
our competitive position or what funding will be required to develop and provide
these technologies, products or services. Our ability to compete successfully
will depend on how well we market our products and services and on our ability
to anticipate and respond to various competitive and technological factors
affecting the industry, including changes in regulation (which may affect us
differently from our competitors), changes in consumer preferences or
demographics, and changes in the product offerings or pricing strategies of our
competitors.
Many of our current and potential competitors have market presence,
engineering, technical and marketing capabilities and financial, personnel and
other resources substantially greater than ours. In addition, some of our
competitors can conduct operations or raise capital at a lower cost than we can,
are subject to less regulation, or have substantially stronger brand names.
Consequently, some competitors may be able to charge lower prices for their
products and services, to develop and expand their communications and network
infrastructures more quickly, to adapt more swiftly to new or emerging
technologies and changes in customer requirements, and to devote greater
resources to the marketing and sale of their products and services than we can.
Competition could adversely impact us in several ways, including (i)
the loss of customers and market share, (ii) the possibility of customers
shifting to less profitable services, (iii) our need to lower prices or increase
marketing expenses to remain competitive and (iv) our inability to diversify by
offering new products or services.
We could be harmed by rapid changes in technology.
The communications industry is experiencing significant technological
changes, particularly in the areas of VoIP, data transmission and wireless
communications. Some of our competitors may enjoy network advantages that will
enable them to provide services more efficiently or at lower cost. Rapid changes
in technology could result in the development of products or services that
compete with or displace those offered by traditional LECs. If we cannot develop
new products to keep pace with technological advances, or if such products are
not widely embraced by our customers, we could be adversely impacted.
Our industry is highly regulated, and continues to undergo various
fundamental regulatory changes.
As a diversified full service incumbent local exchange carrier, or
ILEC, we have traditionally been subject to significant regulation from federal,
state and local authorities. This regulation imposes substantial compliance
costs on us and restricts our ability to raise rates, to compete and to respond
rapidly to changing industry conditions. In recent years, the communications
industry has undergone various fundamental regulatory changes that have
generally permitted competition in each segment of the telephone industry and
reduced the regulation of telephone companies, in particular by requiring or
permitting LECs to opt out of traditional "rate of return" regulation in
exchange for agreeing to alternative forms of regulation. These alternative
forms of regulation, which currently apply to over half our access lines,
typically permit the LEC greater freedom to establish local service rates in
exchange for agreeing not to charge rates in excess of specified caps. These and
subsequent changes could adversely affect us by reducing the fees that we are
permitted to charge, altering our tariff structures, or otherwise changing the
nature of our operations and competition in our industry. Recent rule changes
that permit customers to retain their wireline or wireless number when switching
to another service provider could increase the number of our customers who
choose to disconnect their wireline service. Other pending rulemakings could
have a substantial impact on our operations, including in particular rulemakings
on intercarrier compensation, universal service, and VoIP regulations.
Litigation and different objectives among federal and state regulators could
create uncertainty and delay our ability to respond to new regulations.
Moreover, changes in tax laws, regulations or policies could increase our tax
rate, particularly if state regulators continue to search for additional revenue
sources to address budget shortfalls. We are unable to predict the future
actions of the various regulatory bodies that govern us, but such actions could
materially affect our business.
We cannot assure you that our core businesses will grow or that our
diversification efforts will be successful.
Due to the above-cited changes, the telephone industry has recently
experienced a decline in access lines, intrastate minutes of use and long
distance minutes of use. While we have not suffered as much as a number of other
ILECs from recent industry challenges, the recent decline in access lines and
usage, coupled with the other changes resulting from competitive, technological
and regulatory developments, could materially adversely effect our core business
and future prospects. Our access lines declined 2.6% in 2004 and we expect our
access lines to decline between 2.5% and 3.5% in 2005. We also earned less
intrastate revenues in 2004 due to reductions in intrastate minutes of use
(partially due to the displacement of minutes of use by wireless, electronic
mail and other optional calling services). We believe our intrastate minutes of
use will continue to decline, although the magnitude of such decrease is
uncertain.
Until recently, we have traditionally sought growth largely through
acquisitions of properties similar to those currently operated by us. However,
we cannot assure you that properties will be available for purchase on terms
attractive to us, particularly if they are burdened by regulations, pricing
plans or competitive pressures that are new or different from those historically
applicable to our incumbent properties. Moreover, we cannot assure you that we
will be able to arrange additional financing on terms acceptable to us.
In recent years, we have attempted to broaden our service and product
offerings. During 2003, we expanded our fiber transport business through
selective asset purchases. During 2004, we entered into agreements to provide
co-branded satellite television services and to resell wireless services as part
of our bundled product and service offerings, which we anticipate will dilute
our earnings for 2005 by approximately $.04 to $.07 per share. We cannot assure
you that our recent diversification efforts will be successful.
We are reliant on support funds provided under federal and state laws.
We receive a substantial portion of our revenues from the federal
Universal Service Fund and, to a lesser extent, intrastate support funds. These
governmental programs are reviewed and amended from time to time, and we cannot
assure you that they will not be changed or impacted in a manner adverse to us.
In August 2004, a federal-state joint board requested comments on the FCC's
current rules for high-cost support payments to rural telephone companies,
including comments on whether eligibility requirements should be amended in a
manner that would adversely affect larger rural LECs such as the Company. The
FCC is expected to act upon this request for comments before its current rules
are scheduled to expire on June 30, 2006.
Recent changes in the nationwide average cost per loop factors used by
the FCC to allocate support funds have reduced our receipts from the main
support program administered by the federal Universal Service Fund. These
changes reduced our receipts from such program by $11.3 million in 2004 compared
to 2003, and we expect these changes will further reduce our receipts from such
program by approximately $10 to $15 million in 2005 compared to 2004. In
addition, the number of eligible telecommunications carriers receiving support
payments from this program continues to increase, which, coupled with other
factors, is placing additional financial pressure on the amount of money that is
necessary and available to provide support payments to all eligible recipients,
including us. As a result of the continued increases in the nationwide average
cost per loop factor (caused by limited growth in the size of the USF High Cost
Loop support program and increases in requests for support from the Universal
Service Fund), we believe the aggregate level of payments we receive from the
Universal Service Fund will continue to decline in the near term under the
FCC's current rules.
Our future results will suffer if we do not effectively manage our growth.
In the past few years, we have rapidly expanded our operations
primarily through acquisitions and new product and service offerings, and we may
pursue similar growth opportunities in the future. Our future success depends,
in part, upon our ability to manage our growth, including our ability to:
o upgrade our billing and other information systems
o retain and attract technological, managerial and other key personnel
o effectively manage our day to day operations while attempting to
execute our business strategy of expanding our wireline operations
and our emerging businesses
o realize the projected growth and revenue targets developed by
management for our newly acquired and emerging businesses, and
o continue to identify new acquisition or growth opportunities that
we can finance, consummate and operate on attractive terms.
Our rapid growth poses substantial challenges for us to integrate new
operations into our existing business in an efficient and timely manner, to
successfully monitor our operations, costs, regulatory compliance and service
quality, and to maintain other necessary internal controls. We cannot assure you
that these efforts will be successful, or that we will realize our expected
operating efficiencies, cost savings, revenue enhancements, synergies or other
benefits. If we are not able to meet these challenges effectively, our results
of operations may be harmed.
We could be affected by certain changes in labor matters.
At December 31, 2004, approximately 26% of our employees were members
of 13 separate bargaining units represented by two different unions. From time
to time, our labor agreements with these unions lapse, and we typically
negotiate the terms of new agreements. In 2005, the contracts governing
approximately 71% of the union workforce lapse and are scheduled to be
renegotiated. We cannot predict the outcome of these negotiations. We may be
unable to reach new agreements, and union employees may engage in strikes, work
slowdowns or other labor actions, which could materially disrupt our ability to
provide services. In addition, new labor agreements may impose significant new
costs on us, which could impair our financial condition or results of operations
in the future.
We have a substantial amount of indebtedness.
We have a substantial amount of indebtedness. This could hinder our
ability to adjust to changing market and economic conditions, as well as our
ability to access the capital markets to refinance maturing debt in the ordinary
course of business. In connection with executing our business strategies, we are
continuously evaluating the possibility of acquiring additional communications
assets, and we may elect to finance acquisitions by incurring additional
indebtedness. Moreover, to respond to the competitive challenges discussed
above, we may be required to raise substantial additional capital to finance new
product or service offerings. Our ability to arrange additional financing will
depend on, among other factors, our financial position and performance, as well
as prevailing market conditions and other factors beyond our control. We cannot
assure you that we will be able to obtain additional financing on terms
acceptable to us or at all. If we are able to obtain additional financing, our
credit ratings could be adversely affected. As a result, our borrowing costs
would likely increase, our access to capital may be adversely affected and our
ability to satisfy our obligations under our current indebtedness could be
adversely affected.
Our agreements and organizational documents and applicable law could
limit another party's ability to acquire us at a premium.
Under our articles of incorporation, each share of common stock that
has been beneficially owned by the same person or entity continually since May
30, 1987 generally entitles the holder to ten votes on all matters duly
submitted to a vote of shareholders. As of February 28, 2005, the holders of our
ten-vote shares held approximately 39% of our total voting power. In addition, a
number of other provisions in our agreements and organizational documents,
including our shareholder rights plan, and various provisions of applicable law
may delay, defer or prevent a future takeover of CenturyTel unless the takeover
is approved by our board of directors. This could deprive our shareholders of
any related takeover premium.
Forward-Looking Statements
This report on Form 10-K and other documents filed by us under the federal
securities laws include, and future oral or written statements or press releases
by us and our management may include, certain forward-looking statements,
including without limitation statements with respect to our anticipated future
operating and financial performance, financial position and liquidity, growth
opportunities and growth rates, business prospects, regulatory and competitive
outlook, investment and expenditure plans, investment results, financing
opportunities and sources (including the impact of financings on our financial
position, financial performance or credit ratings), pricing plans, strategic
alternatives, business strategies, and other similar statements of expectations
or objectives that are highlighted by words such as "expects," "anticipates,"
"intends," "plans," "believes," "projects," "seeks," "estimates," "hopes,"
"should," and "may," and variations thereof and similar expressions. Such
forward-looking statements are based upon our judgment and assumptions as of the
date of this report concerning future developments and events, many of which are
outside of our control. These forward-looking statements, and the assumptions
upon which such statements are based, are inherently speculative and are subject
to uncertainties that could cause our actual results to differ materially from
such statements. These uncertainties include but are not limited to those set
forth below:
o the extent, timing, success and overall effects of competition from
wireless carriers, VoIP providers, CLECs, cable television companies and
others, including without limitation the risks that these competitors may
offer less expensive or more innovative products and services.
o the risks inherent in rapid technological change, including without
limitation the risk that new technologies will displace our products and
services.
o the effects of ongoing changes in the regulation of the communications
industry, including without limitation (i) increased competition resulting
from the FCC's regulations relating to local number portability,
interconnection and other matters, (ii) the final outcome of various
federal, state and local regulatory initiatives and proceedings that could
impact our competitive position, compliance costs, capital expenditures or
prospects, and (iii) reductions in revenues received from the federal
Universal Service Fund or other current or future federal and state
support programs designed to compensate LECs operating in high-cost
markets.
o our ability to effectively manage our growth, including without limitation
our ability to (i) integrate newly-acquired operations into our
operations, (ii) attract and retain technological, managerial and other
key personnel, (iii) achieve projected growth, revenue and cost savings
targets, and (iv) otherwise monitor our operations, costs, regulatory
compliance, and service quality and maintain other necessary internal
controls.
o possible changes in the demand for, or pricing of, our products and
services, including without limitation (i) reduced demand for traditional
telephone services caused by greater use of wireless or Internet
communications or other factors, (ii) reduced demand for second lines and
(iii) reduced demand for our access services.
o our ability to successfully introduce new product or service offerings on
a timely and cost-effective basis, including without limitation our
ability to (i) successfully roll out our co-branded satellite television
service and our wireless reseller service, (ii) expand successfully our
long distance, Internet access and fiber transport service offerings to
new or acquired markets and (iii) offer bundled service packages on terms
attractive to our customers.
o our ability to successfully take steps to mitigate the dilutive impact of
the $500 million aggregate stated amount of equity units which currently
commit us to sell shares of our common stock upon settlement in mid-May
2005.
o our ability to collect receivables from financially troubled communications
companies.
o regulatory limits on our ability to change the prices for telephone
services in response to industry changes.
o impediments to our ability to expand through attractively priced
acquisitions, whether caused by regulatory limits, financing constraints,
a decrease in the pool of attractive target companies, or competition for
acquisitions from other interested buyers.
o the possible need to make abrupt and potentially disruptive changes in our
business strategies due to changes in competition, regulation, technology,
product acceptance or other factors.
o the lack of assurance that we can compete effectively against
better-capitalized competitors.
o the impact of terrorist attacks on our business.
o other risks referenced in this report and from time to time in our other
filings with the Securities and Exchange Commission.
o the effects of more general factors, including without limitation:
* changes in general industry and market conditions and growth rates
* changes in labor conditions, including workforce levels and labor
negotiations
* changes in interest rates or other general national, regional or
local economic conditions
* changes in legislation, regulation or public policy, including changes
in federal rural financing programs or changes that increase our tax rate
* increases in capital, operating, medical or administrative costs, or
the impact of new business opportunities requiring significant up-front
investments
* the continued availability of financing in amounts, and on terms and
conditions, necessary to support our operations
* changes in our relationships with vendors, or the failure of these
vendors to provide competitive products on a timely basis
* changes in our senior debt ratings
* unfavorable outcomes of regulatory or legal proceedings, including
rate proceedings
* losses or unfavorable returns on our investments in other
communications companies
* delays in the construction of our networks
* changes in accounting policies, assumptions, estimates or practices
adopted voluntarily or as required by generally accepted accounting
principles.
For additional information, see the description of our business included
above, as well as Item 7 of this report. Due to these uncertainties, there can
be no assurance that our anticipated results will occur, that our judgments or
assumptions will prove correct, or that unforeseen developments will not occur.
Accordingly, you are cautioned not to place undue reliance upon these
forward-looking statements, which speak only as of the date made. We undertake
no obligation to update or revise any of our forward-looking statements for any
reason, whether as a result of new information, future events or developments,
or otherwise.
OTHER MATTERS
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 2004
have not been material and the Company currently has no reason to believe that
such costs will become material.
For additional information concerning the business and properties of the
Company, see Item 7 elsewhere herein, and the Consolidated Financial Statements
and notes 2, 5, 6, and 17 thereto set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of telephone lines, central
office equipment, and land and buildings related to telephone operations. As of
December 31, 2004 and 2003, the Company's gross property, plant and equipment of
approximately $7.4 billion and $7.2 billion, respectively, consisted of the
following:
December 31,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
Cable and wire 53.1% 53.1
Central office 32.1 31.8
General support 10.6 11.3
Fiber transport and CLEC 2.0 1.8
Construction in progress 0.9 0.8
Other 1.3 1.2
- -------------------------------------------------------------------------------
100.0 100.0
===============================================================================
"Cable and wire" facilities consist primarily of buried cable and aerial
cable, poles, wire, conduit and drops used in providing local and long distance
services. "Central office" consists primarily of switching equipment, circuit
equipment and related facilities. "General support" consists primarily of land,
buildings, tools, furnishings, fixtures, motor vehicles and work equipment.
"Fiber transport and CLEC" consist of network assets and equipment to provide
fiber transport and competitive local exchange services. "Construction in
progress" includes property of the foregoing categories that has not been placed
in service because it is still under construction.
The properties of certain of the Company's telephone subsidiaries are
subject to mortgages securing the debt of such companies. The Company owns
substantially all of the central office buildings, local administrative
buildings, warehouses, and storage facilities used in its telephone operations.
For further information on the location and type of the Company's
properties, see the descriptions of the Company's operations in Item 1.
Item 3. Legal Proceedings.
In Barbrasue Beattie and James Sovis, on behalf of themselves and all
others similarly situated, v. CenturyTel, Inc., filed on October 29, 2002 in the
United States District Court for the Eastern District of Michigan (Case No.
02-10277), the plaintiffs allege that the Company unjustly and unreasonably
billed customers for inside wire maintenance services, and seek unspecified
money damages and injunctive relief under various legal theories on behalf of a
purported class of over two million customers in the Company's telephone
markets. The Court has not yet ruled on the plaintiffs' certification motion,
and has not yet set a date to resolve this issue. Given the current status of
this case, the Company cannot estimate the potential impact, if any, that this
case will have on its results of operations.
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, actions relating to employee
claims, occasional grievance hearings before labor regulatory agencies and
miscellaneous third party tort actions. The outcome of these other proceedings
is not predictable. However, the Company does not believe that the ultimate
resolution of these other proceedings, after considering available insurance
coverage, will have a material adverse effect on its financial position, results
of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning the Company's Executive Officers, set forth at Item
10 in Part III hereof, is incorporated in Part I of this Report by reference.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchase of Equity Securities
CenturyTel's common stock is listed on the New York Stock Exchange and is
traded under the symbol CTL. The following table sets forth the high and low
sales prices, along with the quarterly dividends, for each of the quarters
indicated.
Sales prices
------------------- Dividend per
High Low common share
------ ----- ------------
2004:
First quarter $ 33.40 26.20 .0575
Second quarter $ 30.32 26.22 .0575
Third quarter $ 34.47 29.79 .0575
Fourth quarter $ 35.54 31.00 .0575
2003:
First quarter $ 31.79 25.25 .0550
Second quarter $ 35.90 27.33 .0550
Third quarter $ 35.85 32.45 .0550
Fourth quarter $ 36.76 30.09 .0550
Common stock dividends during 2004 and 2003 were paid each quarter. As of
February 28, 2005, there were approximately 4,700 stockholders of record of
CenturyTel's common stock. As of March 15, 2005, the closing stock price of
CenturyTel common stock was $33.77.
In early February 2004, the Company's board of directors approved a
repurchase program authorizing 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 fourth quarter of 2004, all of which were effected in open-market
transactions in accordance with the above-described program. These fourth
quarter 2004 purchases completed the Company's $400 million stock repurchase
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
- -----------------------------------------------------------------------------------------------------
October 1 - October 31, 2004 265,200 $ 33.97 265,200 $ 72,882,412
November 1 - November 30, 2004 2,237,390 $ 32.88 2,237,390 $ -
December 1 - December 31, 2004 - $ - - $ -
--------- ---------
Total 2,502,590 $ 32.99 2,502,590 $ -
========= =========
The Company did not repurchase any of its equity units during the fourth
quarter of 2004.
For information regarding the Company's new share repurchase program and
shares of CenturyTel common stock authorized for issuance under CenturyTel's
equity compensation plans, see Items 7 and 12, respectively.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial data
(from continuing operations) as of and for each of the years ended in the
five-year period ended December 31, 2004:
Selected Income Statement Data
Year ended December 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------
(Dollars, except per share amounts, and shares expressed in thousands)
Operating revenues $ 2,407,372 2,367,610 1,971,996 1,679,504 1,402,357
==================================================================
Operating income $ 753,953 750,396 575,406 425,305 386,137
==================================================================
Nonrecurring gains and
losses, net (pre-tax) $ - - 3,709 33,043 -
==================================================================
Income from continuing operations $ 337,244 344,707 193,533 149,081 127,474
==================================================================
Basic earnings per share from
continuing operations $ 2.45 2.40 1.36 1.06 .91
==================================================================
Basic earnings per share from
continuing operations, as
adjusted for goodwill
amortization $ 2.45 2.40 1.36 1.39 1.17
==================================================================
Diluted earnings per share from
continuing operations $ 2.41 2.35 1.35 1.05 .90
==================================================================
Diluted earnings per share from
continuing operations, as
adjusted for goodwill
amortization $ 2.41 2.35 1.35 1.37 1.16
==================================================================
Dividends per common share $ .23 .22 .21 .20 .19
==================================================================
Average basic shares outstanding 137,215 143,583 141,613 140,743 140,069
==================================================================
Average diluted shares
outstanding 142,144 148,779 144,408 142,307 141,864
==================================================================
Diluted earnings per share and average diluted shares outstanding reflect
the application of Emerging Issues Task Force No. 04-8 (which was effective in
fourth quarter 2004) related to the effect of contingent convertible debt on the
diluted earnings per share calculation. Prior periods have been restated to
reflect this change. See Note 13 of Item 8 for additional information.
Selected Balance Sheet Data
December 31,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------
(Dollars in thousands)
Net property, plant and
equipment $ 3,341,401 3,455,481 3,531,645 2,736,142 2,698,010
Goodwill $ 3,433,864 3,425,001 3,427,281 2,087,158 2,108,344
Total assets $ 7,796,953 7,895,852 7,770,408 6,318,684 6,393,290
Long-term debt $ 2,762,019 3,109,302 3,578,132 2,087,500 3,050,292
Stockholders' equity $ 3,409,765 3,478,516 3,088,004 2,337,380 2,032,079
------------------------------------------------------------------------
See Items 7 and 8 for a discussion of the Company's discontinued wireless
operations.
The following table presents certain selected consolidated operating data
as of the end of each of the years in the five-year period ended December 31,
2004:
Year ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
Telephone access lines 2,313,626 2,376,118 2,414,564 1,797,643 1,800,565
Long distance lines 1,067,817 931,761 798,697 564,851 433,846
---------------------------------------------------------------------
See Items 1 and 2 in Part I and Items 7 and 8 elsewhere herein for
additional information.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Overview
CenturyTel, Inc. ("CenturyTel") and its subsidiaries (the "Company") is an
integrated communications company engaged primarily in providing local exchange,
long distance, Internet access and broadband 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 digital subscriber line
("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 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. Results of
operations for 2003 and 2002 have been conformed to the Company's 2004
presentation of a single reportable segment. In connection with the change in
segment reporting, the Company has, among other things, (i) eliminated certain
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 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.
On July 1, 2002, the Company acquired the local exchange telephone
operations of Verizon Communications, Inc. ("Verizon") in the state of Alabama
for approximately $1.022 billion cash. On August 31, 2002, the Company acquired
the local exchange telephone operations of Verizon in the state of Missouri for
approximately $1.179 billion cash. The results of operations for the Verizon
assets acquired are reflected in the Company's consolidated results of
operations subsequent to each respective acquisition. See "Acquisitions" below
and Note 2 of Notes to Consolidated Financial Statements for additional
information. During 2003, the Company also acquired fiber transport assets in
five central U.S. states (which the Company operates under the name LightCore)
for $55.2 million cash.
On August 1, 2002, the Company sold substantially all of its wireless
operations principally to an affiliate of ALLTEL Corporation ("Alltel") in
exchange for an aggregate of approximately $1.59 billion in cash. As a result,
the Company's wireless operations for the year ended December 31, 2002 has been
reflected as discontinued operations on the Company's consolidated statements of
income and cash flows. For further information, see "Discontinued Operations"
below.
During the three years ended December 31, 2004, the Company has acquired
and sold various other operations, the impact of which has not been material to
the financial position or results of operations of the Company.
The net income of the Company for 2004 was $337.2 million, compared to
$344.7 million during 2003 and $801.6 million during 2002. Diluted earnings per
share for 2004 was $2.41 compared to $2.35 in 2003 and $5.56 in 2002. Income
from continuing operations (and diluted earnings per share from continuing
operations) was $337.2 million ($2.41), $344.7 million ($2.35) and $193.5
million ($1.35) for 2004, 2003 and 2002, respectively. The diluted earnings per
share calculation reflects the application of Emerging Issues Task Force No.
04-8 to all periods presented. See Note 13 for additional information.
Year ended December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income $ 753,953 750,396 575,406
Interest expense (211,051) (226,751) (221,845)
Income from unconsolidated cellular entity 7,067 6,160 5,582
Nonrecurring gains and losses, net - - 3,709
Other income (expense) (2,597) 2,154 (63,814)
Income tax expense (210,128) (187,252) (105,505)
- ----------------------------------------------------------------------------------------------
Income from continuing operations 337,244 344,707 193,533
Discontinued operations, net of tax - - 608,091
- ----------------------------------------------------------------------------------------------
Net income $ 337,244 344,707 801,624
==============================================================================================
Basic earnings per share
From continuing operations $ 2.45 2.40 1.36
From discontinued operations $ - - 4.29
Basic earnings per share $ 2.45 2.40 5.66
Diluted earnings per share
From continuing operations $ 2.41 2.35 1.35
From discontinued operations $ - - 4.21
Diluted earnings per share $ 2.41 2.35 5.56
Average basic shares outstanding 137,215 143,583 141,613
==============================================================================================
Average diluted shares outstanding 142,144 148,779 144,408
==============================================================================================
Operating income increased $3.6 million in 2004 as a $39.8 million
increase in operating revenues was substantially offset by a $36.2 million
increase in operating expenses. Operating income increased $175.0 million in
2003 as a $395.6 million increase in operating revenues was partially offset by
a $220.6 million increase in operating expenses.
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; the Company's ability to successfully take steps to
mitigate the dilutive effect of the $500 million of equity units currently
scheduled to settle in May 2005; 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 included herein. 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.
OPERATING REVENUES
Year ended December 31, 2004 2003 2002
- ------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 716,028 712,565 570,871
Network access 966,011 1,001,462 884,982
Long distance 186,997 173,884 146,536
Data 275,777 244,998 179,695
Fiber transport and CLEC 74,409 43,041 21,666
Other 188,150 191,660 168,246
- ------------------------------------------------------------------------------
Operating revenues $ 2,407,372 2,367,610 1,971,996
==============================================================================
Local service revenues. Local service revenues are derived from the
provision of local exchange telephone services in the Company's service areas.
Of the $3.5 million (.5%) increase in local service revenues in 2004, $12.6
million was due to the provision of custom calling features to more customers,
which was partially offset by an $8.4 million decrease due to the decline in
access lines. Of the $141.7 million (24.8%) increase in local service revenues
in 2003, $121.2 million was due to the properties acquired from Verizon in the
third quarter of 2002. Of the remaining $20.5 million increase, $8.4 million was
due to the provision of custom calling features to more customers and $5.9
million was due to increased rates in certain jurisdictions. Access lines
declined 62,500 (2.6%) during 2004 compared to a decline of 38,400 (1.6%) in
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 between 2.5 and 3.5% for 2005.
Network access revenues. 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 support funds
which allows the Company to recover a portion of its costs under federal and
state cost recovery mechanisms. Certain of the Company's interstate network
access revenues are based on tariffed access charges filed directly with the
Federal Communications Commission ("FCC"); the remainder of such revenues are
derived under revenue sharing arrangements with other local exchange carriers
("LECs") administered by the National Exchange Carrier Association. Intrastate
network access revenues are based on tariffed access charges filed with state
regulatory agencies or are derived under revenue sharing arrangements with
other LECs.
Network access revenues decreased $35.5 million (3.5%) in 2004 and
increased $116.5 million (13.2%) in 2003 due to the following factors:
2004 2003
increase increase
(decrease) (decrease)
- ------------------------------------------------------------------------------
(Dollars in thousands)
Acquisitions of Verizon properties in
third quarter 2002 $ - 107,319
Recovery from the federal Universal
Service High Cost Loop support program (11,311) 250
One-time refund of access charges to
interexchange carriers in 2002 - 7,645
Intrastate revenues due to decreased
minutes of use and decreased
access rates in certain states (25,916) (6,798)
Partial recovery of increased operating
costs through revenue sharing arrangements
with other telephone companies, interstate
access revenues, increased recovery from
state support funds and return on rate base 3,980 3,513
Rate changes in certain jurisdictions 5,052 2,472
Revision of prior year revenue
settlement agreements (3,690) 7,368
Other, net (3,566) (5,289)
- ------------------------------------------------------------------------------
$ (35,451) 116,480
==============================================================================
As indicated in the chart above, in 2004 the Company experienced a
reduction in its intrastate revenues of approximately $25.9 million primarily
due to (i) a reduction in intrastate minutes (partially due to the displacement
of minutes by wireless, electronic mail and other optional calling services) and
(ii) decreased access rates in certain states. The corresponding decrease in
2003 compared to 2002 was $6.8 million. The Company believes intrastate minutes
will continue to decline in 2005, although the magnitude of such decrease cannot
be precisely estimated.
The Company anticipates its 2005 revenues from the federal Universal
Service High Cost Loop support program will be approximately $10-15 million
lower than 2004 levels due to increases in the nationwide average cost per loop
factor used to allocate funds among all recipients.
Long distance revenues. The Company's long distance revenues relate to
the provision of retail long distance services to its customers. Long distance
revenues increased $13.1 million (7.5%) and $27.3 million (18.7%) in 2004 and
2003, respectively. The $13.1 million increase in 2004 was primarily
attributable to a 14.9% increase in the average number of long distance lines
served and a 15.3% increase in minutes of use (aggregating $21.7 million),
partially offset by a decrease in the average rate charged by the Company ($9.2
million). The $27.3 million increase in 2003 was primarily attributable to the
28.3% increase in the average number of long distance lines served and increased
minutes of use ($32.6 million), primarily due to penetration of the markets
acquired from Verizon in 2002. Such increase was partially offset by a decrease
in the average rate charged by the Company ($5.3 million). The Company
anticipates that increased competition and its current level of customer
penetration will continue to place downward pressure on rates and slow the
growth rate of the number of long distance lines served.
Data revenues. Data revenues include revenues primarily related to the
provision of Internet access services (both dial-up and DSL services) and the
provision of data transmission services over special circuits and private lines.
Data revenues increased $30.8 million (12.6%) in 2004 and $65.3 million (36.3%)
in 2003. The $30.8 million increase in 2004 was primarily due to a $20.3 million
increase in Internet revenues due primarily to growth in the number of
customers, principally due to expansion of the Company's DSL product offering,
and an $11.3 million increase in special access revenues due to an increase in
the number of special circuits provided and an increase in the partial recovery
of increased operating expenses through revenue sharing arrangements with other
telephone companies. The $65.3 million increase in 2003 was primarily due to (i)
a $38.4 million increase due to the acquisition of the Verizon properties in
2002 and (ii) a $21.3 million increase in Internet revenues due primarily to
growth in the number of customers in the Company's incumbent markets,
principally due to expansion of the Company's DSL product offering.
Fiber transport and CLEC. Fiber transport and CLEC revenues include
revenues from the Company's fiber transport, competitive local exchange carrier
("CLEC") and security monitoring businesses. Fiber transport and CLEC revenues
increased $31.4 million (72.9%) in 2004 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. Fiber transport
and CLEC revenues increased $21.4 million (98.7%) in 2003 primarily due to (i)
$16.7 million of revenues associated with the acquisition of the Company's
LightCore operations and (ii) a $4.3 million increase in revenues in the
Company's CLEC business primarily due to an increased number of customers,
including those acquired in connection with the purchase of certain CLEC
operations on February 28, 2002.
Other revenues. 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. Other revenues decreased $3.5 million (1.8%) during 2004 primarily
due to a $3.4 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 in 2002. Other revenues
increased $23.4 million (13.9%) in 2003, substantially all of which is due to
the properties acquired from Verizon in 2002.
OPERATING EXPENSES
Year ended December 31, 2004 2003 2002
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Cost of services and products (exclusive
of depreciation and amortization) $ 755,413 739,210 635,164
Selling, general and administrative 397,102 374,352 301,681
Corporate overhead costs allocated to
discontinued operations - - 9,548
Depreciation and amortization 500,904 503,652 450,197
- -------------------------------------------------------------------------------------------
Operating expenses $ 1,653,419 1,617,214 1,396,590
===========================================================================================
Cost of services and products. Cost of services and products increased
$16.2 million (2.2%) in 2004 primarily due to (i) a $14.6 million increase in
expenses associated with operating the Company's fiber transport assets acquired
in June and December 2003; (ii) an $8.5 million increase in expenses associated
with the Company's Internet operations due to an increase in the number of
customers; (iii) a $7.8 million increase in customer service and retention
related expenses; and (iv) a $6.0 million increase in plant operations expenses.
Such increases were partially offset by a $13.8 million decrease in access
expenses (which included a one-time credit of $3.1 million recorded in 2004) and
a $9.2 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.
Cost of services and products increased $104.0 million (16.4%) in 2003
primarily due to (i) a $77.0 million increase due to the properties acquired
from Verizon in the third quarter of 2002, (ii) an $11.1 million increase in
expenses associated with the Company's Internet operations due to an increase in
the number of customers, (iii) a $7.4 million increase in expenses associated
with the Company's long distance operations (primarily attributable to higher
minutes of use partially offset by a decrease in the rate per minute of use),
(iv) a $6.3 million increase in expenses associated with operating the Company's
LightCore assets acquired in 2003, and (v) a $4.8 million increase in access
expenses.
Selling, general and administrative. Selling, general and
administrative expenses increased $22.8 million (6.1%) in 2004 due to (i) a $9.0
million increase in marketing expenses; (ii) a $6.4 million increase in expenses
attributable to the Company's Sarbanes-Oxley internal controls compliance
effort; (iii) 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 (iv) a
$4.3 million increase in expenses associated with operating the Company's
LightCore assets acquired in 2003. Such increases were partially offset by a
$6.6 million decrease in bad debt expense (exclusive of the MCI recovery
mentioned above).
Selling, general and administrative expenses increased $72.7 million
(24.1%) in 2003 due to (i) a $50.3 million increase related to the Verizon
acquisitions in 2002, (ii) a $14.0 million increase in operating taxes, which
included a $7.5 million charge arising out of various operating tax audits in
2003, (iii) a $6.7 million increase in information technology expenses largely
attributable to the Company's development of the new billing system described
below under "Development of Billing System", (iv) a $4.9 million increase
associated with expanding the Company's Internet operations due to an increase
in customers and (v) a $4.4 million increase in expenses associated with the
Company's long distance operations (of which $2.4 million was due to an increase
in billing and collection costs). Such increases were partially offset by an
$11.4 million decrease in the provision for uncollectible receivables (as 2002
was adversely impacted by the establishment of a $15.0 million reserve for
uncollectible receivables primarily related to the bankruptcy of MCI (formerly
WorldCom, Inc.), whereas 2003 was positively impacted by a $5.0 million
reduction in the provision for uncollectible receivables due to the partial
recovery of amounts previously written off related to the bankruptcy of MCI).
Depreciation and amortization. Depreciation and amortization decreased
$2.7 million (.5%) in 2004 and increased $53.5 million (11.9%) in 2003. The year
2004 included a reduction in depreciation expense of $13.2 million to adjust the
balances of certain over-depreciated property, plant and equipment accounts. In
order to reduce the risk of similar event, in early 2005 the Company implemented
automated controls to replace previous manual controls to ensure that
depreciation ceases once an asset group is fully depreciated (after
consideration of salvage and removal costs). Depreciation expense for 2004 was
also reduced by $8.4 million due to certain assets becoming fully depreciated.
Such decreases were partially offset by a $16.7 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
$3.0 million increase in depreciation due to the assets acquired in connection
with the Company's LightCore operations. Of the $53.5 million increase in 2003,
$50.9 million was due to the properties acquired from Verizon in 2002. The
remaining increase is primarily due to increased depreciation expense in the
Company's CLEC and fiber transport businesses (including LightCore) and higher
levels of plant in service.
Other. For additional information regarding certain matters that have
impacted or may impact the Company's operations, see "Regulation and
Competition".
INTEREST EXPENSE
Interest expense decreased $15.7 million (6.9%) in 2004 compared to 2003
partially due to $7.5 million of nonrecurring interest expense in 2003
associated with various operating tax audits. The remainder of the decrease was
primarily due to a decrease in average debt outstanding.
Interest expense increased $4.9 million in 2003 primarily due to $7.5
million of interest associated with various operating tax audits. Such increase
was partially offset by reduced interest expense due to a decrease in average
debt outstanding.
INCOME FROM UNCONSOLIDATED CELLULAR ENTITY
Income from unconsolidated cellular entity was $7.1 million in 2004, $6.2
million in 2003 and $5.6 million in 2002. Such income represents the Company's
share of income from its 49% interest in a cellular partnership.
NONRECURRING GAINS AND LOSSES, NET
In 2002, the Company recorded a pre-tax gain of $3.7 million from the sale
of a Personal Communications Services license.
OTHER INCOME (EXPENSE)
Other income (expense) was ($2.6 million) in 2004, $2.2 million in 2003
and ($63.8 million) in 2002. Included in 2004 was 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 $2.5
million charge related to the impairment of a nonoperating investment, which
amounts were partially offset by a $2.3 million increase in interest income due
to higher cash balances. Included in 2002 was a $59.9 million pre-tax charge
related to the Company's payment of premium in connection with redeeming its
Series I remarketable notes, net of unamortized premium.
INCOME TAX EXPENSE
The Company's effective income tax rate (from continuing operations) was
38.4%, 35.2% and 35.3% in 2004, 2003 and 2002, respectively. Income tax expense
for 2003 was reduced by $21.6 million primarily as a result of reducing the
valuation allowance related to net state operating loss carryforwards as it was
more likely than not that future taxable income will be sufficient to enable the
Company to utilize this portion of the operating loss carryforwards. For
additional information, see Note 12 to the Company's consolidated financial
statements appearing elsewhere in this report.
DISCONTINUED OPERATIONS
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion in cash. As a result, the Company's wireless
operations for 2002 have been reflected as discontinued operations in the
Company's consolidated financial statements. The following table summarizes
certain information concerning the Company's wireless operations for the year
ended December 31, 2002.
Year ended December 31, 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 246,705
Operating expenses, exclusive of corporate overhead
costs of $9.5 million (175,447)
Income from unconsolidated cellular entities 25,768
Minority interest expense (8,569)
Gain on sale of discontinued operations 803,905
Other income 188
Income tax expense (284,459)
- --------------------------------------------------------------------------------
Income from discontinued operations, net of tax $ 608,091
================================================================================
Included above in operating expenses for 2002 is a $30.5 million charge
associated with a write-off of all amounts expended to develop the wireless
portion of the Company's new billing system discussed below under "Development
of Billing System". Depreciation and amortization of long-lived assets and
amortizable intangibles related to the Company's wireless operations ceased
effective March 19, 2002, the date of the Company's definitive sales agreement
with Alltel. Such cessation of depreciation and amortization had the effect of
reducing depreciation and amortization expense of the Company's wireless
operations approximately $20 million in 2002.
The Company recorded an $803.9 million pre-tax gain on the sale of
substantially all of its wireless business in the third quarter of 2002.
For further information, see Note 3 to the Company's consolidated
financial statements appearing elsewhere in this report.
ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of 2004, the Company adopted Emerging Issues Task
Force No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings Per Share" ("EITF 04-8"). EITF 04-8 requires securities issuable under
contingently convertible instruments be included in the diluted earnings per
share calculation. The Company's $165 million Series K senior notes are
convertible into common stock under various contingent circumstances, including
the common stock attaining a specified trading price in excess of the notes'
fixed conversion price. Beginning in the fourth quarter of 2004, the Company's
diluted earnings per share and diluted shares outstanding reflect the
application of EITF 04-8. Prior periods have been restated to reflect this
change in accounting.
The Company has elected to account for employee stock-based compensation
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". In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123(R)"). SFAS 123(R) establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services, focusing primarily on accounting for transactions in which an
entity obtains employee services in exchange for the issuance of stock options.
SFAS 123(R) requires the Company to measure the cost of the employee services
received in exchange for an award of equity instruments based upon the fair
value of the award on the grant date. Such cost will be recognized as an expense
over the period during which the employee is required to provide service in
exchange for the award. SFAS 123(R) is effective for all awards granted after
its effective date of July 1, 2005. In accordance with SFAS 123(R), compensation
cost is also recognized over the applicable remaining vesting period for any
awards that are not fully vested as of the effective date. The Company expects
the adoption of SFAS 123(R) to decrease diluted earnings per share by
approximately $.03 in 2005.
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"),
which addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred and be capitalized as part of the book
value of the long-lived asset.
Although the Company generally has had no legal obligation to remove
obsolete assets, depreciation rates of certain assets established by regulatory
authorities for the Company's telephone operations subject to Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS 71"), have historically included a component for
removal costs in excess of the related estimated salvage value. Notwithstanding
the adoption of SFAS 143, SFAS 71 requires the Company to continue to reflect
this accumulated liability for removal costs in excess of salvage value even
though there is no legal obligation to remove the assets. Therefore, the Company
did not adopt the provisions of SFAS 143 for its telephone operations subject to
SFAS 71. For the Company's telephone operations acquired from Verizon in 2002
(which are not subject to SFAS 71) and its other non-regulated operations, the
Company has not accrued a liability for anticipated removal costs in the past.
For these reasons, the adoption of SFAS 143 did not have a material effect on
the Company's financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Financial Instruments
with Characteristics of both Liabilities and Equity" ("SFAS 150"), which
provides standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and for pre-existing instruments as of the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on the Company's financial condition or results of operations.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. Management continually evaluates its estimates and judgments
including those related to (i) revenue recognition, (ii) allowance for doubtful
accounts, (iii) pension and postretirement benefits and (iv) long-lived assets.
Actual results may differ from these estimates. The Company believes that
certain critical accounting policies involve a higher degree of judgment or
complexity, including those described below.
Revenue recognition. 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.
The Telecommunications Act of 1996 allows local exchange carriers to file
access tariffs on a streamlined basis and, if certain criteria are met, deems
those tariffs lawful. 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. Certain of the Company's telephone subsidiaries file
interstate tariffs directly with the FCC using this streamlined filing approach.
As of December 31, 2004, the amount of the Company's earnings in excess of the
authorized rate of return reflected as a liability on the balance sheet for the
combined 2001/2002 and 2003/2004 monitoring periods aggregated approximately
$63 million. The settlement period 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 any pending or future proceedings that could impact its entitlement to
these funds, and may recognize as revenue some or all of the over-earnings at
the end of the settlement period or as the legal status becomes more certain.
Allowance for doubtful accounts. In evaluating the collectibility
of its accounts receivable, the Company assesses a number of factors, including
a specific customer's or carrier's ability to meet its financial obligations to
the Company, the length of time the receivable has been past due and historical
collection experience. Based on these assessments, the Company records both
specific and general reserves for uncollectible accounts receivable to reduce
the related accounts receivable to the amount the Company ultimately expects to
collect from customers and carriers. If circumstances change or economic
conditions worsen such that the Company's past collection experience is no
longer relevant, the Company's estimate of the recoverability of its accounts
receivable could be further reduced from the levels reflected in the Company's
accompanying consolidated balance sheet.
Pension and postretirement benefits. The amounts recognized in the
Company's financial statements related to pension and postretirement benefits
are determined on an actuarial basis, which utilizes many assumptions in the
calculation of such amounts. A significant assumption used in determining the
Company's pension and postretirement expense is the expected long-term rate of
return on plan assets. For 2003, the Company lowered its expected long-term rate
of return on plan assets to 8.25%, reflecting the expected moderation of
long-term rates of return in the financial markets, and used the same rate in
2004.
Another assumption used in the determination of the Company's pension and
postretirement benefit plan obligations is the appropriate discount rate, which
is generally based on the yield on high-quality corporate bonds. The Company
lowered its assumed discount rate to 5.75% at December 31, 2004 from 6.0% at
December 31, 2003. Changes in the discount rate are not generally expected to
have a material impact on the Company's results of operations.
Intangible and long-lived assets. The Company is subject to testing
for impairment of long-lived assets under two accounting standards, Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), and Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 142 requires goodwill recorded in business combinations to be
reviewed for impairment at least annually and requires write-downs only in
periods in which the recorded amount of goodwill exceeds the fair value. Under
SFAS 142, impairment of goodwill is tested by comparing the fair value of the
reporting unit to its carrying value (including goodwill). Estimates of the fair
value of the reporting unit are based on valuation models using techniques such
as multiples of earnings (before interest, taxes and depreciation and
amortization). If the fair value of the reporting unit is less than the carrying
value, a second calculation is required in which the implied fair value of
goodwill is compared to its carrying value. If the implied fair value of
goodwill is less than its carrying value, goodwill must be written down to its
implied fair value. The Company completed the required annual test of goodwill
impairment (as of September 30, 2004) under SFAS 142 and determined its goodwill
is not impaired as of such date.
Under SFAS 144, the carrying value of long-lived assets other than
goodwill is reviewed for impairment whenever events or circumstances indicate
that such carrying amount cannot be recoverable by assessing the recoverability
of the carrying value through estimated undiscounted net cash flows expected to
be generated by the assets. If the undiscounted net cash flows are less than the
carrying value, an impairment loss would be measured as the excess of the
carrying value of a long-lived asset over its fair value.
For additional information on the Company's critical accounting policies,
see "Accounting Pronouncements" and "Regulation and Competition - Other
Matters", and the footnotes to the Company's consolidated financial statements.
INFLATION
The effects of increased costs historically have been mitigated by the
Company's ability to recover certain costs over time applicable to its regulated
telephone operations through the rate-making process. However, LECs operating
over 60% of the Company's total access lines are now governed by alternative
regulation plans, some of which restrict or delay the Company's ability to
recover increased costs. Additional future regulatory changes may further alter
the Company's ability to recover increased costs in its regulated operations.
For the properties acquired from Verizon in 2002, which are regulated under
price-cap regulation for interstate purposes, price changes are limited to the
rate of inflation, minus a productivity offset. For additional information
regarding the current regulatory environment, see "Regulation and Competition."
As operating expenses in the Company's nonregulated lines of business increase
as a result of inflation, the Company, to the extent permitted by competition,
attempts to recover the costs by increasing prices for its services and
equipment.
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 of 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 December 31, 2004, the fair value of the Company's long-term debt was
estimated to be $3.1 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 available on such date 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 $119.9 million decrease in the fair value of the Company's
long-term debt. As of December 31, 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 December 31, 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 settlement and rate reset dates occurring each six months through
the expiration of the hedges in August 2012. At December 31, 2004, the Company
realized a rate under these hedges of 6.4%. Interest expense was reduced by
$10.3 million during 2004 as a result of these hedges. The aggregate fair market
value of these hedges was $5.7 million at December 31, 2004 and is reflected
both as a liability and as a decrease in the Company's underlying long-term debt
on the December 31, 2004 balance sheet. With respect to 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.
As of December 31, 2004, the Company also had outstanding cash flow hedges
that effectively locked in the interest rate on a majority of certain
anticipated debt transactions that ultimately were completed in February 2005.
The Company locked in the interest rate of (i) $100 million of 2.25 year debt
(remarketed in February 2005) at 3.9% and (ii) $225 million of 10-year debt
(issued in February 2005) at 5.5%. Such cash flow hedges had a fair value of
$571,000 as of December 31, 2004 and are reflected as a component of Accumulated
Other Comprehensive Loss on the consolidated balance sheet. In January 2005, the
Company also entered into a separate cash flow hedge which effectively locked in
the interest rate for an additional $75 million of 10-year debt (issued in
February 2005) at 5.4%. In February 2005, upon settlement of such hedges, the
Company (i) received $366,000 related to the 2.25 year debt remarketing which
will be amortized as a reduction of interest expense over the remaining term of
the debt and (ii) paid $7.7 million related to the 10-year debt issuance which
will be amortized as an increase in interest expense over the 10-year term of
the debt.
Effective May 8, 2003, the Company terminated a fair value interest rate
hedge associated with $500 million aggregate principal amount of its Series H
senior notes and received $22.3 million cash upon settlement, which represented
the fair value of the hedge at the termination date. Such amount is being
amortized as a reduction of interest expense through 2010, the maturity date of
the Series H notes.
DEVELOPMENT OF BILLING SYSTEM
The Company recently implemented a 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". The capitalized costs
of the system aggregated $207 million (before accumulated amortization) at
December 31, 2004 and are being amortized over a 20-year period. Virtually all
of the Company's customers were converted to the new system in late 2004. In
early 2005, the Company implemented software upgrades and other changes to
enhance the productivity and efficiency of the system, the cost of which was not
material. During the development phase of the new billing system, the Company
capitalized payroll related costs of employees dedicated to the project. The
Company began expensing these costs in late 2004, but does not expect the
impact thereof to have a material adverse effect on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to provide for its cash needs. 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.
Operating activities. Net cash provided by operating activities from
continuing operations was $955.8 million, $1.068 billion and $793.4 million in
2004, 2003 and 2002, respectively. 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 those years. For additional
information relating to the continuing and discontinued operations of the
Company, see Results of Operations.
Investing activities. Net cash used in investing activities from
continuing operations was $413.3 million, $464.6 million and $2.623 billion in
2004, 2003 and 2002, respectively. Cash used for acquisitions was $86.2 million
in 2003 (primarily due to the acquisitions of fiber transport assets and the
acquisition of an additional 24.3% interest in a telephone company in which the
Company owns a majority interest) and $2.245 billion in 2002 (substantially all
of which relates to the 2002 Verizon acquisitions). Proceeds from the sales of
assets were $4.1 million in 2002 (excluding the Company's 2002 wireless
divestiture). Capital expenditures from continuing operations during 2004, 2003
and 2002 were $385.3 million, $377.9 million and $386.3 million, respectively.
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 paid $25.0 million to EchoStar (see Note 4 for
additional information).
Financing activities. Net cash provided by (used in) financing
activities from continuing operations was ($578.5) million in 2004, ($403.8)
million in 2003 and $506.3 million in 2002. Payments of debt were $179.4 million
in 2004 and $432.3 million in 2003. Proceeds from the issuance of debt, net of
debt payments, were $531.4 million during 2002. The Company repurchased 13.4
million shares of common stock for $401.0 million in 2004 to complete its stock
repurchase program approved in February 2004.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consisted initially of a beneficial interest in a
CenturyTel senior unsecured note with a principal amount of $25 and a contract
to purchase shares of CenturyTel common stock no later than May 2005. As
discussed below, the senior notes were remarketed in February 2005. Each stock
purchase contract will generally require the holder to purchase between .6944
and .8741 of a share of CenturyTel common stock in May 2005 in exchange for $25,
subject to certain adjustments and exceptions. The total distributions on the
equity units were initially set at an initial annual rate of 6.875%, consisting
of interest (6.02%) and contract adjustment payments (0.855%).
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which may be converted under
certain specified circumstances into shares of CenturyTel common stock at a
conversion price of $40.455 per share). Holders of the convertible senior
debentures will have the right to require the Company to purchase all or a
portion of the debentures on August 1, 2006, August 1, 2010 and August 1, 2017
at par plus any accrued and unpaid interest to the purchase date. For additional
information, see Note 6 to the Company's consolidated financial statements
appearing elsewhere in this report.
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion cash.
The Company used proceeds from the sale of the above-described equity
units, senior notes and convertible senior debentures, along with the proceeds
received from the sale of the Company's wireless operations and utilization of
its $800 million credit facilities, to finance the third quarter 2002
acquisitions of telephone properties in Alabama and Missouri from Verizon which
aggregated $2.201 billion, the redemption of $400 million principal amount in
remarketable debt securities (plus an associated $71.1 million premium payment)
in October 2002 and the Company's fourth quarter 2002 estimated tax payment,
which aggregated $290 million and included the obligation to pay taxes
associated with the sale of substantially all of its wireless operations.
Other. Budgeted capital expenditures for 2005 total $400 million. The
Company anticipates that capital expenditures in its telephone operations will
continue to include the upgrading of its plant and equipment, including its
digital switches, to provide enhanced services, particularly in its newly
acquired markets, and the installation of fiber optic cable.
On February 2, 2005, the Company signed a definitive purchase agreement to
acquire metro fiber assets in 16 markets from KMC Telecom Holdings, Inc. ("KMC")
for $65 million cash, subject to purchase price adjustments.
The following table contains certain information concerning the Company's
material contractual obligations as of December 31, 2004, except for the KMC
purchase price obligation which is as of February 2, 2005.
Payments due by period
- -----------------------------------------------------------------------------------------
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 (1) $ 3,011,636 249,617 806,511(2) 306,557 1,648,951
Interest on long-
term debt
obligations $ 1,935,814 185,807 347,029 304,936 1,098,042
KMC purchase price
obligation $ 65,000 65,000 - - -
- -----------------------------------------------------------------------------------------
(1) For additional information on the terms of the Company's outstanding debt
instruments, see footnote 6 to the consolidated financial statements included
in Item 8 of this annual report.
(2) 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. In February 2005, the Company
purchased and retired approximately $400 million aggregate principal amount of
its Series J notes in connection with a remarketing of the Series J notes.
In February 2005, the Company remarketed approximately $460 million
aggregate principal amount of its $500 million of outstanding Series J senior
notes due 2007 at a rate of 4.628%. In connection with the remarketing, the
Company purchased and retired approximately $400 million aggregate principal
amount of the notes, resulting in approximately $100 million aggregate principal
amount of such notes remaining outstanding. Proceeds to purchase such notes came
from the February 2005 issuance of $350 million 5% senior notes, Series M, due
2015 and cash on hand. The Company expects to incur a pre-tax charge of
approximately $6 million in the first quarter of 2005 related to purchasing and
retiring approximately $400 million of the Series J notes. For additional
information, see Note 6 to the Company's consolidated financial statements
appearing elsewhere in this report.
In early 2005, the Company filed preliminary consent solicitation
materials with the Securities and Exchange Commission describing plans to
solicit consents to amend the purchase contracts forming a part of the Company's
equity units to grant the Company the flexibility to settle such purchase
contracts in cash rather than in common stock (as described above). The Company
is obligated to pay a consent fee to each consenting holder, the amount of which
(should all holders consent) would aggregate $1.75 million. If under the consent
solicitation the Company settled all of the purchase contracts in cash and the
current stock price of the Company's common stock at the settlement date exceeds
$36, the Company would be obligated to pay to the holders of the purchase
contracts $13.9 million for every $1 that the stock price is in excess of $36.
The Company cannot provide assurance that its consent solicitation will be
initiated or be successful.
In early February 2005, the Company's board of directors approved a stock
repurchase program that will allow the Company to repurchase up to an aggregate
of $200 million of either its common stock or convertible equity units prior to
December 31, 2005. The Company commenced purchases under this plan in early
March 2005.
The Company continually evaluates the possibility of acquiring additional
communications operations and expects to continue its long-term strategy of
pursuing the acquisition of attractive communications properties in exchange for
cash, securities or both. At any given time, the Company may be engaged in
discussions or negotiations regarding additional acquisitions. The Company
generally does not announce its acquisitions or dispositions until it has
entered into a preliminary or definitive agreement. The Company may require
additional financing in connection with any such acquisitions, the consummation
of which could have a material impact on the Company's financial condition or
operations. Approximately 4.1 million shares of CenturyTel common stock and
200,000 shares of CenturyTel preferred stock remain available for future
issuance in connection with acquisitions under CenturyTel's acquisition shelf
registration statement.
As of December 31, 2004, the Company had available $533.0 million of
undrawn committed bank lines of credit and the Company's telephone subsidiaries
had available for use $123.0 million of commitments for long-term financing from
the Rural Utilities Service and Rural Telephone Bank. The Company has a
commercial paper program that authorizes the Company 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. As of
December 31, 2004, the Company had no commercial paper outstanding under such
program. The Company also has access to debt and equity capital markets,
including its shelf registration statements. At December 31, 2004, the Company
held over $167 million of cash and cash equivalents.
In March 2005, the Company secured a new five-year, $750 million
revolving credit facility to replace its existing $533 million credit facility
which expires in July 2005. Up to $150 million of the facility can be used for
letters of credit, which reduces the amount available for other extensions of
credit. The credit facility contains financial covenants that require the
Company to meet a consolidated leverage ratio (as defined in the facility) not
exceeding 4 to 1 and a minimum interest coverage ratio (as defined in the
facility) of at least 1.5 to 1. The interest rate on revolving loans under the
facility is based on the Company's choice of several prevailing commercial
lending rates plus an additional margin that varies depending on the Company's
credit ratings and aggregate borrowings under the facility. The Company must pay
a quarterly commitment fee on the unutilized portion of the facility, the amount
of which varies based on the Company's credit ratings.
Moody's Investors Service ("Moody's") rates CenturyTel's long-term debt
Baa2 (with a stable outlook) and Standard & Poor's ("S&P") rates CenturyTel's
long-term debt BBB+ (with a stable outlook). Such ratings were affirmed in early
2005 in connection with the Series J remarketing and the Series M note issuance
mentioned above. The Company's commercial paper program is rated P2 by Moody's
and A2 by S&P. Any downgrade in the Company's credit ratings will increase its
borrowing costs and commitment fees under its $750 million revolving credit
facility. Downgrades could also restrict the Company's access to the capital
markets, accelerate the conversion rights of holders of the Company's
outstanding convertible securities, increase the Company's borrowing costs under
new or replacement debt financings, or otherwise adversely affect the terms of
future borrowings by, among other things, increasing the amount of the Company's
debt covenants and decreasing the Company's financial or operating flexibility.
The following table reflects the Company's debt to total capitalization
percentage and ratio of earnings to fixed charges and preferred stock dividends
as of and for the years ended December 31:
2004 2003 2002
- ---------------------------------------------------------------------------
Debt to total capitalization 46.9% 47.8 54.2
Ratio of earnings from continuing
operations to fixed charges
and preferred stock dividends 3.57 3.33 2.33
- ---------------------------------------------------------------------------
REGULATION AND COMPETITION
The communications industry continues to undergo various fundamental
regulatory, legislative, competitive and technological changes. These changes
may have a significant impact on the future financial performance of all
communications companies.
Events affecting the communications industry. In 1996, the United
States Congress enacted the Telecommunications Act of 1996 (the "1996 Act"),
which obligates LECs to permit competitors to interconnect their facilities to
the LEC's network and to take various other steps that are designed to promote
competition. Under the 1996 Act's rural telephone company exemption,
approximately 50% of the Company's telephone access lines are exempt from
certain of these interconnection requirements unless and until the appropriate
state regulatory commission overrides the exemption upon receipt from a
competitor of a bona fide request meeting certain criteria.
During 2003, the FCC released new rules outlining the obligations of
incumbent LECs to lease to competitors elements of their circuit-switched
networks on an unbundled basis at prices that substantially limited the
profitability of these arrangements to incumbent LECs. On March 2, 2004, a
federal appellate court vacated significant portions of these rules, including
the standards used to determine which unbundled network elements must be made
available to competitors. In response to this court decision, on February 4,
2005, the FCC released rules (effective March 11, 2005) that require incumbent
LECs to lease a network element only in those situations where competing
carriers genuinely would be impaired without access to such network element, and
where the unbundling would not interfere with the development of
facilities-based competition. These rules are further designed to remove
unbundling obligations over time as competing carriers deploy their own networks
and local exchange competition increases.
Prior to and since the enactment of the 1996 Act, the FCC and a number of
state legislative and regulatory bodies have also taken steps to foster local
exchange competition. Coincident with this recent movement toward increased
competition has been the reduction of regulatory oversight of LECs. These
cumulative changes, coupled with various technological developments, have led to
the continued growth of various companies providing services that compete with
LECs' services. Wireless services entities also increasingly constitute a
significant source of competition with LECs.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that will provide predictable levels of
support to rural local exchange carriers, including substantially all of the
Company's local exchange carriers. Based on recent FCC filings, the Company
anticipates its 2005 revenues from the USF High Cost Loop support program will
be approximately $10-15 million lower than 2004 levels due to increases in the
nationwide average cost per loop factor used by the FCC to allocate funds among
all recipients. Wireless and other competitive service providers continue to
seek eligible telecommunications carrier ("ETC") status in order to be eligible
to receive USF support, which, coupled with changes in usage of
telecommunications services, have placed stresses on the USF's funding
mechanism. These developments have placed additional financial pressure on the
amount of money that is necessary and available to provide support to all
eligible service providers, including support payments the Company receives from
the High Cost Loop support program. As a result of the continued increases in
the nationwide average cost per loop factor (caused by limited growth in the
size of the High Cost Loop support program and changes in requests for support
from the USF), the Company believes the aggregate level of payments it receives
from the USF will continue to decline in the near term under the FCC's current
rules.
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 companies, including comments on
whether eligibility requirements should be amended in a manner that would
adversely affect larger rural LECs such as the Company. The FCC has taken
various other steps in anticipation of restructuring universal service support
mechanisms, including opening a docket that will change the method of funding
contributions. The FCC is expected to act before its current rules are scheduled
to expire on June 30, 2006. Congress is also exploring various universal service
issues ranging from targeted universal service legislation to re-writing the
1996 Act. The Company has been and will continue to be active in monitoring
these developments.
Technological developments have led to the development of new services
that compete with traditional LEC services. Technological improvements have
enabled cable television companies to provide traditional circuit-switched
telephone service over their cable networks, and several national cable
companies have aggressively pursued this opportunity. Recent improvements in the
quality of "Voice-over-Internet Protocol" ("VoIP") service have led several
large cable television and telephone companies, as well as start-up companies,
to substantially increase their offerings of VoIP service to business and
residential customers. VoIP providers route calls over the Internet, without use
of ILEC's circuit switches and, in certain cases, without use of ILEC's networks
to carry their communications traffic. VoIP providers use existing broadband
networks to deliver flat-rate, all distance calling plans that may be priced
below those currently charged for traditional local and long distance telephone
services for several reasons, including lower network cost structures and the
current ability of VoIP providers to use ILECs' networks without paying access
charges. However, the service must be purchased in addition to the cost of the
broadband connection. In December 2003, the FCC initiated rulemaking that is
expected to address the effect of VoIP on intercarrier compensation, universal
service and emergency services. On March 10, 2004, the FCC released a notice of
proposed rulemaking seeking comment on the appropriate regulatory treatment of
VoIP service and related issues. Although the FCC's rulemaking regarding
VoIP-enabled services remains pending, the FCC has adopted orders establishing
broad guidelines for the regulation of such services, including an April 2004
order in which the FCC ruled that the IP-telephony service of AT&T, which
converts voice calls to IP format for routing over the public switched telephone
network, is a regulated telecommunications service subject to interstate access
charges. In addition, in November 2004, the FCC ruled that Internet-based
services provided by Vonage Holdings Corporation should be subject to federal
rather than state jurisdiction. Several state commissions have filed appeals of
this decision to various federal appellate courts. Also pending at the FCC is a
petition filed by Level 3 Communications, Inc. asking the FCC to forbear from
imposing interstate or intrastate access charges on Internet-based calls that
originate or terminate on the public switched telephone network. There can be no
assurance that future rulemaking will be on terms favorable to ILECs, or that
VoIP providers will not successfully compete for the Company's customers.
In 2003, the 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. The FCC has
received intercarrier compensation proposals from several industry groups, and
on February 10, 2005 solicited comments on all proposals previously submitted to
it. The Company is involved in this proceeding and will continue to monitor the
implications of these plans to its operations.
Recent events affecting the Company. During the last few years,
several states in which the Company has substantial operations took legislative
or regulatory steps to further introduce competition into the LEC business. The
number of companies which have requested authorization to provide local exchange
service in the Company's service areas has increased in recent years, especially
in the markets acquired from Verizon in 2002 and 2000, and it is anticipated
that similar action may be taken by others in the future.
State alternative regulation plans recently adopted by certain of the
Company's LECs have also affected revenue growth recently.
Certain long distance carriers continue to request that the Company reduce
intrastate access tariffed rates for certain of its LECs. In addition, the
Company has recently experienced reductions in intrastate traffic, partially due
to the displacement of minutes by wireless and electronic mail services. In 2004
the Company incurred a reduction in its intrastate revenues of approximately
$25.9 million compared to 2003 primarily due to these factors. The corresponding
decrease in 2003 compared to 2002 was $6.8 million. The Company believes such
trend of decreased intrastate minutes will continue in 2005, although the
magnitude of such decrease cannot be precisely estimated.
In January 2003, the Louisiana Public Service Commission staff began
reviewing the feasibility of converting the $42 million Louisiana Local Optional
Service Fund ("LOS Fund") into a state universal service fund. Currently, the
LOS Fund is funded primarily by BellSouth, which proposes to expand the base of
contributors into the LOS Fund. The Company currently receives approximately $21
million from the LOS Fund each year. Although the Commission staff has
recommended to transfer the fund's $42 million to a state universal service
fund, there can be no assurance that the Commission will adopt this
recommendation or that funding will remain at current levels.
Competition to provide traditional LEC services has thus far affected
large urban areas to a greater extent than rural, suburban and small urban areas
such as those in which the Company's telephone operations are located. While the
Company expects its operating revenues in 2005 to continue to experience
downward pressure due to continued access line losses and reduced network access
revenues, the Company expects its consolidated revenues to increase in 2005
primarily due to increased demand for its long distance, fiber transport, DSL
and other nonregulated product offerings (including its new video and wireless
initiatives).
Other matters. The Company's regulated telephone operations (except
for the properties acquired from Verizon in 2002) are subject to the provisions
of Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" ("SFAS 71"). Actions by regulators can
provide reasonable assurance of the recognition of an asset, reduce or eliminate
the value of an asset and impose a liability on a regulated enterprise. Such
regulatory assets and liabilities are required to be recorded and, accordingly,
reflected in the balance sheet of an entity subject to SFAS 71. The Company is
monitoring the ongoing applicability of SFAS 71 to its regulated telephone
operations due to the changing regulatory, competitive and legislative
environments, and it is possible that changes in regulation, legislation or
competition or in the demand for regulated services or products could result in
the Company's telephone operations no longer being subject to SFAS 71 in the
near future.
Statement of Financial Accounting Standards No. 101, "Regulated
Enterprises - Accounting for the Discontinuance of Application of FASB Statement
No. 71" ("SFAS 101"), specifies the accounting required when an enterprise
ceases to meet the criteria for application of SFAS 71. SFAS 101 requires the
elimination of the effects of any actions of regulators that have been
recognized as assets and liabilities in accordance with SFAS 71 but would not
have been recognized as assets and liabilities by nonregulated enterprises.
Depreciation rates of certain assets established by regulatory authorities for
the Company's telephone operations subject to SFAS 71 have historically included
a component for removal costs in excess of the related estimated salvage value.
Notwithstanding the adoption of SFAS 143, SFAS 71 requires the Company to
continue to reflect this accumulated liability for removal costs in excess of
salvage value even though there is no legal obligation to remove the assets.
Therefore, the Company did not adopt the provisions of SFAS 143 for its
telephone operations subject to SFAS 71. 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.
The Company's consolidated balance sheet as of December 31, 2004 included
regulatory assets of approximately $3.0 million (primarily deferred costs
related to financing costs and regulatory proceedings) and regulatory
liabilities of approximately $200.3 million related to estimated removal costs
embedded in accumulated depreciation (as described above). Net deferred income
tax assets related to the regulatory assets and liabilities quantified above
were $75.2 million.
When and if the Company's regulated operations no longer qualify for the
application of SFAS 71, the Company does not expect to record any 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 will have a material impact on the
Company's results of operations. For regulatory purposes, the accounting and
reporting of the Company's telephone subsidiaries will not be affected by the
discontinued application of SFAS 71.
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 2004
have not been material, and the Company currently has no reason to believe that
such costs will become material.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
For information pertaining to the Company's market risk disclosure, see
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk".
Item 8. Financial Statements and Supplementary Data
Report of Management
--------------------
The Shareholders
CenturyTel, Inc.:
Management has prepared and is responsible for the integrity and
objectivity of the Company's consolidated financial statements. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and necessarily include
amounts determined using our best judgments and estimates.
The Company's consolidated financial statements have been audited by KPMG
LLP, an independent registered public accounting firm, who have expressed their
opinion with respect to the fairness of the consolidated financial statements.
Their audit was conducted in accordance with standards of the Public Company
Accounting Oversight Board (United States).
Management is responsible for establishing and maintaining adequate
internal controls over financial reporting, a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Under the supervision and with the
participation of management, including our principal executive officer and
principal financial officer, the Company conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our
evaluation under the framework of COSO, management concluded that the Company's
internal control over financial reporting was effective as of December 31, 2004.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by KPMG LLP, as
stated in their report which is included herein.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Audit Committee of the Board of Directors is composed of independent
directors who are not officers or employees of the Company. The Committee meets
periodically with the external auditors, internal auditors and management. The
Committee considers the independence of the external auditors and the audit
scope and discusses internal control, financial and reporting matters. Both the
external and internal auditors have free access to the Committee.
/s/ R. Stewart Ewing, Jr.
- --------------------------
R. Stewart Ewing, Jr.
Executive Vice President and Chief Financial Officer
March 16, 2005
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
CenturyTel, Inc.:
We have audited the consolidated financial statements of CenturyTel,
Inc. and subsidiaries as listed in Item 15a(i). In connection with our audits of
the consolidated financial statements, we also have audited the financial
statement schedule as listed in Item 15a(ii). These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CenturyTel,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 14, 2005 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
Shreveport, Louisiana
March 14, 2005
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
CenturyTel, Inc.:
We have audited management's assessment, included in the accompanying
Report of Management, that CenturyTel, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that CenturyTel, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion,
CenturyTel, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements of CenturyTel, Inc. and subsidiaries and related financial statement
schedule as listed in Items 15(a)(i) and 15(a)(ii), respectively, and our report
dated March 14, 2005 expressed an unqualified opinion on those consolidated
financial statements and related financial statement schedule. Such report
refers to a change in the method of accounting for goodwill and other intangible
assets in 2002.
/s/ KPMG LLP
Shreveport, Louisiana
March 14, 2005
CENTURYTEL, INC.
Consolidated Statements of Income
Year ended December 31,
- -----------------------------------------------------------------------------------------------
2004 2003 2002
- -----------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES $ 2,407,372 2,367,610 1,971,996
- -----------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of services and products (exclusive of
depreciation and amortization) 755,413 739,210 635,164
Selling, general and administrative 397,102 374,352 301,681
Corporate overhead costs allocable to
discontinued operations - - 9,548
Depreciation and amortization 500,904 503,652 450,197
- -----------------------------------------------------------------------------------------------
Total operating expenses 1,653,419 1,617,214 1,396,590
- -----------------------------------------------------------------------------------------------
OPERATING INCOME 753,953 750,396 575,406
- -----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (211,051) (226,751) (221,845)
Income from unconsolidated cellular entity 7,067 6,160 5,582
Nonrecurring gains and losses, net - - 3,709
Other income (expense) (2,597) 2,154 (63,814)
- -----------------------------------------------------------------------------------------------
Total other income (expense) (206,581) (218,437) (276,368)
- -----------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 547,372 531,959 299,038
Income tax expense 210,128 187,252 105,505
- -----------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 337,244 344,707 193,533
DISCONTINUED OPERATIONS
Income from discontinued operations,
net of $284,459 tax - - 608,091
- -----------------------------------------------------------------------------------------------
NET INCOME $ 337,244 344,707 801,624
===============================================================================================
Basic earnings per share
From continuing operations $ 2.45 2.40 1.36
From discontinued operations $ - - 4.29
Basic earnings per share $ 2.45 2.40 5.66
Diluted earnings per share
From continuing operations $ 2.41 2.35 1.35
From discontinued operations $ - - 4.21
Diluted earnings per share $ 2.41 2.35 5.56
DIVIDENDS PER COMMON SHARE $ .23 .22 .21
===============================================================================================
AVERAGE BASIC SHARES OUTSTANDING 137,215 143,583 141,613
===============================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 142,144 148,779 144,408
===============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Comprehensive Income
Year ended December 31,
- ----------------------------------------------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 337,244 344,707 801,624
OTHER COMPREHENSIVE INCOME, NET OF TAXES
Minimum pension liability adjustment:
Minimum pension liability adjustment,
net of ($5,916) $19,312 and
($19,312) tax (9,491) 35,864 (35,864)
Unrealized holding gains:
Unrealized holding gains related to
marketable securities arising
during the period, net of $940 tax 1,508 - -
Derivative instruments:
Net losses on derivatives hedging
variability of cash flows, net
of ($219), ($36) and ($496) tax (351) (67) (921)
Less: reclassification adjustment for
losses included in net income,
net of $487 and $44 tax - 906 82
- ----------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 328,910 381,410 764,921
==============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Balance Sheets
December 31,
- -----------------------------------------------------------------------------------------------
2004 2003
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 167,215 203,181
Accounts receivable
Customers, less allowance of
$12,766 and $13,862 161,827 163,526
Interexchange carriers and other, less
allowance of $8,421 and $9,817 70,753 72,661
Materials and supplies, at average cost 5,361 9,229
Other 14,691 14,342
- -----------------------------------------------------------------------------------------------
Total current assets 419,847 462,939
- -----------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,341,401 3,455,481
- -----------------------------------------------------------------------------------------------
GOODWILL AND OTHER ASSETS
Goodwill 3,433,864 3,425,001
Other 601,841 552,431
- -----------------------------------------------------------------------------------------------
Total investments and other assets 4,035,705 3,977,432
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,796,953 7,895,852
===============================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 249,617 72,453
Accounts payable 141,618 124,320
Accrued expenses and other current liabilities
Salaries and benefits 60,858 55,497
Income taxes 54,648 43,082
Other taxes 47,763 35,532
Interest 67,379 64,247
Other 18,875 31,640
Advance billings and customer deposits 50,860 44,612
- -----------------------------------------------------------------------------------------------
Total current liabilities 691,618 471,383
- -----------------------------------------------------------------------------------------------
LONG-TERM DEBT 2,762,019 3,109,302
- -----------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 933,551 836,651
- -----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
350,000,000 shares, issued and outstanding
132,373,912 and 144,364,168 shares 132,374 144,364
Paid-in capital 222,205 576,515
Accumulated other comprehensive loss, net of tax (8,334) -
Retained earnings 3,055,545 2,750,162
Unearned ESOP shares - (500)
Preferred stock - non-redeemable 7,975 7,975
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 3,409,765 3,478,516
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 7,796,953 7,895,852
===============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
- ----------------------------------------------------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 337,244 344,707 801,624
Adjustments to reconcile net income to net
cash provided by operating activities from
continuing operations
Income from discontinued operations, net of tax - - (608,091)
Depreciation and amortization 500,904 503,652 450,197
Deferred income taxes 74,374 128,706 71,112
Income from unconsolidated cellular entity (7,067) (6,160) (5,582)
Nonrecurring gains and losses, net - - (3,709)
Changes in current assets and current liabilities
Accounts receivable 2,937 37,980 (13,481)
Accounts payable 15,514 47,972 3,769
Accrued taxes 27,040 57,709 43,046
Other current assets and other current
liabilities, net 12,831 17,323 36,316
Retirement benefits 26,954 (14,739) (9,416)
Increase in noncurrent assets (31,714) (23,528) (30,543)
Increase (decrease) in other noncurrent liabilities (6,220) (6,151) 35,489
Other, net 3,034 (19,507) 22,703
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities
from continuing operations 955,831 1,067,964 793,434
- ----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Acquisitions, net of cash acquired (2,000) (86,243) (2,245,026)
Payments for property, plant and equipment (385,316) (377,939) (386,267)
Investment in debt security (25,000) - -
Proceeds from sale of assets - - 4,144
Distributions from unconsolidated cellular entity 8,219 1,104 5,438
Other, net (9,214) (1,560) (1,378)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities
from continuing operations (413,311) (464,638) (2,623,089)
- ----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of debt - - 2,123,618
Payments of debt (179,393) (432,258) (1,592,246)
Repurchase of common stock (401,013) - -
Proceeds from settlement of interest rate hedge contract - 22,315 -
Proceeds from issuance of common stock 29,485 33,980 29,125
Payment of debt issuance costs - - (12,999)
Payment of equity unit issuance costs - - (15,867)
Cash dividends (31,861) (32,017) (30,156)
Other, net 4,296 4,174 4,866
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities from continuing operations (578,486) (403,806) 506,341
- ----------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations - - 1,323,479
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (35,966) 199,520 165
Cash and cash equivalents at beginning of year 203,181 3,661 3,496
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 167,215 203,181 3,661
====================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Stockholders' Equity
Year ended December 31,
- ----------------------------------------------------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
COMMON STOCK
Balance at beginning of year $ 144,364 142,956 141,233
Repurchase of common stock (13,396) - -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,406 1,408 1,723
- ----------------------------------------------------------------------------------------------------
Balance at end of year 132,374 144,364 142,956
- ----------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of year 576,515 537,804 524,668
Repurchase of common stock (387,617) - -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 28,079 32,572 27,402
Equity unit issuance costs and initial contract
adjustment liability - - (24,377)
Amortization of unearned compensation and other 5,228 6,139 10,111
- ----------------------------------------------------------------------------------------------------
Balance at end of year 222,205 576,515 537,804
- ----------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS,
NET OF TAX
Balance at beginning of year - (36,703) -
Change in other comprehensive income (loss)
(net of reclassification adjustment), net of tax (8,334) 36,703 (36,703)
- ----------------------------------------------------------------------------------------------------
Balance at end of year (8,334) - (36,703)
- ----------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 2,750,162 2,437,472 1,666,004
Net income 337,244 344,707 801,624
Cash dividends declared
Common stock - $.23, $.22 and $.21 per share (31,462) (31,618) (29,757)
Preferred stock (399) (399) (399)
- ----------------------------------------------------------------------------------------------------
Balance at end of year 3,055,545 2,750,162 2,437,472
- ----------------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of year (500) (1,500) (2,500)
Release of ESOP shares 500 1,000 1,000
- ----------------------------------------------------------------------------------------------------
Balance at end of year - (500) (1,500)
- ----------------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of year 7,975 7,975 7,975
- ----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,409,765 3,478,516 3,088,004
====================================================================================================
COMMON SHARES OUTSTANDING
Balance at beginning of year 144,364 142,956 141,233
Repurchase of common stock (13,396) - -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,406 1,408 1,723
- ----------------------------------------------------------------------------------------------------
Balance at end of year 132,374 144,364 142,956
====================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements of
CenturyTel, Inc. and its subsidiaries (the "Company") include the accounts of
CenturyTel, Inc. ("CenturyTel") and its majority-owned subsidiaries.
Regulatory accounting - The Company's regulated telephone operations (except for
the properties acquired from Verizon in 2002) are subject to the provisions of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" ("SFAS 71"). Actions by regulators can provide
reasonable assurance of the recognition of an asset, reduce or eliminate the
value of an asset and impose a liability on a regulated enterprise. Such
regulatory assets and liabilities are required to be recorded and, accordingly,
reflected in the balance sheet of an entity subject to SFAS 71. The Company is
monitoring the ongoing applicability of SFAS 71 to its regulated telephone
operations due to the changing regulatory, competitive and legislative
environments, and it is possible that changes in regulation, legislation or
competition or in the demand for regulated services or products could result in
the Company's telephone operations no longer being subject to SFAS 71 in the
near future. The Company's consolidated balance sheet as of December 31, 2004
included regulatory assets of approximately $3.0 million (primarily deferred
costs related to financing costs and regulatory proceedings) and regulatory
liabilities of approximately $200.3 million related to estimated removal costs
embedded in accumulated depreciation (as required to be recorded by regulators).
Net deferred income tax assets related to the regulatory assets and liabilities
quantified above were $75.2 million.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue recognition - Revenues are generally recognized when services are
provided or when products are delivered to customers. Revenue that is billed in
advance includes monthly recurring network access services, special access
services and monthly recurring local line charges. The unearned portion of this
revenue is initially deferred as a component of advanced billings and customer
deposits on the Company's balance sheet and recognized as revenue over the
period that the services are provided. Revenue that is billed in arrears
includes nonrecurring network access services, nonrecurring local services and
long distance services. The earned but unbilled portion of this revenue is
recognized as revenue in the period that the services are provided.
Certain of the Company's telephone subsidiaries participate in revenue
sharing arrangements with other telephone companies for interstate revenue and
for certain intrastate revenue. Such sharing arrangements are funded by toll
revenue and/or access charges within state jurisdictions and by access charges
in the interstate market. Revenues earned through the various sharing
arrangements are initially recorded based on the Company's estimates.
Property, plant and equipment - Telephone plant is stated at original cost.
Normal retirements of telephone plant are charged against accumulated
depreciation, along with the costs of removal, less salvage, with no gain or
loss recognized. Renewals and betterments of plant and equipment are capitalized
while repairs, as well as renewals of minor items, are charged to operating
expense. Depreciation of telephone plant is provided on the straight line method
using class or overall group rates acceptable to regulatory authorities; such
average rates range from 2.8% to 23%.
Non-telephone property is stated at cost and, when sold or retired, a
gain or loss is recognized. Depreciation of such property is provided on the
straight line method over estimated service lives ranging from two to 35 years.
Intangible assets - Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), requires goodwill recorded
in a business combination to be reviewed for impairment and to be written down
only in periods in which the recorded amount of goodwill exceeds its fair value.
Impairment of goodwill is tested at least annually by comparing the fair value
of the reporting unit to its carrying value (including goodwill). Estimates of
the fair value of the reporting unit are based on valuation models using
criterion such as multiples of earnings.
Long-lived assets - Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets (exclusive of goodwill) and also broadens the reporting of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal transaction.
As a result of the Company's agreement in March 2002 to sell its wireless
operations (which was consummated on August 1, 2002) (see Note 3), such
operations have been reflected as discontinued operations for the year ended
December 31, 2002.
Affiliated transactions - Certain service subsidiaries of CenturyTel provide
installation and maintenance services, materials and supplies, and managerial,
operational, technical, accounting and administrative services to subsidiaries.
In addition, CenturyTel provides and bills management services to subsidiaries
and in certain instances makes interest bearing advances to finance construction
of plant and purchases of equipment. These transactions are recorded by the
Company's telephone subsidiaries at their cost to the extent permitted by
regulatory authorities. Intercompany profit on transactions with regulated
affiliates is limited to a reasonable return on investment and has not been
eliminated in connection with consolidating the results of operations of
CenturyTel and its subsidiaries. Intercompany profit on transactions with
affiliates not subject to SFAS 71 has been eliminated.
Income taxes - CenturyTel files a consolidated federal income tax return with
its eligible subsidiaries. The Company uses the asset and liability method of
accounting for income taxes under which deferred tax assets and liabilities are
established for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases.
Derivative financial instruments - The Company accounts for derivative
instruments and hedging activities in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended. SFAS 133, as amended, requires that all
derivative instruments, such as interest rate swaps, be recognized in the
financial statements and measured at fair value regardless of the purpose or
intent of holding them. On the date a derivative contract is entered into, the
Company designates the derivative as either a fair value or cash flow hedge. A
hedge of the fair value of a recognized asset or liability or of an unrecognized
firm commitment is a fair value hedge. A hedge of a forecasted transaction or
the variability of cash flows to be received or paid related to a recognized
asset or liability is a cash flow hedge. The Company also formally assesses,
both at the hedge's inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. If the Company determines that a
derivative is not highly effective as a hedge or that it has ceased to be a
highly effective hedge, the Company would discontinue hedge accounting
prospectively. 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.
Earnings per share - Basic earnings per share amounts are determined on the
basis of the weighted average number of common shares outstanding during the
year. Diluted earnings per share gives effect to all potential dilutive common
shares that were outstanding during the period. In the fourth quarter of 2004,
the Company adopted the requirements of Emerging Issues Task Force No. 04-8,
"The Effect of Contingently Convertible Instruments on Diluted Earnings Per
Share," in calculating its diluted earnings per share. See Note 13 for
additional information.
Stock-based compensation - The Company currently accounts for 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 to
date recognized compensation cost in connection with issuing stock options.
During 2004 the Company granted 952,975 options (the "2004 Options") at
market price. The weighted average fair value of each of the 2004 Options was
estimated as of the date of grant to be $10.25 using an option-pricing model
with the following assumptions: dividend yield - .7%; expected volatility - 30%;
weighted average risk-free interest rate - 3.6%; and expected option life -
seven years.
During 2003 the Company granted 1,720,317 options (the "2003 Options") at
market price. The weighted average fair value of each of the 2003 Options was
estimated as of the date of grant to be $9.94 using an option-pricing model with
the following assumptions: dividend yield - .7%; expected volatility - 30%;
weighted average risk-free interest rate - 3.4%; and expected option life -
seven years.
During 2002 the Company granted 1,983,150 options (the "2002 Options") at
market price. The weighted average fair value of each of the 2002 Options was
estimated as of the date of grant to be $11.66 using an option-pricing model
with the following assumptions: dividend yield - .7%; expected volatility - 30%;
weighted average risk-free interest rate - 3.4%; and expected option life -
seven years.
If compensation cost for CenturyTel's options had been determined
consistent with SFAS 123, the Company's net income and earnings per share on a
pro forma basis for 2004, 2003 and 2002 would have been as follows:
Year ended December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 337,244 344,707 801,624
Less: Total stock-based compensation
expense determined under fair value
based method, net of tax $ (9,767) (13,183) (15,001)
-----------------------------------
Pro forma net income $ 327,477 331,524 786,623
===================================
Basic earnings per share
As reported $ 2.45 2.40 5.66
Pro forma $ 2.38 2.31 5.55
Diluted earnings per share
As reported $ 2.41 2.35 5.56
Pro forma $ 2.34 2.26 5.46
- ----------------------------------------------------------------------------------
Beginning in the third quarter of 2005, the Company will adopt the
provisions of Statement of Financial Accounting Standards No. 123 (Revised
2004), "Share-Based Payments" ("SFAS 123(R)"). SFAS 123(R) requires the Company
to measure the cost of the employee services received in exchange for an award
of equity instruments based upon the fair value of the award on the grant date.
Such cost will be recognized as an expense over the period during which the
employee is required to provide service in exchange for the award. In accordance
with SFAS 123(R), compensation cost is also recognized over the applicable
remaining vesting period for any awards that are not fully vested as of the
effective date.
Cash equivalents - The Company considers short-term investments with a maturity
at date of purchase of three months or less to be cash equivalents.
Discontinued operations - On August 1, 2002, the Company sold substantially all
of its wireless operations to an affiliate of ALLTEL Corporation ("Alltel") and
certain other purchasers for an aggregate of approximately $1.59 billion in
cash. As a result, the Company's wireless operations have been reflected as
discontinued operations for 2002. See Note 3 for additional information.
Reclassifications - Certain amounts previously reported for prior years have
been reclassified to conform with the 2004 presentation, including the
presentation of the Company's segment reporting. See Note 17 for additional
information.
(2) ACQUISITIONS
On July 1, 2002, the Company purchased approximately 300,000 telephone
access lines in the state of Alabama from Verizon Communications, Inc.
("Verizon") for approximately $1.022 billion cash. On August 31, 2002, the
Company purchased approximately 350,000 telephone access lines in the state of
Missouri from Verizon for approximately $1.179 billion cash. The assets
purchased in these transactions included (i) franchises authorizing the
provision of local telephone service, (ii) related property and equipment
comprising Verizon's local exchange operations in predominantly rural markets
throughout Alabama and Missouri and (iii) Verizon's assets used to provide
digital subscriber line ("DSL") and other high speed data services within the
purchased exchanges. For financing arrangements related to these acquisitions,
see Note 6.
In June and December 2003, the Company acquired certain fiber transport
assets for an aggregate of $55.2 million cash (of which $3.8 million was paid as
a deposit in 2002). In the fourth quarter of 2003, the Company purchased an
additional 24.3% interest in a telephone company in which it owned a majority
interest for $32.4 million cash.
The results of operations of the acquired properties are included in the
Company's results of operations from and after the respective acquisition dates.
The following pro forma information represents the consolidated results
of continuing operations of the Company for the year ended December 31, 2002 as
if the Verizon acquisitions in 2002 had been consummated as of January 1, 2002.
2002
-------------
(Dollars in thousands,
except per share amounts)
Operating revenues from continuing operations $ 2,285,866
Income from continuing operations $ 218,252
Basic earnings per share from
continuing operations $ 1.54
Diluted earnings per share from
continuing operations $ 1.52
The pro forma information is based on various assumptions and estimates.
The pro forma information (i) reflects the effect of reduced interest expense
after August 1, 2002 as a result of reducing outstanding indebtedness from
utilization of proceeds received from the August 1, 2002 sale of substantially
all of the Company's wireless operations described in Note 3 and (ii) makes no
pro forma adjustments to reflect any assumed consummation of such sale (or any
use of such sale proceeds) prior to August 1, 2002. The pro forma information is
not necessarily indicative of the operating results that would have occurred if
the Verizon acquisitions had been consummated as of January 1, 2002, nor is it
necessarily indicative of future operating results. The pro forma information
does not give effect to any actual or potential revenue enhancements or cost
synergies or other operating efficiencies resulting from the acquisitions.
(3) DISCONTINUED OPERATIONS
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion in cash. In connection with this transaction, the
Company divested its (i) interests in its majority-owned and operated cellular
systems, which at June 30, 2002 served approximately 783,000 customers and had
access to approximately 7.8 million pops, (ii) minority cellular equity
interests representing approximately 1.8 million pops at June 30, 2002, and
(iii) licenses to provide PCS covering 1.3 million pops in Wisconsin and Iowa.
Proceeds from the sale of the wireless operations were used to partially fund
the Company's acquisitions of telephone properties in Alabama and Missouri
during the third quarter of 2002.
As a result of the sale, the Company's wireless operations have been
reflected as discontinued operations in the Company's consolidated statements of
income and cash flows for the year ended December 31, 2002.
The depreciation and amortization of long-lived and amortizable intangible
assets related to the wireless operations ceased on March 19, 2002, the date of
the definitive agreement to sell such operations.
The Company had no outstanding indebtedness directly related to its
wireless operations; therefore, no interest expense was allocated to
discontinued operations. The following table represents certain summary income
statement information related to the Company's wireless operations that is
reflected in discontinued operations.
Year ended December 31, 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 246,705
- --------------------------------------------------------------------------------
Operating income (1) $ 71,258
Income from unconsolidated cellular entities 25,768
Minority interest expense (8,569)
Gain on sale of discontinued operations 803,905
Other income 188
- --------------------------------------------------------------------------------
Pre-tax income from discontinued operations $ 892,550
Income tax expense (284,459)
- --------------------------------------------------------------------------------
Income from discontinued operations $ 608,091
================================================================================
(1) Excludes corporate overhead costs of $9.5 million allocated to the wireless
operations. Included as a reduction in operating income is a $30.5 million
charge associated with the write-off of all amounts expended to develop the
wireless portion of the Company's new billing system.
The following table represents certain summary cash flow statement
information related to the Company's wireless operations reflected as
discontinued operations:
Year ended December 31, 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Net cash used in operating activities $ (248,716)(1)
Net cash provided by investing activities 1,572,195 (2)
Net cash provided by financing activities -
- --------------------------------------------------------------------------------
Net cash provided by discontinued operations $ 1,323,479
================================================================================
(1) Includes approximately $305 million estimated tax payment related to sale
of wireless operations.
(2) Includes cash proceeds of $1.59 billion from the sale of substantially
all of the Company's wireless operations.
(4) GOODWILL AND OTHER ASSETS
Goodwill and other assets at December 31, 2004 and 2003 were composed of
the following:
December 31, 2004 2003
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Goodwill $ 3,433,864 3,425,001
Billing system development costs, less accumulated amortization
of $4,652 and $508 202,349 162,980
Cash surrender value of life insurance contracts 93,792 93,960
Prepaid pension asset 46,800 59,055
Franchise costs 35,300 35,300
Marketable securities 30,092 27,653
Deferred interest rate hedge contracts 28,435 31,239
Investment in debt security 21,013 -
Customer base, less accumulated amortization of $3,756 and $2,242 18,944 20,458
Other 125,116 121,786
- ----------------------------------------------------------------------------------------------------------
$ 4,035,705 3,977,432
=========================================================================================================
As of September 30, 2004, the Company completed the required annual
impairment test under SFAS 142 and determined its goodwill was not impaired.
The Company recently implemented a 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." Aggregate capitalized
costs (before accumulated amortization) totaled $207.0 million and $163.5
million at December 31, 2004 and 2003, respectively. Such system is being
amortized over a twenty-year period.
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 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 is being amortized over a three-year period.
In connection with the acquisitions of properties from Verizon in 2002,
the Company assigned $35.3 million of the purchase price as an intangible asset
associated with franchise costs (which includes amounts necessary to maintain
eligibility to provide telecommunications services in its licensed service
areas). Such asset has an indefinite life and therefore is not subject to
amortization currently.
The Company assigned $22.7 million of the purchase price to a customer
base intangible asset in connection with the acquisitions of Verizon properties
in 2002. Such asset is being amortized over 15 years. In addition, as mentioned
above, an intangible asset was established related to the contractual rights to
provide video service. Total amortization expense for these identifiable
intangible assets for 2004, 2003 and 2002 was $2.0 million, $1.5 million and
$729,000, respectively, and is expected to be $2.9 million for each of the
subsequent two years, $2.4 million in 2007 and $1.5 million annually thereafter
through 2009.
(5) PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at December 31, 2004 and 2003 was
composed of the following:
December 31, 2004 2003
- --------------------------------------------------------------------------------
(Dollars in thousands)
Cable and wire $ 3,948,784 3,817,646
Central office 2,385,406 2,285,528
General support 785,025 811,301
Fiber transport and CLEC 150,098 127,080
Information origination/termination 56,428 49,643
Construction in progress 66,485 58,018
Other 38,791 34,939
- --------------------------------------------------------------------------------
7,431,017 7,184,155
Accumulated depreciation (4,089,616) (3,728,674)
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 3,341,401 3,455,481
================================================================================
Depreciation expense was $498.9 million, $502.1 million and $449.5
million in 2004, 2003 and 2002, respectively. The year 2004 included a reduction
in depreciation expense of $13.2 million to adjust the balances of certain
over-depreciated property, plant and equipment accounts.
(6) LONG-TERM DEBT
The Company's long-term debt as of December 31, 2004 and 2003 was as
follows:
December 31, 2004 2003
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
CenturyTel
Senior notes and debentures:
7.75% Series A $ - 50,000
8.25% Series B - 100,000
6.55% Series C, due 2005 50,000 50,000
7.20% Series D, due 2025 100,000 100,000
6.15% Series E, due 2005 100,000 100,000
6.30% Series F, due 2008 240,000 240,000
6.875% Series G, due 2028 425,000 425,000
8.375% Series H, due 2010 500,000 500,000
6.02% Series J, due 2007* 500,000 500,000
4.75% Series K, due 2032 165,000 165,000
7.875% Series L, due 2012 500,000 500,000
Employee Stock Ownership Plan commitment - 500
Unamortized net discount (3,919) (4,501)
Net fair value of derivative instruments
related to Series H and L senior notes 10,865 7,747
Other 79 114
- -------------------------------------------------------------------------------------------
Total CenturyTel 2,587,025 2,733,860
- -------------------------------------------------------------------------------------------
Subsidiaries
First mortgage debt
5.92%** notes, payable to agencies of the
U. S. government and cooperative lending
associations, due in installments
through 2028 210,403 234,743
7.98% notes, due through 2016 4,964 5,211
Other debt
6.98%** unsecured medium-term notes, due through 2008 197,999 199,613
8.76%** notes, due in installments through 2028 6,187 3,739
5.35%** capital lease obligations, due through 2008 5,058 4,589
- -------------------------------------------------------------------------------------------
Total subsidiaries 424,611 447,895
- -------------------------------------------------------------------------------------------
Total long-term debt 3,011,636 3,181,755
Less current maturities 249,617 72,453
- -------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 2,762,019 3,109,302
===========================================================================================
* In February 2005, the Company purchased and retired approximately $400
million of the Series J notes; the interest rate on the remaining $100
million was reset to 4.628%.
** Weighted average interest rate at December 31, 2004
The approximate annual debt maturities for the five years subsequent to
December 31, 2004 are as follows (after giving consideration to the Company
purchasing and retiring approximately $400 million of its Series J notes in
February 2005): 2005 - $249.6 million; 2006 - $281.3 million (including $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); 2007 - $125.2 million; 2008 - $285.9 million; and 2009 - $20.6
million.
Certain of the loan agreements of CenturyTel and its subsidiaries contain
various restrictions, among which are limitations regarding issuance of
additional debt, payment of cash dividends, reacquisition of capital stock and
other matters. In addition, the transfer of funds from certain consolidated
subsidiaries to CenturyTel is restricted by various loan agreements.
Subsidiaries which have loans from government agencies and cooperative lending
associations, or have issued first mortgage bonds, generally may not loan or
advance any funds to CenturyTel, but may pay dividends if certain financial
ratios are met. At December 31, 2004, restricted net assets of subsidiaries were
$227.6 million and subsidiaries' retained earnings in excess of amounts
restricted by debt covenants totaled $1.4 billion. At December 31, 2004, all of
the consolidated retained earnings reflected on the balance sheet was available
under CenturyTel's loan agreements for the declaration of dividends.
The senior notes and debentures of CenturyTel referred to above were
issued under an indenture dated March 31, 1994. This debenture does not contain
any financial covenants, but does include restrictions that limit the Company's
ability to (i) incur, issue or create liens upon its property and (ii)
consolidate with or merge into, or transfer or lease all or substantially all of
its assets to, any other party. The indenture does not contain any provisions
that are tied to the credit ratings of the Company, or that restrict the
issuance of new securities in the event of a material adverse change in the
Company.
Approximately 21% of the Company's property, plant and equipment is
pledged to secure the long-term debt of subsidiaries.
In May 2004, the Company prepaid all $100 million aggregate principal
amount of its 8.25%, Series B 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 unamortized deferred debt costs) in the second quarter of 2004
associated with this prepayment.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consisted initially of a beneficial interest in a
CenturyTel senior unsecured note (Series J) with a principal amount of $25 and a
contract to purchase shares of CenturyTel common stock no later than May 2005.
As discussed below, the senior notes were remarketed in February 2005. Each
purchase contract will generally require the holder to purchase between .6944
and .8741 of a share of CenturyTel common stock in May 2005 based on the then
current stock price of CenturyTel common stock in exchange for $25, subject to
certain adjustments and exceptions. Accordingly, upon full settlement of the
purchase contracts in May 2005, the Company will receive proceeds of $500
million and will deliver between 13.9 million and 17.5 million common shares in
the aggregate. The senior notes were initially pledged by the holders to secure
their obligations under the purchase contracts. The total distributions on the
equity units were initially set at an initial annual rate of 6.875%, consisting
of interest (6.02%) and contract adjustment payments (0.855%), each payable
quarterly.
The senior note portion of the equity units is reflected on the December
31, 2004 balance sheet as long-term debt in the amount of $500 million. Interest
expense on the senior notes has accrued at a rate of 6.02%, the initial interest
rate through February 14, 2005. The present value of the aggregate contract
adjustment payments has been recorded as an $11.6 million reduction to paid-in
capital and as an equivalent liability. The Company is amortizing the difference
between the aggregate amount of all payments and the present value thereof as
interest expense over the three-year term of the purchase contracts. Upon making
each such payment, the Company will allocate most of the payment to the
reduction of its $11.6 million liability, and record the remainder as interest
expense. The issuance costs of the equity units have been allocated to the
units' debt and equity components. The debt issuance costs ($3.3 million) were
computed based on typical costs of a debt transaction and will be amortized to
interest expense over the term of the senior notes. The remainder of the
issuance costs ($12.6 million) were treated as a cost of raising equity and
recorded as a charge to paid-in capital.
In mid-February 2005, substantially all of the senior notes were
remarketed, at which time the interest rate on the senior notes was reset in
order to generate sufficient proceeds to secure the holder's obligation under
the related purchase contracts. In connection with the remarketing, the Company
purchased and retired approximately $400 million of the Series J notes. As of
February 15, 2005, only approximately $100 million aggregate principal amount of
the Series J notes remained outstanding. The Company financed this purchase with
the net proceeds from its offering of $350 million of senior notes, Series M,
due 2015, and cash on hand.
As of December 31, 2004, the Company had available a $533 million
three-year revolving credit facility, which was scheduled to expire in July
2005. The Company had no outstanding borrowings under its facility at December
31, 2004. In March 2005, the Company secured a five-year $750 million revolving
credit facility to replace the above-mentioned facility. At December 31, 2004,
the Company's telephone subsidiaries had available for use $123.0 million of
commitments for long-term financing from the Rural Utilities Service and Rural
Telephone Bank.
In the third quarter of 2002, the Company issued $165 million of
convertible senior debentures, Series K, due 2032 (which bear interest at 4.75%
and which may be converted under certain specified circumstances into shares of
CenturyTel common stock at a conversion price of $40.455 per share). Holders of
the convertible senior debentures will have the right to require the Company to
purchase all or a portion of the debentures on August 1, 2006, August 1, 2010
and August 1, 2017. In each case, the purchase price payable will be equal to
100% of the principal amount of the debentures to be purchased plus any accrued
and unpaid interest to the purchase date. The Company will pay cash for all
debentures so purchased on August 1, 2006. For any such purchases on or after
August 1, 2010, the Company may choose to pay the purchase price in cash or
shares of its common stock, or any combination thereof (except that the Company
will pay any accrued and unpaid interest in cash).
On October 15, 2002, the Company redeemed $400 million principal amount of
its Series I Remarketable Senior Notes at par value, plus accrued interest. In
connection with such redemption, the Company also paid a premium of
approximately $71.1 million in accordance with the redemption provisions of the
associated remarketing agreement. Such premium payment (net of $11.1 million of
unamortized net premium primarily associated with the option payment received by
the Company in 2000 in connection with the original issuance of the remarketable
notes) is reflected as an Other Expense in the Company's results of operations
for the year ended December 31, 2002.
(7) DERIVATIVE INSTRUMENTS
In May and July 2003, the Company entered into four separate fair value
interest rate hedges associated with the full $500 million 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 settlement and rate reset dates occurring each six months through
the expiration of the hedges in August 2012. As of December 31, 2004, the
Company realized a weighted average interest rate of 6.4% related to these
hedges. Interest expense was reduced by $10.3 million during 2004 as a result of
these hedges. The aggregate fair value of such hedges at December 31, 2004 was
$5.7 million and is reflected on the accompanying balance sheet as both a
liability (included in "Deferred credits and other liabilities") and as a
decrease to the Company's underlying long-term debt.
As of December 31, 2004, the Company also had outstanding cash flow hedges
that effectively locked in the interest rate on the majority of certain
anticipated debt transactions that ultimately were completed in February 2005.
The Company locked in the interest rate on (i) $100 million of 2.25 year debt
(remarketed in February 2005) at 3.9% and (ii) $225 million of 10-year debt
(issued in February 2005) at 5.5%. Such cash flow hedges had a fair value of
$571,000 as of December 31, 2004 and is reflected as a component of Accumulated
Other Comprehensive Loss on the consolidated balance sheet. In January 2005, the
Company also entered into a separate cash flow hedge which effectively locked in
the interest rate for an additional $75 million of 10-year debt (issued in
February 2005) at 5.4%. In February 2005, upon settlement of such hedges, the
Company (i) received $366,000 related to the 2.25 year debt remarketing which
will be amortized as a reduction of interest expense over the remaining term of
the debt and (ii) paid $7.7 million related to the 10-year debt issuance which
will be amortized as an increase in interest expense over the 10-year term of
the debt.
During 2002, the Company entered into (i) a cash flow hedge designed to
lock in a fixed interest rate for $100 million of the $500 million senior notes
issued in the third quarter of 2002 which was settled in the third quarter of
2002 for a $1.1 million payment by the Company (which is being amortized as
additional interest expense over a ten-year period, which equates to the term of
the debt issuance hedged) and (ii) a cash flow hedge designed to eliminate the
variability of interest payments for $400 million of variable rate debt under
the Company's $800 million credit facilities. During the second quarter of 2003,
the Company retired all outstanding indebtedness associated with its $800
million credit facilities; therefore, such cash flow hedge was deemed
ineffective in 2003 and resulted in a $722,000 unfavorable pre-tax charge to the
Company's income.
During 2002, the Company entered into a fair value hedge with respect to
the Company's $500 million aggregate principal amount of 8.375% Series H senior
notes, due 2010. In May 2003, the Company terminated this hedge. In connection
with such termination, the Company received approximately $22.3 million in cash
upon settlement, which represented the fair value of the hedge at the
termination date. Such amount is being amortized as a reduction of interest
expense through 2010, the maturity date of the Series H notes.
(8) DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 2004 and 2003 were
composed of the following:
December 31, 2004 2003
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred federal and state income taxes $ 601,757 528,551
Accrued postretirement benefit costs 232,546 222,613
Additional minimum pension liability 18,450 -
Minority interest 7,508 7,218
Fair value of interest rate swap 6,283 11,693
Other 67,007 66,576
- -------------------------------------------------------------------------------------------
$ 933,551 836,651
===========================================================================================
(9) STOCKHOLDERS' EQUITY
Common stock - Unissued shares of CenturyTel common stock were reserved as
follows:
December 31, 2004
- --------------------------------------------------------------------------------
(In thousands)
Incentive compensation programs 9,717
Acquisitions 4,064
Employee stock purchase plan 4,721
Dividend reinvestment plan 422
Conversion of convertible preferred stock 435
Other employee benefit plans 3,393
- --------------------------------------------------------------------------------
22,752
================================================================================
During 2004, the Company repurchased approximately 13.4 million shares of
common stock to complete its $400 million stock repurchase program approved by
the Company's board of directors in early 2004. In February 2005, the Company's
board of directors approved a stock repurchase program that will allow the
Company to repurchase up to an aggregate of $200 million of either its common
stock or convertible equity units prior to December 31, 2005.
Under CenturyTel's Articles of Incorporation each share of common stock
beneficially owned continuously by the same person since May 30, 1987 generally
entitles the holder thereof to ten votes per share. All other shares entitle the
holder to one vote per share. At December 31, 2004, the holders of 8.1 million
shares of common stock were entitled to ten votes per share.
Preferred stock - As of December 31, 2004, CenturyTel had 2.0 million shares of
authorized convertible preferred stock, $25 par value per share. At December 31,
2004 and 2003, there were 319,000 shares of outstanding preferred stock. Holders
of outstanding CenturyTel preferred stock are entitled to receive cumulative
dividends, receive preferential distributions equal to $25 per share plus unpaid
dividends upon CenturyTel's liquidation and vote as a single class with the
holders of common stock.
Shareholders' Rights Plan - In 1996 the Board of Directors declared a dividend
of one preference share purchase right for each common share outstanding. Such
rights become exercisable if and when a potential acquiror takes certain steps
to acquire 15% or more of CenturyTel's common stock. Upon the occurrence of such
an acquisition, each right held by shareholders other than the acquiror may be
exercised to receive that number of shares of common stock or other securities
of CenturyTel (or, in certain situations, the acquiring company) which at the
time of such transaction will have a market value of two times the exercise
price of the right.
(10) POSTRETIREMENT BENEFITS
The Company sponsors health care plans (which use a December 31
measurement date) that provide postretirement benefits to all qualified retired
employees.
In May 2004, the Financial Accounting Standards Board issued Financial
Statement Position FAS 106-2, which provides accounting guidance to sponsors of
postretirement health care plans that are impacted by the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act"). The Company
believes that certain drug benefits offered under its postretirement health care
plans will qualify for subsidy under Medicare Part D. In the third quarter of
2004, the Company estimated that the effect of the Act on the Company would not
be material. The Company first reflected the effects of the Act as of the
December 31, 2004 measurement date. As of this date, the Company estimated that
the reduction in its accumulated benefit obligation attributable to prior
service cost was approximately $7 million and has reflected such amount as an
actuarial gain.
In 2003, the Company announced changes, effective January 1, 2004, that
would decrease its subsidization of benefits provided under its postretirement
benefit plan.
The following is a reconciliation of the beginning and ending balances
for the benefit obligation and the plan assets.
December 31, 2004 2003 2002
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 311,421 253,762 215,872
Service cost 6,404 6,176 6,669
Interest cost 17,585 18,216 15,962
Participant contributions 1,362 1,199 617
Acquisitions - - 56,539
Plan amendments 2,529 (34,597) -
Actuarial (gain) loss (18,185) 79,163 (29,534)
Benefits paid (15,396) (12,498) (12,363)
- ---------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 305,720 311,421 253,762
===================================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 29,877 28,697 36,555
Return on assets 2,377 4,479 (2,896)
Employer contributions 11,350 8,000 6,784
Participant contributions 1,362 1,199 617
Benefits paid (15,396) (12,498) (12,363)
- ---------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 29,570 29,877 28,697
===================================================================================================
Net periodic postretirement benefit cost for 2004, 2003 and 2002 included
the following components:
Year ended December 31, 2004 2003 2002
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 6,404 6,176 6,669
Interest cost 17,585 18,216 15,962
Expected return on plan assets (2,465) (2,367) (3,656)
Amortization of unrecognized actuarial loss 3,611 1,731 1,470
Amortization of unrecognized prior service cost (3,648) (2,447) (129)
- ---------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 21,487 21,309 20,316
===================================================================================================
The following table sets forth the amounts recognized as liabilities for
postretirement benefits at December 31, 2004, 2003 and 2002.
December 31, 2004 2003 2002
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (305,720) (311,421) (253,762)
Fair value of plan assets 29,570 29,877 28,697
Unamortized prior service cost (26,891) (33,068) (918)
Unrecognized net actuarial loss 68,185 89,893 14,573
- ---------------------------------------------------------------------------------------------------
Accrued benefit cost $ (234,856) (224,719) (211,410)
===================================================================================================
Assumptions used in accounting for postretirement benefits as of December
31, 2004 and 2003 were:
2004 2003
- --------------------------------------------------------------------------------------
Determination of benefit obligation
Discount rate 5.75% 6.0
Healthcare cost increase trend rates
(Medical/Prescription Drug)
Following year 10.0%/15.0% 11.0/16.0
Rate to which the cost trend rate is
assumed to decline (the
ultimate cost trend rate) 5.0%/5.0% 5.0/5.0
Year that the rate reaches the ultimate
cost trend rate 2010/2015 2010/2015
Determination of benefit cost
Discount rate 6.0% 6.75
Expected return on plan assets 8.25% 8.25
- --------------------------------------------------------------------------------------
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. The intent of this strategy is to
minimize plan expenses by outperforming plan liabilities over the long term.
Risk tolerance is established through careful consideration of plan liabilities,
plan funded status and corporate financial condition. Investment risk is
measured and monitored on an ongoing basis through annual liability
measurements, periodic asset studies and periodic portfolio reviews.
The Company's postretirement benefit plan weighted-average asset
allocations at December 31, 2004 and 2003 by asset category are as follows:
2004 2003
- -----------------------------------------------------------------------
Equity securities 63.0% 80.5
Debt securities 34.1 16.4
Other 2.9 3.1
- -----------------------------------------------------------------------
Total 100.0% 100.0
=======================================================================
In determining the expected return on plan assets, historical markets are
studied and long-term relationships between equities and fixed income are
preserved consistent with the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. Peer data and
historical returns are also reviewed to check for reasonableness.
Assumed health care cost trends have a significant effect on the amounts
reported for postretirement benefit plans. A one-percentage-point change in
assumed health care cost rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Effect on total of service and
interest cost components $ 1,562 (1,489)
Effect on postretirement benefit obligation $ 20,004 (18,775)
- -----------------------------------------------------------------------------------
The Company expects to contribute approximately $15 million to its
postretirement benefit plan in 2005.
The Company's estimated future projected benefit payments under its
postretirement benefit plan are as follows:
Before Medicare Medicare Net of
Year Subsidy Subsidy Medicare Subsidy
- --------------------------------------------------------------------------------
(Dollars in thousands)
2005 $ 15,200 - 15,200
2006 $ 16,900 (800) 16,100
2007 $ 17,900 (800) 17,100
2008 $ 18,700 (900) 17,800
2009 $ 19,600 (1,000) 18,600
2010-2014 $ 99,400 (5,500) 93,900
(11) RETIREMENT AND SAVINGS PLANS
CenturyTel and certain subsidiaries sponsor defined benefit pension plans
for substantially all employees. CenturyTel also sponsors an Outside Directors'
Retirement Plan and a Supplemental Executive Retirement Plan to provide
directors and officers, respectively, with supplemental retirement, death and
disability benefits. The Company uses a December 31 measurement date for its
plans.
The following is a reconciliation of the beginning and ending balances
for the aggregate benefit obligation and the plan assets for the Company's
retirement and savings plans.
December 31, 2004 2003 2002
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 390,833 346,256 271,490
Service cost 14,175 12,840 10,353
Interest cost 23,156 23,617 20,053
Plan amendments 428 - -
Acquisitions - - 51,428
Settlements - (9,962) -
Actuarial loss 16,304 46,221 9,231
Benefits paid (26,266) (28,139) (16,299)
- ------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 418,630 390,833 346,256
================================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 348,308 266,420 270,902
Return on plan assets 35,892 52,783 (42,998)
Employer contributions 6,047 50,437 3,387
Acquisitions - 6,807 51,428
Benefits paid (26,266) (28,139) (16,299)
- ------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 363,981 348,308 266,420
================================================================================================
At December 31, 2004 and 2003, the Company's underfunded pension plans
(meaning those with benefit obligations in excess of plan assets) had aggregate
benefit obligations of $172.0 million and $138.4 million, respectively, and
aggregate plan assets of $109.0 million and $84.4 million, respectively.
Net periodic pension expense for 2004, 2003 and 2002 included the
following components:
Year ended December 31, 2004 2003 2002
- ------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 14,175 12,840 10,353
Interest cost 23,156 23,617 20,053
Expected return on plan assets (28,195) (22,065) (28,575)
Settlements 1,093 2,233 -
Recognized net losses 5,525 7,214 1,248
Net amortization and deferral 279 397 395
- ------------------------------------------------------------------------------------
Net periodic pension expense $ 16,033 24,236 3,474
====================================================================================
The following table sets forth the combined plans' funded status and
amounts recognized in the Company's consolidated balance sheet at December 31,
2004, 2003 and 2002.
December 31, 2004 2003 2002
- -------------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (418,630) (390,833) (346,256)
Fair value of plan assets 363,981 348,308 266,420
Unrecognized transition asset (648) (900) (1,152)
Unamortized prior service cost 3,618 3,721 4,370
Unrecognized net actuarial loss 98,479 98,759 102,664
- -------------------------------------------------------------------------------------
Prepaid pension cost $ 46,800 59,055 26,046
=====================================================================================
The Company's accumulated benefit obligation as of December 31, 2004 and
2003 was $353.1 million and $329.0 million, respectively.
Amounts recognized on the balance sheet consist of:
December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------------
(Dollars in thousands)
Prepaid pension cost (reflected in Other Assets) $ 46,800 59,055 26,046
Additional minimum pension liability (reflected
in Deferred Credits and Other Liabilities) (18,450) - (56,388)
Intangible asset (reflected in Other Assets) 3,043 - 1,212
Accumulated Other Comprehensive Loss 15,407 - 55,176
- ----------------------------------------------------------------------------------------
$ 46,800 59,055 26,046
========================================================================================
Assumptions used in accounting for the pension plans as of December 2004
and 2003 were:
2004 2003
- -----------------------------------------------------------------------------------
Determination of benefit obligation
Discount rate 5.75% 6.0
Weighted average rate of compensation increase 4.0% 4.0
Determination of benefit cost
Discount rate 6.0% 6.75
Weighted average rate of compensation increase 4.0% 4.50
Expected long-term rate of return on assets 8.25% 8.25
- -----------------------------------------------------------------------------------
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. The intent of this strategy is to
minimize plan expenses by outperforming plan liabilities over the long term.
Risk tolerance is established through careful consideration of plan liabilities,
plan funded status and corporate financial condition. Investment risk is
measured and monitored on an ongoing basis through annual liability
measurements, periodic asset studies and periodic portfolio reviews.
The Company's pension plans weighted-average asset allocations at December
31, 2004 and 2003 by asset category are as follows:
2004 2003
- --------------------------------------------------------------------------------
Equity securities 71.7% 54.0
Debt securities 25.5 11.0
Cash and cash equivalents - 32.3
Other 2.8 2.7
- --------------------------------------------------------------------------------
Total 100.0% 100.0
================================================================================
In determining the expected return on plan assets, historical markets are
studied and long-term relationships between equities and fixed income are
preserved consistent with the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. Peer data and
historical returns are also reviewed to check for reasonableness.
The amount of the 2005 contribution will be determined based on a number
of factors, including the results of the 2005 actuarial valuation report. At
this time, the amount of the 2005 contribution is not known.
The Company's estimated future projected benefit payments under its
defined benefit pension plans are as follows: 2005 - $20.7 million; 2006 - $22.1
million; 2007 - $23.4 million; 2008 - $26.2 million; 2009 - $28.4
million; and 2010-2014 - $176.8 million.
CenturyTel sponsors an Employee Stock Ownership Plan ("ESOP") which
covers most employees with one year of service with the Company and is funded by
Company contributions determined annually by the Board of Directors. The
Company's expense related to the ESOP during 2004, 2003 and 2002 was $8.1
million, $8.9 million, and $9.3 million, respectively. At December 31, 2004, the
ESOP owned an aggregate of 6.8 million shares of CenturyTel common stock.
CenturyTel and certain subsidiaries also sponsor qualified profit sharing
plans pursuant to Section 401(k) of the Internal Revenue Code (the "401(k)
Plans") which are available to substantially all employees of the Company. The
Company's matching contributions to the 401(k) Plans were $9.1 million in 2004,
$8.2 million in 2003 and $6.7 million in 2002.
(12) INCOME TAXES
Income tax expense from continuing operations included in the
Consolidated Statements of Income for the years ended December 31, 2004, 2003
and 2002 was as follows:
Year ended December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------
(Dollars in thousands)
Federal
Current $ 121,374 58,659 22,987
Deferred 59,973 118,600 80,056
State
Current 14,380 (113) 11,406
Deferred 14,401 10,106 (8,944)
- ----------------------------------------------------------------------------------
$ 210,128 187,252 105,505
==================================================================================
Income tax expense for 2003 was reduced by $21.6 million primarily as a
result of reducing the valuation allowance related to net state operating loss
carryforwards as it was more likely than not that future taxable income will be
sufficient to enable the Company to utilize this portion of the operating loss
carryforwards.
Income tax expense from continuing operations was allocated as follows:
Year ended December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
Income tax expense in the consolidated
statements of income $ 210,128 187,252 105,505
Stockholders' equity:
Compensation expense for tax purposes
in excess of amounts recognized for
financial reporting purposes (3,244) (4,385) (7,471)
Tax effect of the change in accumulated
other comprehensive income (loss) (5,195) 19,763 (19,763)
- ----------------------------------------------------------------------------------------------
The following is a reconciliation from the statutory federal income tax
rate to the Company's effective income tax rate from continuing operations:
Year ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------
(Percentage of pre-tax income)
Statutory federal income tax rate 35.0% 35.0 35.0
State income taxes, net of federal
income tax benefit 3.4 1.2 .5
Amortization of investment tax credits - - (.1)
Amortization of regulatory liability - (.1) (.3)
Other, net - (.9) .2
- --------------------------------------------------------------------------------
Effective income tax rate 38.4% 35.2 35.3
================================================================================
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2004 and 2003 were as follows:
December 31, 2004 2003
- --------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Postretirement benefit costs $ 72,353 59,215
Regulatory support 12,509 12,464
Net state operating loss carryforwards 48,735 41,358
Other employee benefits 19,096 10,160
Other 31,593 24,819
- --------------------------------------------------------------------------------
Gross deferred tax assets 184,286 148,016
Less valuation allowance (27,112) (19,735)
- --------------------------------------------------------------------------------
Net deferred tax assets 157,174 128,281
- --------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment, primarily
due to depreciation differences (340,175) (291,482)
Goodwill (394,832) (350,812)
Deferred debt costs (2,275) (2,470)
Intercompany profits (3,301) (3,485)
Other (18,348) (8,583)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (758,931) (656,832)
- --------------------------------------------------------------------------------
Net deferred tax liability $ (601,757) (528,551)
================================================================================
The Company establishes valuation allowances when necessary to reduce the
deferred tax assets to amounts expected to be realized. As of December 31, 2004,
the Company had available tax benefits associated with net state operating loss
carryforwards, which expire through 2024, of $48.7 million. The ultimate
realization of the benefits of the carryforwards is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. The Company considers its scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. As a result of such assessment, $27.1
million was reserved through the valuation allowance as of December 31, 2004 as
it is likely that this amount of net operating loss carryforwards will not be
utilized prior to expiration.
(13) EARNINGS PER SHARE
In the fourth quarter of 2004, the Company adopted Emerging Issues Task
Force No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings Per Share" ("EITF 04-8"). EITF 04-8 requires contingently convertible
instruments be included in the diluted earnings per share calculation. The
Company's $165 million Series K senior notes (issued in the third quarter of
2002) are convertible into common stock under various contingent circumstances,
including the common stock attaining a specified trading price in excess of the
notes' fixed conversion price. Beginning in the fourth quarter of 2004, the
Company's diluted earnings per share and diluted shares outstanding reflect the
application of EITF 04-8. Prior periods have been restated to reflect this
change in accounting.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
Year ended December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, and shares in thousands)
Income (Numerator):
Income from continuing operations $ 337,244 344,707 193,533
Discontinued operations, net of tax - - 608,091
- ----------------------------------------------------------------------------------------------
Net income 337,244 344,707 801,624
Dividends applicable to preferred stock (399) (399) (399)
- ----------------------------------------------------------------------------------------------
Net income applicable to common stock for
computing basic earnings per share 336,845 344,308 801,225
Interest on convertible debentures, net of tax 4,829 5,079 1,845
Dividends applicable to preferred stock 399 399 399
- ----------------------------------------------------------------------------------------------
Net income as adjusted for purposes of computing
diluted earnings per share $ 342,073 349,786 803,469
==============================================================================================
Shares (Denominator):
Weighted average number of shares outstanding
during period 137,225 143,673 141,796
Employee Stock Ownership Plan shares not
committed to be released (10) (90) (183)
- ----------------------------------------------------------------------------------------------
Weighted average number of shares outstanding during
period for computing basic earnings per share 137,215 143,583 141,613
Incremental common shares attributable to
dilutive securities:
Shares issuable under convertible securities 4,514 4,514 1,964
Shares issuable under outstanding stock options 415 682 831
- ----------------------------------------------------------------------------------------------
Number of shares as adjusted for purposes of
computing diluted earnings per share 142,144 148,779 144,408
==============================================================================================
Basic earnings per share
From continuing operations $ 2.45 2.40 1.36
From discontinued operations $ - - 4.29
Basic earnings per share $ 2.45 2.40 5.66
Diluted earnings per share
From continuing operations $ 2.41 2.35 1.35
From discontinued operations $ - - 4.21
Diluted earnings per share $ 2.41 2.35 5.56
The weighted average number of options to purchase shares of common stock
that were excluded from the computation of diluted earnings per share because
the exercise price of the option was greater than the average market price of
the common stock was 2.4 million for 2004, 2.6 million for 2003 and 3.3 million
for 2002.
(14) STOCK OPTION PROGRAMS
CenturyTel currently maintains programs which allow the Board of Directors,
through the Compensation Committee, to grant (i) incentives to certain employees
in any one or a combination of several forms, including incentive and
non-qualified stock options; stock appreciation rights; restricted stock; and
performance shares and (ii) stock options to outside directors. As of December
31, 2004, CenturyTel had reserved 9.7 million shares of common stock which may
be issued under CenturyTel's current incentive compensation programs.
Under the Company's programs, options have been granted to employees and
directors at a price either equal to or exceeding the then-current market price.
All of the options expire ten years after the date of grant and the vesting
period ranges from immediate to three years.
Stock option transactions during 2004, 2003 and 2002 were as follows:
Number Average
of options price
- --------------------------------------------------------------------------------
Outstanding December 31, 2001 6,367,520 $ 23.51
Exercised (1,366,560) 13.97
Granted 1,983,150 32.28
Forfeited (88,308) 28.59
- -----------------------------------------------------------------
Outstanding December 31, 2002 6,895,802 27.95
Exercised (1,059,414) 22.30
Granted 1,720,317 27.36
Forfeited (822,133) 33.34
- -----------------------------------------------------------------
Outstanding December 31, 2003 6,734,572 28.14
Exercised (827,486) 22.96
Granted 952,975 28.22
Forfeited (146,503) 27.90
- -----------------------------------------------------------------
Outstanding December 31, 2004 6,713,558 28.79
=================================================================
Exercisable December 31, 2004 4,686,177 28.71
=================================================================
Exercisable December 31, 2003 3,807,355 27.21
=================================================================
The following tables summarize certain information about CenturyTel's
stock options at December 31, 2004.
Options outstanding
- ------------------------------------------------------------------------------------
Weighted average
Range of remaining contractual Weighted average
exercise prices Number of options life outstanding exercise price
- ------------------------------------------------------------------------------------
$ 13.33-17.64 605,300 1.7 $ 14.51
24.36-29.88 3,563,019 7.3 27.68
30.00-39.00 2,523,274 6.1 33.64
45.54-46.19 21,965 4.2 45.62
---------
13.33-46.19 6,713,558 6.3 28.79
=========
Options exercisable
- ------------------------------------------------------------------------------------
Range of Number of Weighted average
exercise prices options exercisable exercise price
- ------------------------------------------------------------------------------------
$ 13.33-17.64 605,300 $ 14.51
24.36-29.88 2,055,911 27.75
30.00-39.00 2,003,001 33.80
45.54-46.19 21,965 45.62
----------
13.33-46.19 4,686,177 28.71
=========
(15) SUPPLEMENTAL CASH FLOW DISCLOSURES
The amount of interest actually paid by the Company, net of amounts
capitalized of $762,000, $488,000 and $1.2 million during 2004, 2003 and 2002,
respectively, was $207.2 million, $221.1 million and $210.9 million during 2004,
2003 and 2002, respectively. Income taxes paid were $129.9 million in 2004,
$91.6 million in 2003 and $325.5 million in 2002. Income tax refunds totaled
$8.9 million in 2004, $85.7 million in 2003 and $2.7 million in 2002.
The Company has consummated the acquisitions of various operations, along
with certain other assets, during the three years ended December 31, 2004. In
connection with these acquisitions, the following assets were acquired and
liabilities assumed:
Year ended December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment, net $ - 46,390 866,575
Goodwill 5,274 21,743 1,335,157
Deferred credits and other liabilities (3,381) 21,754 (56,897)
Other assets and liabilities, excluding
cash and cash equivalents 107 (3,644) 100,191
- ----------------------------------------------------------------------------------------
Decrease in cash due to acquisitions $ 2,000 86,243 2,245,026
========================================================================================
The Company has disposed of various operations reflected within
continuing operations, along with certain other assets, during the three years
ended December 31, 2004. In connection with these dispositions, the following
assets were sold, liabilities eliminated, assets received and gain recognized:
Year ended December 31, 2004 2003 2002
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Other assets and liabilities, excluding
cash and cash equivalents $ - - (435)
Gain on sale of assets - - (3,709)
- -----------------------------------------------------------------------------------
Increase in cash due to dispositions $ - - (4,144)
===================================================================================
For information on the Company's discontinued operations, see Note 3.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of certain of the Company's financial instruments at December 31, 2004
and 2003.
Carrying Fair
Amount value
- ------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 2004
- -----------------
Financial assets
Other $ 96,808 96,808 (2)
Financial liabilities
Long-term debt (including
current maturities) $ 3,011,636 3,132,041 (1)
Interest rate swaps $ 6,283 6,283 (2)
Other $ 50,860 50,860 (2)
- ------------------------------------------------------------------------------
December 31, 2003
- -----------------
Financial assets
Other $ 82,258 82,258 (2)
Financial liabilities
Long-term debt (including
current maturities) $ 3,181,755 3,440,279 (1)
Interest rate swaps $ 11,693 11,693 (2)
Other $ 44,612 44,612 (2)
- ------------------------------------------------------------------------------
(1) Fair value was estimated by discounting the scheduled payment streams to
present value based upon rates currently available to the Company for
similar debt.
(2) Fair value was estimated by the Company to approximate carrying value.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates the fair value due to the
short maturity of these instruments and have not been reflected in the above
table.
(17) 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 and broadband 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. Results of operations for 2003 and
2002 have been conformed to the Company's 2004 presentation of a single
reportable segment.
The Company's operating revenues for its products and services include
the following components:
Year ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 716,028 712,565 570,871
Network access 966,011 1,001,462 884,982
Long distance 186,997 173,884 146,536
Data 275,777 244,998 179,695
Fiber transport and CLEC 74,409 43,041 21,666
Other 188,150 191,660 168,246
- --------------------------------------------------------------------------------
Total operating revenues $ 2,407,372 2,367,610 1,971,996
================================================================================
For a description of each of the sources of revenues, see Management's
Discussion and Analysis and Results of Operations - Operating Revenues.
Interexchange carriers and other accounts receivable on the balance
sheets are primarily amounts due from various long distance carriers,
principally AT&T, and several large local exchange operating companies.
(18) COMMITMENTS AND CONTINGENCIES
Construction expenditures and investments in vehicles, buildings and
equipment during 2005 are estimated to be $400 million.
In Barbrasue Beattie and James Sovis, on behalf of themselves and all
others similarly situated, v. CenturyTel, Inc., filed on October 29, 2002 in the
United States District Court for the Eastern District of Michigan (Case No.
02-10277), the plaintiffs allege that the Company unjustly and unreasonably
billed customers for inside wire maintenance services, and seek unspecified
money damages and injunctive relief under various legal theories on behalf of a
purported class of over two million customers in the Company's telephone
markets. The Court has not yet ruled on the plaintiffs' certification motion,
and has not yet set a date to resolve this issue. Given the current status of
this case, the Company cannot estimate the potential impact, if any, that this
case will have on its results of operations.
The Telecommunications Act of 1996 allows local exchange carriers to file
access tariffs on a streamlined basis and, if certain criteria are met, deems
those tariffs lawful. 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. Certain of the Company's telephone subsidiaries file
interstate tariffs directly with the FCC using this streamlined filing approach.
As of December 31, 2004, the amount of the Company's earnings in excess of the
authorized rate of return reflected as a liability on the balance sheet for the
combined 2001/2002 and 2003/2004 monitoring periods aggregated approximately
$63 million. The settlement period 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 any pending or future proceedings that could impact its entitlement to
these funds, and may recognize as revenue some or all of the over-earnings at
the end of the settlement period or as the legal status becomes more certain.
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, actions relating to
employee claims, occasional grievance hearings before labor regulatory agencies
and miscellaneous third party tort actions. The outcome of these other
proceedings is not predictable. However, the Company does not believe that the
ultimate resolution of these other proceedings, after considering available
insurance coverage, will have a material adverse effect on its financial
position, results of operations or cash flows.
* * * * * * * * *
CENTURYTEL, INC.
Consolidated Quarterly Income Statement Information
(Unaudited)
First Second Third Fourth
quarter quarter quarter quarter
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
2004 (unaudited)
- ---------------------------------------------------------------------------------------------------------
Operating revenues $ 593,704 603,555 603,879 606,234
Operating income $ 183,557 189,911 190,869 189,616
Net income $ 83,279 83,284 86,192 84,489
Basic earnings per share $ .58 .60 .64 .63
Diluted earnings per share $ .57 .59 .63 .62
2003
- ---------------------------------------------------------------------------------------------------------
Operating revenues $ 578,014 586,729 600,264 602,603
Operating income $ 184,773 188,381 190,781 186,461
Net income $ 83,919 87,367 90,979 82,442
Basic earnings per share $ .59 .61 .63 .57
Diluted earnings per share $ .58 .60 .62 .56
2002
- ---------------------------------------------------------------------------------------------------------
Operating revenues $ 422,918 438,702 524,497 585,879
Operating income $ 119,049 109,531 157,716 189,110
Income from continuing operations $ 43,117 41,482 64,589 44,345
Net income $ 70,767 78,763 607,749 44,345
Basic earnings per share from continuing operations $ .30 .29 .46 .31
Basic earnings per share $ .50 .56 4.29 .31
Diluted earnings per share from continuing operations $ .30 .29 .45 .31
Diluted earnings per share $ .50 .55 4.20 .31
Diluted earnings per share for all periods has been restated to reflect
the application of EITF 04-8. See Note 13 for additional information.
Diluted earnings per share for the fourth quarter of 2003 included a $.06
per share charge related to operating taxes, net of related revenue effect, and
interest associated with various operating tax audits.
Diluted earnings per share for the third quarter of 2002 included $3.67
per share related to the gain on the sale of substantially all of the Company's
wireless operations, net of amounts written off for costs expended related to
the wireless portion of the new billing system currently in development. Diluted
earnings per share for the fourth quarter of 2002 was negatively impacted by
$.26 per share related to the redemption premium on the Company Series I
remarketable notes that were redeemed in October 2002.
On July 1 and August 31, 2002, the Company acquired nearly 650,000
telephone access lines and related assets from Verizon. See Note 2 for
additional information.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure 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 December
31, 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 annual report. Since the date of Messrs. Post's and
Ewing's most recent evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls. 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. Because of the inherent limitations in any control system, you should be
aware that misstatements due to error or fraud could occur and not be detected.
Reports on Internal Controls Over Financial Reporting. Incorporated by reference
from the reports appearing at the forefront of Item 8 "Financial Statements and
Supplementary Data".
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The name, age and office(s) held by each of the Registrant's executive
officers are shown below. Each of the executive officers listed below serves at
the pleasure of the Board of Directors.
Name Age Office(s) held with CenturyTel
- ---- --- ------------------------------
Glen F. Post, III 52 Chairman of the Board of Directors
and Chief Executive Officer
Karen A. Puckett 44 President and Chief Operating Officer
R. Stewart Ewing, Jr. 53 Executive Vice President and
Chief Financial Officer
David D. Cole 47 Senior Vice President -
Operations Support
Stacey W. Goff 39 Senior Vice President, General Counsel
and Secretary
Michael Maslowski 57 Senior Vice President and
Chief Information Officer
Each of the Registrant's executive officers, except for Ms. Puckett and Mr.
Goff, has served as an officer of the Registrant and one or more of its
subsidiaries in varying capacities for more than the past five years.
Ms. Puckett has served as President and Chief Operating Officer of the
Company since August 2002, as Executive Vice President and Chief Operating
Officer of the Company from July 2000 through August 2002 and as Sales and
Marketing Senior Officer of BroadStream Communications from July 1999 through
July 2000. Commco Technology LLC (formerly BroadStream Communications) filed for
bankruptcy on December 18, 2000 in the United States Bankruptcy Court, District
of Connecticut (Bridgeport). Ms. Puckett was an officer of BroadStream
Communications from July 1999 through July 2000.
Mr. Post has served as Chairman of the Board since June 2002, and
previously served as Vice Chairman of the Board from 1993 to 2002 and President
from 1990 to 2002.
In August 2003, Mr. Goff was promoted to Senior Vice President, General
Counsel and Secretary. He previously served as Vice President and Assistant
General Counsel from 2000 to July 2003 and as Director-Corporate Legal from 1998
to 2000.
The balance of the information required by Item 10 is incorporated by
reference to the Registrant's definitive proxy statement relating to its 2005
annual meeting of stockholders (the "Proxy Statement"), which Proxy Statement
will be filed pursuant to Regulation 14A within the first 120 days of 2005.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to the
Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated by reference to the
Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a. Documents filed as a part of this report
(1) The following Consolidated Financial Statements are
included in Part II, Item 8:
Report of Management, including its assessment of the
effectiveness of its internal controls over
financial reporting
Report of Independent Registered Public Accounting Firm
on Consolidated Financial Statements and Financial
Statement Schedule
Report of Independent Registered Public Accounting Firm
on management's assessment of, and the effective
operation of, internal controls over financial reporting
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2004, 2003 and 2002
Consolidated Balance Sheets - December 31, 2004 and 2003
Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Consolidated Quarterly Income Statement Information
(unaudited)
(2) Schedule:*
II Valuation and Qualifying Accounts
* Those schedules not listed above are
omitted as not applicable or not required.
(3) Exhibits:
3.1 Amended and Restated Articles of Incorporation of
Registrant, dated as of May 6, 1999, (incorporated by
reference to Exhibit 3(i) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999).
3.2 Registrant's Bylaws, as amended through August
26, 2003 (incorporated by reference to Exhibit
3.1 of Registrant's Current Report on Form 8-K
dated August 26, 2003 and filed on December 2,
2003).
3.3 Corporate Governance Guidelines, as amended through
February 22, 2005, included elsewhere herein.
3.4 Charters of Committees of Board of Directors
(a) Charter of the Audit Committee of the Board of
Directors, as amended through November
18, 2004, included elsewhere herein.
(b) Charter of the Compensation Committee of the
Board of Directors, as amended through February
25, 2004 (incorporated by reference to Exhibit
3.3 of Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
(c) Charter of the Nominating and Corporate
Governance Committee of the Board of Directors,
as amended through February 25, 2004
(incorporated by reference to Exhibit 3.3 of
Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003).
(d) Charter of the Risk Evaluation Committee of
the Board of Directors, as amended through
February 25, 2004 (incorporated by reference to
Exhibit 3.3 of Registrant's Annual Report on Form
10-K for the year ended December 31, 2003).
4.1 Rights Agreement, dated as of August 27, 1996,
between Registrant and Society National Bank, as
Rights Agent, including the form of Rights
Certificate (incorporated by reference to Exhibit
1 of Registrant's Current Report on Form 8-K
filed August 30, 1996) and Amendment No.1
thereto, dated May 25, 1999 (incorporated by
reference to Exhibit 4.2(ii) to Registrant's
Report on Form 8-K dated May 25, 1999) and
Amendment No. 2 thereto, dated and effective as
of June 30, 2000, by and between the Registrant
and Computershare Investor Services, LLC, as
rights agent (incorporated by reference to
Exhibit 4.1 of Registrant's Quarterly report on
10-Q for the quarter ended September 30, 2000).
4.2 Form of common stock certificate of the Registrant
(incorporated by reference to Exhibit 4.3 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000).
4.3 Instruments relating to the Company's public senior debt
(a) Indenture dated as of March 31, 1994
between the Company and Regions Bank
(formerly First American Bank & Trust of
Louisiana), as Trustee (incorporated by
reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3,
Registration No. 33-52915).
(b) Resolutions designating the terms and
conditions of the Company's 6.55% Senior
Notes, Series C, due 2005 and 7.2% Senior
Notes, Series D, due 2025 (incorporated by
reference to Exhibit 4.27 to Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1995).
(c) Resolutions designating the terms and
conditions of the Company's 6.15% Senior
Notes, Series E, due 2005; 6.30% Senior
Notes, Series F, due 2008; and 6.875%
Debentures, Series G, due 2028,
(incorporated by reference to Exhibit 4.9
to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
(d) Form of Registrant's 8.375% Senior Notes,
Series H, Due 2010, issued October 19, 2000
(incorporated by reference to Exhibit 4.2
of Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30,
2000).
(e) For information on Registrant's Series J notes and
related First Supplemental Indenture, see Item 4.6
below.
(f) Second Supplemental Indenture dated as of
August 20, 2002 between CenturyTel and
Regions Bank (successor-in-interest to
First American Bank & Trust of Louisiana
and Regions Bank of Louisiana), as Trustee,
designating and outlining the terms and
conditions of CenturyTel's 4.75%
Convertible Senior Debentures, Series K,
due 2032 (incorporated by reference to
Exhibit 4.3 of CenturyTel's registration
statement on Form S-4, File No.
333-100480).
(g) Form of 4.75% Convertible Debentures, Series K, due
2032 (included in Exhibit 4.3(f)).
(h) Board resolutions designating the terms and
conditions of CenturyTel's 7.875% Senior
Notes, Series L, due 2012 (incorporated by
reference to exhibit 4.2 of CenturyTel's
registration statement on Form S-3, File
No. 333-100481).
(i) Form of 7.875% Senior Notes, Series L, due 2012
(included in Exhibit 4.3(h)).
(j) Third Supplemental Indenture dated as of
February 14, 2005 between CenturyTel and
Regions Bank (successor-in-interest to
First American Bank & Trust of Louisiana
and Regions Bank of Louisiana), as Trustee,
designating and outlining the terms and
conditions of CenturyTel's 5% Senior Notes,
Series M, due 2015 (incorporated by
reference to Exhibit 4.1 of CenturyTel's
Current Report on Form 8-K dated February
15, 2005).
(k) Form of 5% Senior Notes, Series M, due 2015
(included in Exhibit 4.3(j)).
4.4 $750 Million Five-Year Revolving Credit Facility, dated
March 7, 2005, between CenturyTel, Inc. and the
lenders named therein, included elsewhere herein.
4.5 First Supplemental Indenture, dated as of November 2,
1998, to Indenture between CenturyTel of the
Northwest, Inc. and The First National Bank of Chicago
(incorporated by reference to Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
4.6 Agreements relating to equity units issued by CenturyTel
in May 2002:
(a) Purchase Contract Agreement, dated as of May
1, 2002, between CenturyTel and Wachovia
Bank, National Association, as Purchase
Contract Agent (incorporated by reference to
Exhibit 4.13 to CenturyTel's Registration
Statement on Form S-3, File No. 333-84276).
(b) Pledge Agreement, dated as of May 1, 2002,
by and among CenturyTel, JPMorgan Chase
Bank, as Collateral Agent, Custodial Agent,
and Securities Intermediary, and Wachovia
Bank, National Association, as Purchase
Contract Agent (incorporated by reference to
Exhibit 4.15 to CenturyTel's Registration
Statement on Form S-3, File No. 333-84276).
(c) First Supplemental Indenture, dated as of
May 1, 2002, between CenturyTel and Regions
Bank, as Trustee, to the Indenture, dated as
of March 31, 1994, between CenturyTel and
Regions Bank, as Trustee, relating to
CenturyTel's Senior Notes, Series J, due
2007 issued in connection with the equity
units (incorporated by reference to Exhibit
4.2(b) to CenturyTel's Registration
Statement on Form S-3, File No. 333-84276).
10.1 Qualified Employee Benefit Plans (excluding several
narrow-based qualified plans that cover union employees
or other limited groups of Company employees)
(a) Registrant's Employee Stock Ownership Plan
and Trust, as amended and restated February
28, 2002 and amendment thereto dated
December 31, 2002 (incorporated by
reference to Exhibit 10.1(a) of
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002).
(b) Registrant's Dollars & Sense Plan and
Trust, as amended and restated, effective
September 1, 2000 and amendment thereto
dated December 31, 2002 (incorporated by
reference to Exhibit 10.1(b) of
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002).
(c) Registrant's Amended and Restated
Retirement Plan, effective as of February
28, 2002, and amendment thereto dated
December 31, 2002 (incorporated by
reference to Exhibit 10.1(c) of
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002).
10.2 Stock-based Incentive Plans
(a) Registrant's 1983 Restricted Stock Plan, dated
February 21, 1984, as amended and restated as of
November 16, 1995 (incorporated by reference to
Exhibit 10.1(e) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995) and
amendment thereto dated November 21, 1996,
(incorporated by reference to Exhibit 10.1(e) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996), and amendment thereto
dated February 25, 1997 (incorporated by reference
to Exhibit 10.3 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997), and
amendment thereto dated April 25, 2001 (incorporated
by reference to Exhibit 10.1 of Registrant's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001), and amendment thereto dated
April 17, 2000 (incorporated by reference to Exhibit
10.2(a) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001).
(b) Registrant's 1995 Incentive Compensation Plan
approved by Registrant's shareholders on May 11,
1995 (incorporated by reference to Exhibit 4.4 to
Registration No. 33-60061) and amendment thereto
dated November 21, 1996 (incorporated by Reference
to Exhibit 10.1 (l) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1996), and amendment thereto dated February
25, 1997 (incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997) and amendment
thereto dated May 29, 2003 (incorporated by
reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003).
(i) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of May 22, 1995, entered
into by Registrant and its officers
(incorporated by reference to Exhibit 10.5
to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995).
(ii) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of June 23, 1995, entered
into by Registrant and certain key
employees (incorporated by reference to
Exhibit 10.6 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1995).
(iii) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of February 24, 1997,
entered into by Registrant and its officers
(incorporated by reference to Exhibit 10.4
to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
(iv) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of February 21, 2000,
entered into by Registrant and its officers
(incorporated by reference to Exhibit 10.1
(t) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1999).
(v) Form of Restricted Stock and
Performance Share Agreement, dated as of
February 22, 1999, relating to equity
incentive awards granted in 1999 pursuant
to the Registrant's 1995 Incentive
Compensation Plan that were vested or
earned wholly or in part in early 2004
(incorporated by reference to Exhibit
10.1(x) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1999).
(c) Amended and Restated Registrant's
2000 Incentive Compensation Plan,
as amended through May 23, 2000
(incorporated by reference to
Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000)
and amendment thereto dated May 29,
2003 (incorporated by reference to
Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003).
(i) Form of Stock Option Agreement,
pursuant to the 2000 Incentive
Compensation Plan and dated as of
May 21, 2001, entered into by
Registrant and its officers
(incorporated by reference to
Exhibit 10.2(e) to Registrant's
Annual Report on Form 10-K for the
year ended December 31, 2001).
(ii) Form of Stock Option Agreement,
pursuant to the 2000 Incentive
Compensation Plan and dated as of
February 25, 2002, entered into by
Registrant and its officers
(incorporated by reference to
Exhibit 10.2(d)(ii) of Registrant's
Annual Report on Form 10-K for the
year ended December 31, 2002).
(d) Amended and Restated CenturyTel,
Inc. 2002 Directors Stock Option
Plan, dated as of February 25,
2004, (incorporated by reference to
Exhibit 10.2(e) of Registrant's
Annual Report on Form 10-K for the
year ended December 31, 2003).
(i) Form of Stock Option Agreement,
pursuant to the foregoing plan,
entered into by CenturyTel in
connection with options granted to
the outside directors as of May 10,
2002 (incorporated by reference to
Exhibit 10.2 of Registrant's
Quarterly Report on Form 10-Q for
the period ended September 30,
2002).
(ii) Form of Stock Option Agreement,
pursuant to the foregoing plan,
entered into by CenturyTel in
connection with options granted to
the outside directors as of May 9,
2003 (incorporated by reference to
Exhibit 10.2(e)(ii) of Registrant's
Annual Report on Form 10-K for the
year ended December 31, 2003).
(e) Amended and Restated CenturyTel, Inc. 2002
Management Incentive Compensation Plan,
dated as of February 25, 2004 (incorporated
by reference to Exhibit 10.2(f) of
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2003).
(i) Form of Stock Option Agreement,
pursuant to the foregoing plan,
entered into between CenturyTel and
certain of its officers and key
employees at various dates since
May 9, 2002 (incorporated by
reference to Exhibit 10.4 of
Registrant's Quarterly Report on
Form 10-Q for the period ended
September 30, 2002).
(ii) Form of Stock Option Agreement,
pursuant to the foregoing plan and
dated as of February 24, 2003,
entered into by Registrant and its
officers (incorporated by reference
to Exhibit 10.2(f)(ii) of
Registrant's Annual Report on Form
10-K for the year ended December
31, 2002).
(iii) Form of Stock Option Agreement, pursuant to
the foregoing plan and dated as of February
25, 2004, entered into by Registrant and its
officers (incorporated by reference to Exhibit
10.2(f)(iii) of Registrant's Annual Report
on Form 10-K for the year ended December 31,
2003).
(iv) Form of Restricted Stock Agreement, pursuant
to the foregoing plan and dated as of February
24, 2003, entered into by Registrant and its
executive officers (incorporated by reference
to Exhibit 10.1 of Registrant's Quarterly
Report on Form 10-Q for the period ended March
31, 2003).
(v) Form of Stock Option Agreement, pursuant to
the foregoing plan and dated as of February 17,
2005, entered into by Registrant and its
officers, included elsewhere herein.
(vi) Form of Restricted Stock Agreement, pursuant
to the foregoing plan and dated as of February
17, 2005, entered into by Registrant and its
executive officers, included elsewhere herein.
10.3 Other Non-Qualified Employee Benefit Plans
(a) Registrant's Key Employee Incentive Compensation
Plan, dated January 1, 1984, as amended and restated
as of November 16, 1995 (incorporated by reference
to Exhibit 10.1(f) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995) and
amendment thereto dated November 21, 1996
(incorporated by reference to Exhibit 10.1 (f) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996), amendment thereto
dated February 25, 1997 (incorporated by reference
to Exhibit 10.2 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997),
amendment thereto dated April 25, 2001 (incorporated
by reference to Exhibit 10.2 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001) and amendment thereto dated April
17, 2000 (incorporated by reference to Exhibit
10.3(a) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001).
(b) Registrant's Restated Supplemental Executive
Retirement Plan, dated April 3, 2000 (incorporated
by reference to Exhibit 10.1(d) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000).
(c) Registrant's Restated Supplemental Defined
Contribution Plan, restated as of July 17, 2001
(incorporated by reference to Exhibit 10.1 of
Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001).
(d) Registrant's Amended and Restated Supplemental
Dollars & Sense Plan, effective as of January 1,
1999 (incorporated by reference to Exhibit 10.1
(q) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998).
(e) Registrant's Supplemental Defined Benefit
Plan, effective as of January 1, 1999
(incorporated by reference to Exhibit 10.1 (y) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998), and amendment
thereto dated February 28, 2002 (incorporated by
reference to Exhibit 10.3(e) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 2001).
(f) Registrant's Amended and Restated Salary Continuation
(Disability) Plan for Officers, dated November 26,
1991 (incorporated by reference to Exhibit 10.16 of
Registrant's Annual Report on Form 10- K for the
year ended December 31, 1991).
(g) Registrant's Restated Outside Directors'
Retirement Plan, dated as of November 16, 1995
(incorporated by reference to Exhibit 10.1(t) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995) and amendment thereto
dated April 17, 2000 (incorporated by reference to
Exhibit 10.3(g) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001)
and amendment thereto dated December 31, 2002
(incorporated by reference to Exhibit 10.3(g) of
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2002).
(h) Registrant's Restated Deferred Compensation
Plan for Outside Directors, dated as of November
16, 1995 (incorporated by reference to Exhibit
10.1(u) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1995) and
amendment thereto dated April 17, 2000
(incorporated by reference to Exhibit 10.3(h) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001).
(i) Registrant's Executive Officer Short-Term Incentive
Program (incorporated by reference to 2001 Proxy
Statement).
(j) Registrant's 2001 Employee Stock Purchase Plan
(incorporated by reference to Registrant's 2001
Proxy Statement).
10.4 Employment, Severance and Related Agreements
(a) Change of Control Agreement, dated
February 22, 2000 by and between Glen F.
Post, III and Registrant (incorporated by
reference to Exhibit 10.1(b) to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
(b) Form of Change of Control Agreement, dated
February 22, 2000, by and between Registrant
and David D. Cole, R. Stewart Ewing and
Michael E. Maslowski (incorporated by
reference exhibit 10.1(c) to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000).
(c) Form of Change of Control Agreement dated
July 24, 2000, by and between the Registrant
and Karen A. Puckett (incorporated by
reference to Exhibit 10.1(c) of Registrant's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
(d) Form of Change of Control Agreement dated
August 26, 2003 by and between Registrant
and Stacey W. Goff (incorporated by
reference to Exhibit 10.1(c) of
Registrant's Quarterly Report on Form 10-Q
for the period ended March 31, 2000).
14 Registrant's Corporate Compliance Program (incorporated
by reference to Exhibit 14 of Registrant's Annual Report
on Form 10-K for the year ended December 31, 2003).
21 Subsidiaries of the Registrant, included elsewhere herein.
23 Independent Registered Public Accounting Firm Consent,
included elsewhere herein.
31.1 Registrant's Chief Executive Officer certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, included elsewhere herein.
31.2 Registrant's Chief Financial Officer certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, included elsewhere herein.
32 Registrant's Chief Executive Officer and Chief Financial
Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, included elsewhere herein.
Reports on Form 8-K.
The following items were reported in a Form 8-K filed October
28, 2004:
Items 2.02 and 9.01. Results of Operations and Financial
Condition - News release announcing third quarter 2004
operating results.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 16, 2005 By: /s/ Glen F. Post, III
----------------------------
Glen F. Post, III
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Chairman of the Board and
/s/ Glen F. Post, III Chief Executive Officer
- ---------------------------
Glen F. Post, III March 16, 2005
Executive Vice President and
/s/ R. Stewart Ewing, Jr. Chief Financial Officer
- ---------------------------
R. Stewart Ewing, Jr. March 16, 2005
/s/ Neil A. Sweasy Vice President and Controller
- ---------------------------
Neil A. Sweasy March 16, 2005
/s/ William R. Boles, Jr. Director
- ---------------------------
William R. Boles, Jr. March 16, 2005
/s/ Virginia Boulet Director
- ---------------------------
Virginia Boulet March 16, 2005
/s/ Calvin Czeschin Director
- ---------------------------
Calvin Czeschin March 16, 2005
/s/ James B. Gardner Director
- ---------------------------
James B. Gardner March 16, 2005
/s/ W. Bruce Hanks Director
- ---------------------------
W. Bruce Hanks March 16, 2005
/s/ R. L. Hargrove, Jr. Director
- ---------------------------
R. L. Hargrove, Jr. March 16, 2005
/s/ Johnny Hebert Director
- ---------------------------
Johnny Hebert March 16, 2005
/s/ C. G. Melville, Jr. Director
- ---------------------------
C. G. Melville, Jr. March 16, 2005
/s/ Fred Nichols Director
- ---------------------------
Fred Nichols March 16, 2005
/s/ Harvey P. Perry Director
- ---------------------------
Harvey P. Perry March 16, 2005
/s/ Jim D. Reppond Director
- ---------------------------
Jim D. Reppond March 16, 2005
/s/ Joseph R. Zimmel Director
- ---------------------------
Joseph R. Zimmel March 16, 2005
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CENTURYTEL, INC.
For the years ended December 31, 2004, 2003 and 2002
Additions
Balance at charged to Deductions Balance
beginning costs and from Other at end
Description of period expenses allowance changes of period
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 2004
Allowance for doubtful accounts $ 23,679 27,872 (30,364) (1) - 21,187
Valuation allowance for
deferred tax assets $ 19,735 7,377 - - 27,112
Year ended December 31, 2003
Allowance for doubtful accounts $ 33,962 31,910 (42,193) (1) - 23,679
Valuation allowance for
deferred tax assets $ 28,380 12,978 (21,623) (2) - 19,735
Year ended December 31, 2002
Allowance for doubtful accounts $ 13,908 34,045 (17,134) (1) 3,143 (3) 33,962
Valuation allowance for
deferred tax assets $ 19,691 8,689 - - 28,380
(1) Customers' accounts written-off, net of recoveries.
(2) Change in the valuation allowance allocated to income tax expense.
(3) Allowance for doubtful accounts at the date of acquisition of purchased
subsidiaries, net of allowance for doubtful accounts at the date of
disposition of subsidiaries sold.