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, 2006
or
o
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)
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Louisiana
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72-0651161
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(State
or other jurisdiction of incorporation or
organization)
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(IRS
Employer Identification No.)
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100
CenturyTel Drive, Monroe, Louisiana
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71203
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code - (318) 388-9000
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $1.00
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New
York Stock Exchange
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Berlin
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
Stock
Options
(Title
of class)
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
x
No
o
Indicate
by check mark if the Registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes
o
No
x
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Act 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
o
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. o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Indicate
by check mark if the Registrant is a shell company (as defined in Rule 12b-2
of
the Act). Yes
o
No
x
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 our outstanding voting securities) was $2.9 billion as of
June
30, 2006. As of February 15, 2007, there were 111,374,266 shares of common
stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Registrant’s Proxy Statement to be furnished in connection with the 2007
annual meeting of shareholders are incorporated by reference in Part III
of this
Report.
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Page
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Part
I.
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Item
1.
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4
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Item
1A.
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26
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Item
1B.
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39
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Item
2.
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40
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Item
3.
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40
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Item
4.
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41
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Part
II.
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Item
5.
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42
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Item
6.
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43
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Item
7.
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45
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Item
7A.
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66
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Item
8.
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67
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Item
9.
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107
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Item
9A.
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107
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Item
9B.
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107
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Part
III.
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Item
10.
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108
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Item
11.
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109
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Item
12.
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109
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Item
13.
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109
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Item
14.
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109
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Part
IV.
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Item
15.
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110
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122 |
PART
I
General.
CenturyTel, Inc., together with its subsidiaries, is an integrated
communications company engaged primarily in providing an array of communications
services, including local and long distance voice, Internet access and broadband
services. We strive to maintain our customer relationships by, among other
things, bundling our service offerings to provide our customers with a complete
offering of integrated communications services. We conduct all of our operations
in 25 states located within the continental United States.
At
December 31, 2006, our incumbent local exchange telephone subsidiaries operated
approximately 2.1 million telephone access lines, primarily in rural areas
and
small to mid-size cities in 21 states, with over 70% of these lines located
in
Missouri, Wisconsin, Alabama, Arkansas and Washington. According to published
sources, we are the seventh largest local exchange telephone company in the
United States based on the number of access lines served.
We
also
provide fiber transport, competitive local exchange carrier, security
monitoring, and other communications and business information services in
certain local and regional markets.
Since
2005, we have expanded our product offerings to include co-branded satellite
television services, wireless communications services under reselling
arrangements, Internet voice communication services, and wireless broadband
services. For additional information, see “Operations - Recent Product
Developments” below.
For
information on the amount of revenue derived by our various lines of services,
see “Operations - Services” below and Item 7 of this annual report.
Recent
acquisitions.
In June
2005, we acquired fiber assets in 16 metropolitan markets from KMC Telecom
Holdings, Inc. (“KMC”) for approximately $75.5 million, which allows us to offer
broadband and competitive local exchange services to customers in these markets.
In
June
2003, we purchased for $39.4 million 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. In addition, in December 2003, we 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, we 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, we
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 and equipment
necessary to conduct local exchange operations in predominantly rural markets
throughout Alabama and Missouri and (ii) Verizon's assets used to provide
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, we purchased from KMC its fiber network and customer base
operations in Monroe and Shreveport, Louisiana, which allowed us to offer
broadband and competitive local exchange services to customers in these markets.
We
also
acquired approximately 660,000 and 490,000 telephone access lines in
transactions completed in 1997 and 2000, respectively, the former of which
substantially expanded our operations in the Western United States.
We
continually evaluate 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.
We
generally do not announce our acquisitions or dispositions until we have
entered
into a preliminary or definitive agreement. Although our primary focus will
continue to be on acquiring interests that are proximate to our properties
or
that serve a customer base large enough for us to operate efficiently, we
may
also acquire other communications interests and these acquisitions could
have a
material impact upon us.
Pending
Acquisition. On
December 17, 2006, we entered into a stock purchase agreement with Madison
River
Communications Corp. (“MRCC”) and its owner, Madison River Telephone Company,
LLC. Under this agreement, we agreed to purchase all of the capital stock
of
MRCC in exchange for $830 million less MRCC’s net indebtedness on the
transaction’s closing date (which was approximately $494 million at September
30, 2006), subject to certain closing adjustments.
MRCC
operates more than 170,000 predominantly rural access lines in four states
with
more than 30% high-speed Internet penetration. MRCC’s network is 99%
broadband-enabled and includes a 2,400 route mile fiber network, substantially
all of which is leased under indefeasible rights of use agreements. The
acquisition is expected to close in the second quarter of 2007, subject to
the
satisfaction of certain closing conditions including necessary approvals
from
federal and state regulators.
Recent
Dispositions.
On
August 1, 2002, we sold substantially all of our 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,
we
divested our (i) interest in our 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 our 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.
Where
to find additional information. We
make
available our filings with the Securities and Exchange Commission (“SEC”) on
Forms 10-K, 10-Q and 8-K on our website (www.centurytel.com)
as soon
as reasonably practicable after we complete such filings with the
SEC.
We
also
make available on our website our Corporate Governance Guidelines, our Corporate
Compliance Program and the charters of our audit, compensation, risk evaluation,
and nominating and corporate governance committees. We will furnish printed
copies of these materials free of charge upon the request of any
shareholder.
In
connection with filing this annual report, our chief executive officer and
chief
financial officer made the certifications regarding our financial disclosures
required under the Sarbanes-Oxley Act of 2002, and the Act’s related
regulations. In addition, during 2006 our chief executive officer certified
to
the New York Stock Exchange that he was unaware of any violation by us of
the
New York Stock Exchange’s corporate governance listing standards.
Industry
information.
Unless
otherwise indicated, information contained in this annual report and other
documents filed by us under the federal securities laws concerning our views
and
expectations regarding the telecommunications industry are based on estimates
made by us using data from industry sources, and on assumptions made by us
based
on our management’s knowledge and experience in the markets in which we operate
and the telecommunications industry generally. We believe these estimates
and
assumptions are accurate as of the date made. However, this information may
prove to be inaccurate because it cannot always be verified with certainty.
You
should be aware that we have not independently verified data from industry
or
other third-party sources and cannot guarantee its accuracy or completeness.
Our
estimates and assumptions involve risks and uncertainties and are subject
to
change based on various factors, including those discussed in Item 1A of
this
annual report.
Other.
As of
December 31, 2006, we had approximately 6,400 employees, of which approximately
1,600 were members of 12 different bargaining units represented by the
International Brotherhood of Electrical Workers and the Communications Workers
of America. We believe that relations with our employees continue to be
generally good. On March 1, 2006 and August 30, 2006, we announced reductions
of
our workforce which aggregated approximately 400 jobs, or 6% of our workforce,
primarily due to increased competitive pressures and the loss of access lines
over the last several years.
We
were
incorporated under Louisiana law in 1968 to serve as a holding company for
several telephone companies acquired over the previous 15 to 20 years. Our
principal executive offices are located at 100 CenturyTel Drive, Monroe,
Louisiana 71203 and our telephone number is (318) 388-9000.
OPERATIONS
According
to published sources, we are the seventh largest local exchange telephone
company in the United States, based on the approximately 2.1 million access
lines we served at December 31, 2006. An “access line” is a telephone line that
connects a home or business to the public switched telephone network. All
of our
access lines are digitally switched. Through our operating telephone
subsidiaries, we provide local exchange services to predominantly rural areas
and small to mid-sized cities in 21 states. Our local exchange companies
serve
an average of approximately 12 access lines per square mile versus a nationwide
average of approximately 50 access lines per square mile.
The
following table lists additional information regarding our access lines as
of
December 31, 2006 and 2005.
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December
31, 2006
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December
31, 2005
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State
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Number
of access lines
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Percent
of access lines
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Number
of access lines
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Percent
of access lines
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Missouri
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424,000
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20
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%
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442,000
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20
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%
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Wisconsin
(1)
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413,000
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20
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444,000
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20
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Alabama
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249,000
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12
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262,000
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12
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Arkansas
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227,000
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11
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241,000
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11
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Washington
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166,000
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8
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177,000
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8
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Michigan
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96,000
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5
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102,000
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5
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Louisiana
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90,000
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4
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96,000
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4
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Colorado
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90,000
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4
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92,000
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4
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Ohio
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72,000
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3
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77,000
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3
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Oregon
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70,000
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3
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72,000
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3
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Montana
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60,000
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3
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62,000
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3
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Texas
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37,000
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2
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41,000
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2
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Minnesota
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28,000
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1
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29,000
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1
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Tennessee
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25,000
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1
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26,000
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1
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Mississippi
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23,000
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1
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24,000
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1
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New
Mexico
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6,000
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*
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6,000
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*
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Wyoming
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6,000
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*
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6,000
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|
*
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Idaho
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5,000
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|
*
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6,000
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*
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Indiana
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5,000
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*
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5,000
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*
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Iowa
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2,000
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*
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2,000
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*
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Arizona
(2)
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-
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*
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2,000
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*
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Nevada
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|
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*
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*
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*
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*
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|
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2,094,000 |
(3) |
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100
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%
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2,214,000
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100
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%
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*
|
Represents
less than 1% or less than 1,000 access
lines.
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(1)
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As
of December 31, 2006 and 2005, approximately 53,000 and 56,000,
respectively, of these lines were owned and operated by our 89%-owned
affiliate.
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(2)
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We
sold our Arizona telephone operations in May
2006.
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(3)
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Excluding
adjustments during 2006 to reflect (i) the removal of test lines,
(ii)
database conversion and clean-up and (iii) the sale of our Arizona
properties, access line losses for 2006 were approximately
107,000.
|
As
indicated in the following table, we have generally experienced growth in
our
operating revenues over the past five years, a substantial portion of which
was
attributable to the third quarter 2002 acquisition of telephone properties
from
Verizon and the internal growth of our Internet access business.
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|
Year
ended or as of December 31,
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2006
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2005
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2004
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2003
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2002
|
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(Dollars
in thousands)
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|
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|
|
|
|
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|
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Access
lines
|
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2,094,000
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2,214,000
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2,314,000
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2,376,000
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2,415,000
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%
Residential
|
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74
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%
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|
75
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|
|
75
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|
|
76
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|
|
76
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%
Business
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26
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%
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25
|
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25
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24
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24
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Internet
customers
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459,000
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357,000
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271,000
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223,000
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184,000
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%
High-speed Internet service
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80
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%
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|
70
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|
|
53
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|
|
37
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|
29
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%
Dial-up service
|
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20
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%
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|
30
|
|
|
47
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|
|
63
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|
|
71
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
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$
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2,447,730
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2,479,252
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2,407,372
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2,367,610
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|
|
1,971,996
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|
Capital
expenditures
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|
$
|
314,071
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|
|
414,872
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|
|
385,316
|
|
|
377,939
|
|
|
386,267
|
|
As
discussed further below, our access lines (exclusive of acquisitions) have
declined in recent years, and are expected to continue to decline. To mitigate
these declines, we hope to, among other things, (i) promote long-term
relationships with our customers through bundling of integrated services,
(ii)
provide new services, such as video and wireless, and other additional services
that may become available in the future due to advances in technology, spectrum
sales or improvements in our infrastructure, (iii) provide our premium services
to a higher percentage of our customers, (iv) pursue acquisitions of additional
communications properties if available at attractive prices, (v) increase
usage
of our networks, and (vi) market our products to new customers. See “Services”
and “Regulation and Competition.”
Services
We
derive
revenue from providing (i) local exchange and long distance voice telephone
services, (ii) network access services, (iii) data services, which includes
both
high-speed and dial-up Internet services, as well as special access and private
line services, (iv) fiber transport, competitive local exchange and security
monitoring services and (v) other related services. The following table reflects
the percentage of operating revenues derived from these respective
services:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
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Voice
|
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35.2
|
%
|
|
36.0
|
|
|
37.5
|
|
Network
access
|
|
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35.9
|
|
|
38.7
|
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40.1
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|
Data
|
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14.3
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|
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12.9
|
|
|
11.5
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|
Fiber
transport and CLEC
|
|
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6.1
|
|
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4.7
|
|
|
3.1
|
|
Other
|
|
|
8.5
|
|
|
7.7
|
|
|
7.8
|
|
|
|
|
100.0
|
%
|
|
100.0
|
|
|
100.0
|
|
Voice.
We
derive our local service revenues by providing local exchange telephone services
in our service areas, including basic dial-tone service through our regular
switched network, generally for a fixed monthly charge. Access lines declined
4.8% in 2006 (exclusive of certain adjustments mentioned earlier), 4.3% in
2005
and 2.6% in 2004. We believe these declines in the number of access lines
were
primarily due to the displacement of traditional wireline telephone services
by
other competitive services. We expect access lines to decline between 4.5%
and
6.0% for 2007.
In
exchange for additional charges, we offer enhanced voice services (such as
call
forwarding, conference calling, caller identification, selective call ringing
and call waiting). In 2006, we continued to expand the availability of enhanced
services offered in certain service areas.
We
derive
our long distance revenues by providing retail long distance services based
on
either usage or pursuant to flat-rate calling plans. At December 31, 2006,
we
provided long distance services to nearly 1.2 million lines. We continue
to add
new customers, although the rate of our customer growth has slowed in recent
periods, principally due to competitive factors. We anticipate that most
of our
long distance service revenues will be provided as part of an integrated
bundle
with our other service offerings, including our local exchange telephone
service
offering.
Network
access.
We
derive our network access revenues primarily from (i) providing services
to
various carriers and customers in connection with the use of our facilities
to
originate and terminate their interstate and intrastate voice transmissions
and
(ii) receiving universal support funds which allows us to recover a portion
of
our costs under federal and state cost recovery mechanisms (see “Regulation and
Competition Relating to Incumbent Local Exchange Operations” below). Our
revenues for switched access services depend primarily on the level of call
volume.
Certain
of our 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 our intrastate network access revenues are derived through access charges
that we bill 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
our 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 (the “1996 Act”) 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 our telephone subsidiaries file
interstate tariffs with the FCC using this streamlined filing approach. Since
July 2004, we have recognized billings from our tariffs as revenue since
we
believe such tariffs are “deemed lawful”. For those billings from tariffs prior
to July 2004, we initially recorded as a liability our earnings in excess
of the
authorized rate of return, and may thereafter recognize as revenue some or
all
of these amounts at the end of the settlement period or as our legal entitlement
thereto becomes certain. As of December 31, 2006, the amount of our earnings
in
excess of the authorized rate of return reflected as a liability on the balance
sheet for the 2003/2004 monitoring period aggregated approximately $43 million.
The settlement period related to the 2003/2004 monitoring period lapses on
September 30, 2007.
Data.
We
derive our
data
revenues primarily from monthly recurring charges for providing Internet
access
services (both high-speed and dial-up services) and data transmission services
over special circuits and private lines. We began offering traditional dial-up
Internet access services to our telephone customers in 1995. In late 1999,
we
began offering high-speed Internet access services, a premium-priced broadband
data service. As of December 31, 2006, approximately 79% of our access lines
were broadband-enabled. At December 31, 2006, we provided high-speed Internet
access services to over 369,000 customers and dial-up services to over 90,000
customers. During 2006, we added over 120,000 high-speed Internet
customers.
Fiber
transport and CLEC.
Our
fiber transport and CLEC revenues include revenues from our fiber transport,
competitive local exchange carrier (“CLEC”) and security monitoring
businesses.
In
late
2000, we 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, we purchased the fiber network
and
customer base of KMC’s operations in Monroe and Shreveport, Louisiana and in
June 2005, we purchased the fiber assets in 16 metropolitan markets from
KMC
which allowed us to offer broadband and competitive local exchange services
to
customers in these markets. As of December 31, 2006, our competitive local
exchange markets provided service over 1,200 miles of fiber.
Under
the
name “LightCore”, we sell fiber capacity to other carriers and businesses over a
network that encompassed, at December 31, 2006, over 9,500 miles of fiber
in the
central United States. We began our fiber transport business during the second
quarter of 2001, when we began selling capacity over a 700-mile fiber optic
ring
that we constructed in southern and central Michigan. In June 2003, we 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.
We have used the network to sell services to new and existing customers and
to
reduce our reliance on third party transport providers. In addition, in December
2003, we acquired additional fiber transport assets in Arkansas, Missouri
and
Illinois from Level 3 Communications, Inc. to provide services similar to
those
described above.
We offer
24-hour burglary and fire monitoring services to over 9,700 customers in
select
markets in Louisiana, Arkansas, Mississippi, Texas and Ohio.
Other.
We
derive our “other revenues” principally by (i) leasing, selling, installing and
maintaining customer premise telecommunications equipment and wiring, (ii)
providing billing and collection services to third parties, (iii) participating
in the publication of local telephone directories, which allows us to share
in
revenues generated by the sale of yellow page and related advertising to
businesses, and (iv) offering our new services described below under the
heading
“-Recent Product Developments”. We also provide printing, database management
and direct mail services and cable television services.
From
time
to time, we also make investments in other domestic or foreign communications
companies.
For
further information on regulatory, technological and competitive changes
that
could impact our revenues, see “Regulation and Competition” under this Item 1
below and “Risk Factors and Cautionary Statements” under Item 1A below. For more
information on the financial contributions of our various services, see Item
7
of this annual report.
Recent
Product Developments
During
2005, we began offering, under a three-year agreement with EchoStar, co-branded
satellite television service to virtually all households in our local exchange
service areas, except for LaCrosse, Wisconsin, where we initiated our switched
digital television service to a portion of this market. In early 2007, we
initiated a second switched digital video trial in Columbia,
Missouri.
In
mid-2005, we began reselling wireless communication services under an agreement
with a nationwide wireless carrier. By December 31, 2006, we offered wireless
service through this arrangement to markets serving approximately 30% of
our
residential access lines.
In
December 2006, we completed construction of a wireless broadband network
in
Vail, Colorado, which allows us to provide wireless broadband Internet service
in public locations throughout the Vail town limits. We are exploring
opportunities to construct similar networks in other areas.
We
are
currently developing a Voice over Internet Protocol (“VoIP”) service offering
that we plan to offer to our existing CLEC business customers as a low-cost
managed service for both Internet and voice services.
For
additional information on the financial impact of these new offerings, see
Items
1A and 7 of this annual report.
Federal
Financing Programs
Certain
of our telephone subsidiaries receive long-term financing from the Rural
Utilities Service (“RUS”), a federal agency that has historically provided
long-term financing to telephone companies at relatively attractive interest
rates. Approximately 15% of our telephone plant is pledged to secure obligations
of our telephone subsidiaries to the RUS. For additional information regarding
our financing, see our consolidated financial statements included in Item
8
herein.
Sales
and Marketing
We
maintain local offices in most of the larger population centers within our
service territories. These offices are typically staffed by local residents
and
provide sales and customer support services in the community. In addition,
our
strategy is to enhance our communications services by offering comprehensive
bundling of services and deploying new technologies to build upon the strong
reputation we enjoy in our markets and to further promote customer loyalty.
Network
Architecture
Our
local
exchange carrier networks consist of central office hosts and remote sites,
all
with advanced digital switches (primarily manufactured by Nortel and Siemens)
and operating with licensed software. Our outside plant consists of transport
and distribution delivery networks connecting each of our host central offices
to our remote central offices, and ultimately to our customers. As of December
31, 2006, we maintained over 244,000 miles of copper plant and approximately
19,000 miles of fiber optic plant in our local exchange networks. Our fiber
optic cable is the primary transport technology between our host and remote
central offices and interconnection points with other incumbent carriers.
For
additional related information, see “Services - Fiber Transport and
CLEC.”
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 our
intrastate telephone operations have traditionally been regulated extensively
by
various state regulatory agencies (generally called public service commissions
or public utility commissions) and our interstate operations have been regulated
by the FCC under the Communications Act of 1934. As we discuss in greater
detail
below, passage of 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. We anticipate that these trends toward reduced regulation and
increased competition will continue.
The
following description discusses some of the major industry regulations that
affect us, but numerous other regulations not discussed below could also
impact
us. Some legislation and regulations are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
substantially change the manner in which the communications industry operates.
Neither the outcome of any of these developments, nor their potential impact
on
us, can be predicted at this time. Regulation can change rapidly in the
communications industry, and such changes may have an adverse effect on us
in
the future. See Item 1A of this annual report below.
State
regulation.
The
local service rates and intrastate access charges of substantially all of
our
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. Historically, most of these commissions also (i) regulated
the
purchase and sale of LECs, (ii) prescribed depreciation rates and certain
accounting procedures, (iii) enforced laws requiring LECs to provide universal
service under publicly filed tariffs setting forth the terms, conditions
and
prices of their LEC services, (iv) oversaw implementation of several federal
telecommunications laws and (v) regulated various other matters, including
certain service standards and operating procedures.
In
recent
years, state legislatures and regulatory commissions in most of the 21 states
in
which our telephone subsidiaries operate have either reduced the regulation
of
LECs or have announced their intention to do so, and we expect this trend
will
continue. Essentially, such relief comes in two forms: (i) full or partial
deregulation through legislation; or (ii) the ability to opt in to existing
state alternative regulation through a regulatory proceeding. Wisconsin,
Missouri, Alabama, Arkansas and several other states have implemented laws
or
rulings which require or permit LECs to either be deregulated for pricing
or 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 65%
of
our access lines in various states have agreed to be governed by alternative
regulation plans, and we continue to explore our options for similar treatment
in other states. We believe that reduced regulatory oversight of certain
of our
telephone operations may allow us 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 us in
Wisconsin, Missouri, Alabama and Arkansas, which are our four largest markets.
The following summary describes the alternative regulation plans applicable
to
us in these states.
· Our
Wisconsin access lines, except for those acquired from Verizon in 2000 (which
continue to be regulated under “rate of return” regulation), are regulated under
various alternative regulation plans. Each of these alternative regulation
plans
permits us to adjust local rates within specified parameters if we meet certain
quality-of-service and infrastructure-development commitments. These plans
also
include initiatives designed to promote competition.
· All
of
our Missouri LECs are regulated under a price-cap regulation plan whereby
basic
service rates are adjusted annually based on an inflation-based factor;
non-basic services may be increased without restriction up to 5% annually.
If
the inflation-based factor were to decline as it has done in recent years,
our
revenues would be negatively impacted.
· In
2005,
the state of Alabama passed legislation that essentially allowed telephone
companies the option to phase in deregulation of certain LEC services. In
February 2007, our Alabama LECs deregulated all local services (including
bundled services) except for certain basic telephone and optional calling
services. Certain basic telephone and optional calling services continue
to be
regulated and subject to a price cap.
· Our
Arkansas LECs, excluding one property acquired from Verizon in 2000, are
regulated under an alternative regulation plan under which 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
under
certain conditions.
Notwithstanding
the movement toward alternative regulation, LECs operating approximately
34% of
our 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.
Federal
regulation.
Our
telephone subsidiaries are required to comply with the Communications Act
of
1934, which requires us to offer services at just and reasonable rates and
on
non-discriminatory terms, as well as the 1996 Act, which amended the
Communications Act to promote competition.
The
FCC
regulates interstate services provided by our telephone subsidiaries primarily
by regulating the interstate access charges that we bill to long distance
companies and other communications companies for use of our 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. The FCC retains
the
right to revoke these licenses if a carrier materially violates relevant
legal
requirements.
The
FCC
requires price-cap regulation of interstate access rates for the Regional
Bell
Operating Companies, and permits it for all other LECs. 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. We have not elected price-cap regulation
for our
incumbent operations. However, the properties we acquired from Verizon in
2002
have continued to operate under price-cap regulation, as permitted under
FCC
rules for acquired properties. All of our other operations continue to be
governed by traditional rate-of-return regulation for interstate access charges,
which permit us to set rates based upon an authorized rate of return of
11.25%.
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, or carrying
telecommunications traffic. The FCC has received intercarrier compensation
proposals from several industry groups, and in early 2005 solicited comments
on
all proposals previously submitted to it. Industry negotiations are continuing
with the goal of developing a consensus plan that addresses the concerns
of
carriers from all industry segments. In July 2006, the National Association
of
Regulatory Utility Commissioners’ Task Force on Intercarrier Compensation filed
an industry-sponsored plan called the “Missoula Plan” which proposes
comprehensive intercarrier compensation reform. In summary, the Missoula
Plan
seeks to reduce rates carriers charge one another to complete and terminate
calls between networks, increases end-user retail rates and creates additional
funding through an expanded universal service-like mechanism. The FCC is
currently seeking comments from the industry regarding the impact of adopting
the proposal. While we support certain key concepts of the proposal, we do
not
believe the plan in its present form is an equitable solution for intercarrier
compensation reform. Until the FCC’s proceeding concludes and the changes, if
any, to the existing rules are established, we cannot estimate the impact
it
will have on our results of operations.
In
December 2005, a group of six mid-sized carriers, including us, filed proposed
rules with the FCC regarding “phantom traffic”. “Phantom traffic” generally
refers to telecommunications calls that cannot be billed properly to responsible
carriers by other carriers in the call path because the traffic is mislabeled,
unlabeled or improperly routed. Such proposal calls on the FCC to implement
updated rules that require carriers to accurately identify, label and route
network traffic so that appropriate bills can be created. In late 2006, the
FCC opened a separate phantom traffic proceeding with the intent of formalizing
potential phantom traffic rules for the industry. Until the FCC’s phantom
traffic
proceeding concludes and the changes, if any, to the existing rules are
established, we cannot estimate the impact they will have on our results
of
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 our high-cost service
areas, and, as discussed further below, place additional financial pressure
on
the FCC’s support programs.
Our
operations and those of all communications carriers also may be impacted
by
legislation and regulation imposing new or greater obligations related to
assisting law enforcement, bolstering homeland security, minimizing
environmental impacts, or addressing other issues that impact our business,
including the Communications Assistance for Law Enforcement Act, and laws
governing local number portability and customer proprietary network information
requirements. These laws and regulations may cause us to incur additional
costs.
Universal
service support funds, revenue sharing arrangements and related
matters.
A
significant number of our telephone subsidiaries recover a portion of their
costs from the federal Universal Service Fund (the “USF”) and from similar state
“universal support” mechanisms, which receive their funding from fees charged to
interexchange carriers and LECs. 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
table
below sets forth the amounts received by our telephone subsidiaries in 2006
and
2005 from federal and state universal support programs.
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Support
Program
|
|
Amount
Received
|
|
%
of Total
2006
Operating
Revenues
|
|
Amount
Received
|
|
%
of Total
2005
Operating
Revenues
|
|
|
|
(amounts
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
USF
High Cost Loop Support
|
|
$
|
163.1
|
|
|
6.6
|
%
|
$
|
174.9
|
|
|
7.1
|
%
|
Other
Federal Support Programs
|
|
|
134.6
|
|
|
5.5
|
%
|
|
139.2
|
|
|
5.6
|
%
|
Total
Federal Support Receipts
|
|
|
297.7
|
|
|
12.1
|
%
|
|
314.1
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
Support Programs
|
|
|
36.2
|
|
|
1.5
|
%
|
|
37.6
|
|
|
1.5
|
%
|
TOTAL
|
|
$
|
333.9
|
|
|
13.6
|
%
|
$
|
351.7
|
|
|
14.2
|
%
|
Federal
USF programs have recently undergone substantial changes, and are expected
to
experience more changes in the coming years. As mandated by the 1996 Act,
in May
2001 the FCC modified its existing universal service support mechanism for
rural
telephone companies by adopting an interim mechanism for a five-year period
based on embedded, or historical, costs that provides relatively predictable
levels of support to many LECs, including substantially all of our LECs.
In May
2006, the FCC extended this interim mechanism until such time that new high-cost
support rules are adopted for rural telephone companies.
Wireless
and other competitive service providers continue to seek eligible
telecommunications carrier status in order to receive USF support, which,
coupled with changes in usage of telecommunications services, have placed
stress
on the funding mechanism of the USF, which is subject to annual caps on
disbursements. 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 we receive from the
USF
High Cost Loop support program.
A
significant portion of our support payments have varied over time based on
our
average cost to serve customers compared to national cost averages. Under
the
USF High Cost Loop program, which is the USF’s principal support program, our
payments from the USF will decrease if national average costs per loop increase
and our average costs per loop remain constant (or decrease). Increases in
the
nationwide average cost per loop factor used to allocate funds among all
USF
recipients caused our revenues from the USF High Cost Loop support program
to
decrease in 2005 and 2006 from the amounts received in the prior year. However,
based on recent FCC filings, we anticipate our 2007 revenues from the USF
High
Cost Loop support program will approximate our 2006 levels.
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. In early 2003, the FSJB issued a
notice
for public comment on whether present rules fulfill their purpose or should
be
modified. During 2004, the FSJB recommended a comprehensive general review
of
the high-cost support mechanisms for rural and non-rural carriers and requested
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 us.
In addition, the FCC has taken various other steps in anticipation of
restructuring universal service support mechanisms, which in the aggregate
could
substantially impact these support payments.
In
August
2005, the FSJB sought comments on four separate proposals to modify the
distribution of High Cost Loop support funds. Each of the proposals provides
the
state public service commissions a greater role in the support distribution
process, which would remain subject to specific FCC guidelines. In August
2006,
the FSJB sought comment on the viability of using competitive bidding to
determine the amount of high-cost funding for all eligible carriers. We
anticipate that the FSJB will make reform suggestions to the FCC during 2007,
at
which time the FCC would be required to seek comments. Due to the pending
nature
of these proposals, we cannot estimate the impact that such proposals would
have
on our operations. In addition, there are a number of judicial appeals
challenging several aspects of the FCC’s universal service rules and various
Congressional proposals seeking to substantially modify USF programs, none
of
which have been resolved at this time. We have been and will continue to
be
active in monitoring these developments.
In
2004,
the FCC mandated changes in the administration of the universal service support
programs that temporarily suspended the disbursement of funds under the USF’s
E-rate program (for service to Schools and Libraries), and, more significantly,
created questions that these administrative changes could similarly delay
the
disbursement of funds to LECs from the Universal Service High Cost Loop support
program. Congress has passed bills in recent years granting one-year exemptions
from the federal law that impacted the E-rate program. Such a bill was also
passed in 2007, extending the exemption through December 31, 2007. Although
we
expect funding from this program to continue, we cannot assure you that the
lack
of a definitive resolution of this issue will not delay or impede the
disbursement of funds in the future.
In
the
second quarter of 2005, the Louisiana Public Service Commission (“LPSC”) adopted
an order that transferred the previously-existing $42 million Louisiana Optional
Service Fund (“LOS Fund”) into a state universal service fund effective August
31, 2005. Prior to this change, we received approximately $21 million annually
from the LOS Fund. Thus far, we have received similar amounts under the new
fund, and currently expect this to continue. The new state universal service
fund expands the base of contributors to all telecommunications service
providers operating in the state. In June 2005, two telecommunications service
providers separately served the LPSC with an appeal of the new fund, both
of
which were dismissed by the Louisiana Supreme Court. The LOS Fund is subject
to
an annual review by the LPSC; as such, there can be no assurance that the
new
fund will remain as adopted by the LPSC or that funding levels will remain
at
current levels.
Some
of
our 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.
All
of
our interstate network access revenues are based on access charges, cost
separation studies or special settlement arrangements, many of which are
administered by the FCC or NECA. See “Services.”
Certain
long distance carriers continue to request that certain of our LECs reduce
intrastate access tariffed rates. Long distance carriers have also aggressively
pursued regulatory or legislative changes that would reduce access rates.
However, in light of pending intercarrier compensation reform that would
address
intrastate access charges, most states are deferring action until they receive
direction from the FCC. See “Services - Network Access” above for additional
information.
Developments
affecting competition.
Over
the past decade, fundamental technological, regulatory and legislative changes
have significantly impacted the communications industry, and we expect these
changes will continue. Primarily as a result of regulatory and technological
changes, competition has been introduced and encouraged in each sector of
the
communications industry in recent years. As a result, we increasingly face
competition from other communication service providers.
Wireless
telephone services increasingly constitute a significant source of competition
with LEC services, especially since wireless carriers have begun to compete
effectively on the basis of price with more traditional telephone services.
As a
result, some customers have chosen to completely forego use of traditional
wireline phone service and instead rely solely on wireless service for voice
services. This trend is more pronounced among residential customers, which
comprise 74% of our access line customers. We anticipate this trend will
continue, particularly if wireless service providers continue to expand their
coverage areas, reduce their rates, improve the quality of their services,
and
offer enhanced new services. Most of our access line customers are currently
capable of receiving wireless services from a competitive service provider.
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 2005, we began offering our CenturyTel
branded
wireless reseller service and, by the end of December 2006, we offered wireless
service through this reselling arrangement to markets serving approximately
30%
of our residential access lines.
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
nondiscriminatory “unbundled” access to all aspects of the LEC’s network, (iii)
offer resale of its telecommunications services at wholesale rates and (iv)
permit competitors, on terms and conditions (including rates) that are just,
reasonable and nondiscriminatory, 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 required 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
LEC’s
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 our 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.
In
addition to these changes in federal regulation, all of the 21 states in
which
we provide 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 densely
populated 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 our service areas has increased in recent
years, especially in our markets acquired from Verizon in 2002 and 2000.
We
anticipate 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.
Recent
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 telephone service over their cable
networks, and several national cable companies have aggressively pursued
this
opportunity. As of December 31, 2006, we believe that nearly 30% of our access
lines currently face competition from cable voice offerings. Additionally,
several large electric utilities have recently announced plans to offer
communications services that compete with LECs.
Recent
improvements in the quality of VoIP service have led several cable, Internet,
data and other communications companies, as well as start-up companies, to
substantially increase their offerings of VoIP service to business and
residential customers. VoIP providers route calls partially or wholly 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
frequently use existing broadband networks to deliver flat-rate, all distance
calling plans that may offer features that cannot readily be provided by
traditional LECs. These plans may also be priced competitively or below those
currently charged for traditional local and long distance telephone services
for
several reasons, including lower operating costs. 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 (i) an April 2004 order that found an IP-telephony
service using the public switched telephone network to be a regulated
telecommunications service subject to interstate access charges, (ii) a November
2004 order that Internet-based services provided by Vonage Holdings Corporation
should be subject to federal rather than state regulation and (iii) a June
2005
order requiring all VoIP service providers whose services are interconnected
to
the public switched telephone network to provide E-911 services to their
customers. In addition, in March 2005, Level 3 Communications, Inc. withdrew
its
petition requesting the FCC to forbear from imposing interstate and 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 our customers.
Similar
to us, many cable, entertainment, technology or other communications companies
that previously offered a limited range of services are now offering diversified
bundles of services, either through their own networks, reselling arrangements
or joint ventures. As such, a growing number of companies are competing to
serve
the communications needs of the same customer base. Several of these companies
started offering full service bundles before us, which could give them an
advantage in building customer loyalty. Such activities will continue to
place
downward pressure on the demand for our access lines.
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
non-carrier 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. We anticipate that all these trends will continue and lead
to decreased use of our networks.
Significant
competitive factors in the local telephone industry include pricing, packaging
of services and features, quality and convenience 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
we do
or own larger or more diverse networks than ours. In addition, many of them
are
not subject to the same regulatory constraints we are.
Competition
can harm us by causing us to lose customers, or by causing us to lower prices
or
increase our capital or operating expenses to retain customers. Competing
communications services, such as wireless, VoIP, electronic mail and optional
calling services, can also reduce usage of our network and thereby decrease
our
network access revenues. Competition can also cause customers to reduce either
usage of our services or switch to less profitable services, and could impede
our ability to diversity into new lines of business dominated by incumbent
providers.
We
anticipate that the traditional operations of LECs will continue to be impacted
by continued regulatory and technological developments affecting the ability
of
LECs to attract and retain customers and the capability of wireless companies,
CLECs, cable television companies, VoIP providers, electric utilities 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
the
less dense areas in which we operate. We will actively monitor these
developments, observe the effect of emerging competitive trends in larger
markets and continue to evaluate new business opportunities that may arise
out
of future technological, legislative and regulatory developments.
While
we
expect our operating revenues in 2007 to continue to experience downward
pressure primarily due to continued access line losses and reduced network
access revenues, we expect such declines to be partially offset primarily
due to
increased demand for our fiber transport, high-speed Internet and other
nonregulated product offerings (including our new video and wireless initiatives
mentioned above).
Regulation
and Competition Relating to Other Operations
Long
Distance Operations.
We
offer intra-LATA, intrastate and interstate long distance services. State
public
service commissions generally regulate intra-LATA toll calls within the same
LATA and inter-LATA 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 our 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, our principal
competitors for providing long distance services were large long distance
companies such as AT&T, regional phone companies and dial-around resellers.
Increasingly, however, we have experienced competition from newer sources,
including wireless companies offering attractively-priced calling plans.
Technological substitutions, including VoIP and electronic mail, have further
reduced demand for traditional long distance services.
Data
Operations.
In
connection with our data business, we face competition from Internet service
providers, satellite companies and cable companies which use wired or wireless
technologies to offer dial-up Internet access services or high-speed broadband
services. As of December 31, 2006, we believe approximately 57% of our local
exchange markets are overlapped by cable systems offering data services
competitive with ours. Many of these competitors offer content that we cannot
match. Moreover, many of these providers have traditionally been subject
to less
rigorous regulatory scrutiny than our subsidiaries, although 2005 FCC rule
changes classifying our high-speed offering as an “information service” has
helped reduce regulatory disparities. The FCC is currently conducting several
other rulemakings considering the regulatory treatment of broadband services,
the outcomes of which could reduce our pricing flexibility or could
significantly impact our competitive position.
Fiber
Transport Operations.
When
our fiber transport networks are used to provide intrastate telecommunications
services, we must comply with state requirements for telecommunications
utilities, including state tariffing requirements. To the extent our facilities
are used to provide interstate communications, we are subject to federal
regulation as a non-dominant common carrier. Due largely to excess capacity,
the
fiber transport industry is highly competitive. Our primary competitors are
from
other communications companies, many of whom operate networks and have resources
much larger than ours. In addition, new IP-based services may enable new
entrants to transport data at prices lower than we currently offer.
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 our CLEC markets, we face competition from the ILEC, which traditionally
has long-standing relationships with its customers. Over time, we may also
face
competition from one or more other CLECs, or from other communications providers
who can provide comparable services.
Other
Operations.
Similar
to our CLEC business, we may be required to obtain licenses or franchises
to
enter new markets for our switched digital television and wireless broadband
services, which could delay our rollout of these offerings. The wireless
industry, in which our resold wireless services competes, is highly competitive,
which will substantially limit our operating margins.
OTHER
DEVELOPMENTS OR MATTERS
In
February 2006, our board of directors approved a $1.0 billion stock repurchase
program. We purchased the first $500 million of common stock in late February
2006 under accelerated share repurchase agreements with investment banks
and,
beginning in the third quarter of 2006, we began repurchasing the remaining
$500
million balance of the $1.0 billion program through open market transactions.
During 2006, we repurchased a total of $802.2 million of common stock (21.4
million shares). We previously repurchased approximately $401.0 million,
$186.7
million and $437.5 million of our shares under separate repurchase programs
approved in February 2004, February 2005 and May 2005, respectively. For
additional information, see Liquidity and Capital Resources included in Item
7
of this annual report.
We
have
certain obligations based on federal, state and local laws relating to the
protection of the environment. Costs of compliance through 2006 have not
been
material and we currently have no reason to believe that such costs will
become
material.
For
additional information concerning our business and properties, see Items
2 and 7
elsewhere herein, and the Consolidated Financial Statements and notes 2,
4, 5,
and 16 thereto set forth in Item 8 elsewhere herein.
RISK
FACTORS AND CAUTIONARY STATEMENTS
Risk
Factors
Any
of
the following risks could materially and adversely affect our business,
financial condition, results of operations, liquidity or prospects. The risks
described below are not the only risks facing us. Please be aware that
additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial could also materially and adversely affect
our
business operations.
Risks
Related to Our Business
If
we continue to experience access line losses like we have in the past several
years, our revenues, earnings and cash flows may be adversely
impacted.
Our
business generates a substantial portion of its revenues by delivering voice
and
data services over access lines. We have experienced access line losses over
the
past several years, including a 4.8% decline (excluding the effect of certain
adjustments) during the year ended December 31, 2006, due to a number of
factors, including increased competition and wireless and broadband
substitution, which are described further below. We expect to continue to
experience access line losses in our markets for an unforeseen period of
time.
Our inability to retain access lines could adversely impact our revenues,
earnings and cash flow from operations.
We
face competition, which we expect to intensify.
As
a
result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive, and we expect
these trends to continue. In our LEC markets, we face competition from wireless
telephone services, which we expect to increase if wireless providers continue
to expand and improve their network coverage, lower their prices and offer
enhanced services. In certain of our LEC markets, we face competition from
cable
television operators and CLECs. Over time, we expect to face additional local
exchange competition from more recent market entrants, including VoIP providers
and electric utilities, and we expect continued competition from alternative
networks or non-carrier systems designed to reduce demand for our switching
or
access services. The Internet, long distance and data services markets are
also
highly competitive, and we expect that competition will intensify in these
and
other markets that we serve. The recent proliferation of companies offering
integrated service offerings has further intensified competition in the markets
we serve.
We
expect
competition to intensify as a result of new competitors and the development
of
new products and services. We cannot predict which future products or services
will be important to maintain our competitive position or what funding will
be
required to develop and provide these 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
own larger and more diverse networks, can conduct operations or raise capital
at
a lower cost than we can, are subject to less regulation, have lower benefit
plan costs, or have substantially stronger brand names. Consequently, some
competitors may be able to charge lower prices for their products and services,
to offer more attractive service bundles, 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 reducing their usage
of our
services or shifting to less profitable services, (iii) reduced traffic on
our
networks, (iv) our need to expend substantial time or money on new capital
improvement projects, (v) our need to lower prices or increase marketing
expenses to remain competitive and (vi) our inability to diversify by
successfully 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. Recently, several large electric utilities have announced
plans
to offer communications services that will compete with LECs. 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, or that enable current customers to reduce
or
bypass use of our networks. We cannot predict with certainty which technological
changes will provide the greatest threat to our competitive position. We
may not
be able to obtain timely access to new technology on satisfactory terms or
incorporate new technology into our systems in a cost effective manner, or
at
all. 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.
We
cannot assure you 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 in the past 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 4.8% in 2006 and we expect our
access lines to decline between 4.5% and 6.0% in 2007. We also earned less
intrastate revenues in 2006 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.
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
2005, we began providing co-branded satellite television services and reselling
wireless services as part of our bundled product and service offerings. Our
reliance on other companies and their networks to provide these services
could
constrain our flexibility and limit the profitability of these new offerings.
In
addition, during 2005 we launched our facilities-based digital video offering
to
select markets in Wisconsin and initiated a second switched digital video
trial
in early 2007. As discussed further under the heading “Operations - Services -
Recent Product Developments” in Item 1 of this annual report, we have also
recently begun offering wireless broadband and other new communication services.
We anticipate these new offerings will generate lower profit margins than
many
of our traditional services. As such, to the extent revenues from these new
offerings replace revenues lost from declines in our traditional LEC business,
our overall profit margins will decline. We cannot assure you that our recent
diversification efforts will be successful.
Future
deterioration in our financial performance could adversely impact our credit
ratings, our cost of capital and our access to the capital
markets.
Our
future results will suffer if we do not effectively manage our
operations.
In
the
past several years, we have expanded our operations through acquisitions
and new
product and service offerings, and we may pursue similar opportunities in
the
future. Our future success depends, in part, upon our ability to manage our
expansion opportunities, including our ability to:
|
·
|
retain
and attract technological, managerial and other key personnel
|
|
·
|
effectively
manage our day to day operations while attempting to execute our
business
strategy of expanding our emerging
businesses
|
|
·
|
realize
the projected growth and revenue targets developed by management
for our
newly acquired and emerging businesses,
and
|
|
·
|
continue
to identify new acquisition or growth opportunities that we can
finance,
consummate and operate on attractive terms.
|
Expansion
opportunities pose 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. In addition, acquisitions entail
the
additional risk that we will incur unanticipated liabilities or contingencies
of
the acquired business, unbudgeted expenses or the loss of key employees or
customers. We cannot assure you that our expansion or acquisition opportunities
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.
Network
disruptions could adversely affect our operating
results.
To
be
successful, we will need to continue providing our customers with a high
capacity, reliable and secure network. Some of the risks to our network and
infrastructure include:
|
·
|
power
losses or physical damage to our access lines, whether caused by
fire,
adverse weather conditions, terrorism or
otherwise
|
|
·
|
software
and hardware defects
|
|
·
|
breaches
of security, including sabotage, tampering, computer viruses and
break-ins, and
|
|
·
|
other
disruptions that are beyond our
control.
|
Disruptions
or system failures may cause interruptions in service or reduced capacity
for
customers. If service is not restored in a timely manner, agreements with
our
customers or service standards set by state regulatory commissions could
obligate us to provide credits or other remedies, and this would reduce our
revenues or increase our costs. Service disruptions could also damage our
reputation with customers, causing us to lose existing customers or have
difficulty attracting new ones.
Any
failure or inadequacy of our information technology infrastructure could
harm
our business.
The
capacity, reliability and security of our information technology hardware
and
software infrastructure (including our billing systems) is important to the
operation of our current business, which would suffer in the event of system
failures. Likewise, our ability to expand and update our information technology
infrastructure in response to our growth and changing needs are important
to the
continued implementation of our new service offering initiatives. Our inability
to expand or upgrade our technology infrastructure could have adverse
consequences, which could include the delayed implementation of new service
offerings, service or billing interruptions, and the diversion of development
resources.
We
rely on a limited number of key suppliers and vendors to operate our
business.
We
depend
on a limited number of suppliers and vendors for equipment and services relating
to our network infrastructure. If these suppliers experience interruptions
or
other problems delivering or servicing these network components on a timely
basis, our operations could suffer significantly. To the extent that proprietary
technology of a supplier is an integral component of our network, we may
have
limited flexibility to purchase key network components from alternative
suppliers. We also rely on a limited number of other communications companies
in
connection with reselling long distance, wireless and satellite entertainment
services to our customers. In addition, we rely on a limited number of software
vendors to support our business management systems. In the event it becomes
necessary to seek alternative suppliers and vendors, we may be unable to
obtain
satisfactory replacement supplies or services on economically attractive
terms,
on a timely basis, or at all, which could increase costs or cause disruptions
in
our services.
Our
relationships with other communications companies are material to our operations
and their financial difficulties may adversely affect
us.
We
originate and terminate calls for long distance carriers and other interexchange
carriers over our network in exchange for access charges that represent a
significant portion of our revenues. Should these carriers go bankrupt or
experience substantial financial difficulties, our inability to timely collect
access charges from them could have a negative effect on our business and
results of operations.
In
addition, our LightCore operations carry a significant amount of voice and
data
traffic for larger communications companies. As these larger communications
companies consolidate, it is possible that they could transfer a significant
portion of this traffic from our fiber network to their networks, which could
have a negative effect on our business and results of operations.
We
depend on key members of our senior management team.
Our
success depends largely on the skills, experience and performance of a limited
number of senior officers, none of whom are parties to employment agreements.
Competition for senior management in our industry is intense and we may have
difficulty retaining our current senior managers or attracting new ones in
the
event of terminations or resignations.
We
could be affected by certain changes in labor
matters.
At
December 31, 2006, approximately 25% of our employees were members of 12
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. 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. Moreover, our post-employment benefit
offerings cause us to incur costs not faced by many of our competitors, which
could ultimately hinder our competitive position.
Risks
Related to Our Regulatory Environment
Our
revenues could be materially reduced or our expenses materially increased
by
changes in regulations.
The
majority of our revenues are substantially dependent upon regulations which,
if
changed, could result in material revenue reductions. Laws and regulations
applicable to us and our competitors may be, and have been, challenged in
the
courts, and could be changed by federal or state legislators. Any of the
following could significantly impact us:
Risk
of loss or reduction of network access charge revenues.
A
significant portion of our network access revenues are paid to us by intrastate
and interstate long distance carriers for originating and terminating calls
in
the regions we serve. The amount of access charge revenues that we receive
is
based largely on rates set by federal and state regulatory bodies, and such
rates could change. In 2003, the FCC opened a broad intercarrier compensation
proceeding that is expected to overhaul the current system for compensating
carriers originating, terminating, carrying and delivering telecommunications
traffic. This proceeding could materially impact our results of operations.
In
addition, our financial results could be harmed if carriers that use our
access
services become financially distressed or bypass our networks, either due
to
changes in regulation or other factors. Furthermore, access charges currently
paid to us could be diverted to competitors who enter our markets or expand
their operations, either due to changes in regulation or otherwise.
Risk
of loss or reduction of support fund payments.
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 us. In August 2006, this board
sought
comments on the viability of using competitive bidding to determine the amount
of high-cost funding for all eligible carriers. Recently, several parties
have
objected to the size of the USF or questioned the continued need to maintain
the
program in its current form. Pending judicial appeals and Congressional
proposals create additional uncertainty regarding our future receipt of support
payments. We cannot estimate the impact that these developments will have
on
us.
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 $11.8 million in 2006 compared to 2005. In
addition, the number of eligible telecommunications carriers receiving support
payments from this program continues to increase, which, coupled with other
factors, has placed additional financial pressure on the amount of money
that is
necessary and available to provide support payments to all eligible recipients,
including us.
Risk
of loss of statutory exemption from burdensome interconnection rules imposed
on
incumbent local exchange carriers.
Approximately 50% of our telephone access lines are exempt from the 1996
Act’s
more burdensome requirements governing the rights of competitors to interconnect
to incumbent local exchange carrier networks and to utilize discrete network
elements of the incumbent’s network at favorable rates. If state regulators
decide that it is in the public’s interest to impose these more burdensome
interconnection requirements on us, we would be required to provide unbundled
network elements to competitors. As a result, more competitors could enter
our
traditional telephone markets than we currently expect, resulting in lower
revenues and higher additional administrative and regulatory
expenses.
Risk
of losses from rate reductions.
Notwithstanding the movement toward alternative state regulation, LECs operating
approximately 34% of our 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, which could lead to revenue reductions. LECs governed by
alternative regulatory plans could also under certain circumstances be ordered
to reduce rates or could experience rate reductions following the lapse of
plans
currently in effect.
The
FCC
regulates tariffs for interstate access and subscriber line charges, both
of
which are components of our revenues. The FCC currently is considering proposals
to reduce interstate access charges for carriers like us. We could be adversely
affected if the FCC lowers interstate access charges without adopting an
adequate revenue replacement mechanism.
Risks
posed by costs of regulatory compliance.
Regulations continue to create significant compliance costs for us. Challenges
to our tariffs by regulators or third parties or delays in obtaining
certifications and regulatory approvals could cause us to incur substantial
legal and administrative expenses, and, if successful, such challenges could
adversely affect the rates that we are able to charge our customers. Our
business also may be impacted by legislation and regulation imposing new
or
greater obligations related to assisting law enforcement, bolstering homeland
security, minimizing environmental impacts, or addressing other issues that
impact our business (including local number portability and customer proprietary
network information requirements). For example, existing provisions of the
Communications Assistance for Law Enforcement Act require communications
carriers to ensure that their equipment, facilities, and services are able
to
facilitate authorized electronic surveillance. We expect our compliance costs
to
increase if future legislation or regulations continue to increase our
obligations to assist other governmental agencies.
Regulatory
changes in the communications industry could adversely affect our business
by
facilitating greater competition against us.
The
1996
Act provides for significant changes and increased competition in the
communications industry, including the local communications and long distance
industries. This Act and the FCC’s implementing regulations remain subject to
judicial review and additional rulemakings, thus making it difficult to predict
what effect the legislation will have on us and our competitors. Several
regulatory and judicial proceedings have recently concluded, are underway
or may
soon be commenced, which address issues affecting our operations and those
of
our competitors. Moreover, certain communities nationwide have expressed
an
interest in establishing a municipal telephone utility that would compete
for
customers. We cannot predict the outcome of these developments, nor can we
assure that these changes will not have a material adverse effect on us or
our
industry.
We
are subject to significant regulations that limit our
flexibility.
As
a
diversified full service incumbent local exchange carrier, or ILEC, we have
traditionally been subject to significant regulation that does not apply
to many
of our competitors. For instance, unlike many of our competitors, we are
subject
to federal mandates to share facilities, file and justify tariffs, maintain
certain accounts and file reports, and state requirements that obligate us
to
maintain service standards and limit our ability to change tariffs in a timely
manner. 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. Although newer alternative forms of regulation permit
us
greater freedoms in several states in which we operate, they nonetheless
typically impose caps on the rates that we can charge our customers. As our
business becomes increasingly competitive, regulatory disparities between
us and
our competitors could impede our ability to compete. Litigation and different
objectives among federal and state regulators could create uncertainty and
impede 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
are subject to franchising requirements that could impede our expansion
opportunities.
We
may be
required to obtain from municipal authorities operating franchises to install
or
expand facilities. Some of these franchises may require us to pay franchise
fees. These franchising requirements generally apply to our fiber transport
and
CLEC operations, and to our emerging switched digital television and wireless
broadband businesses. These requirements could delay us in expanding our
operations or increase the costs of providing these services.
We
will be exposed to risks relating to evaluations of controls required by
Section
404 of the Sarbanes-Oxley Act.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act and related regulations implemented
by the SEC, the New York Stock Exchange and the Public Company Accounting
Oversight Board, are creating uncertainty for public companies, increasing
legal
and financial compliance costs, and making some activities more time consuming.
These regulations require us to evaluate our internal controls system to
allow
management to report on, and our independent auditors to attest to, our internal
controls as required by Section 404 of the Sarbanes-Oxley Act. The annual
evaluation of our internal controls may result in identifying material
weaknesses in our internal controls. While we have thus far been able to
complete our annual assessments in a timely manner, there is no guarantee
that
we will do so in the future. Any future failure to successfully or timely
complete these annual assessments could subject us to sanctions or investigation
by regulatory authorities. Any such action could adversely affect our financial
results or investors’ confidence in us, and could cause our stock price to fall.
If we fail to maintain effective controls and procedures, we may be unable
to
provide financial information in a timely and reliable manner, which could
in
certain instances limit our ability to borrow or raise capital.
For
a
more thorough discussion of the regulatory issues that may affect our business,
see “Operations” above.
Other
Risks
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 January 31, 2007, we estimate that the holders of our
ten-vote shares held approximately 31% of our total voting power. In addition,
a
number of other provisions in our agreements and organizational documents
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.
We
face other risks.
The
list
of risks above is not exhaustive, and you should be aware that we face various
other risks. For a description of additional risks, please see “Operations”
above, “Forward-Looking Statements” below, and the other items of this annual
report, particularly Items 3, 7 and 8.
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, acquisition and divestiture opportunities,
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 or
accompanying statements of assumptions that are highlighted by words such
as
“expects,” “anticipates,” “intends,” “plans,” “believes,” “projects,” “seeks,”
“estimates,” “hopes,” “should,” “could,” and “may,” and variations thereof and
similar expressions. Such forward-looking statements are based upon our judgment
and assumptions as of the date such statements are made 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:
·
|
the
extent, timing, success and overall effects of competition from
wireless
carriers, VoIP providers, CLECs, cable television companies, electric
utilities and others, including without limitation the risks that
these
competitors may offer less expensive or more innovative products
and
services
|
·
|
the
risks inherent in rapid technological change, including without
limitation
the risk that new technologies will displace our products and
services
|
·
|
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 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
|
·
|
our
ability to effectively manage our growth, including without limitation
our
ability to (i) effectively manage our expansion opportunities,
(ii)
successfully finance and consummate our pending acquisition of
Madison
River Communications Corp. and to integrate such properties into
our
operations, (iii) attract and retain technological, managerial
and other
key personnel, (iv) achieve projected growth, revenue and cost
savings
targets, and (v) otherwise monitor our operations, costs, regulatory
compliance, and service quality and maintain other necessary internal
controls
|
·
|
possible
changes in the demand for, or pricing of, our products and services,
including without limitation reduced demand for traditional telephone
services caused by greater use of wireless or Internet communications
or
other factors and reduced demand for our access
services
|
·
|
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 new video, voice and broadband
services,
(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
|
·
|
our
ability to collect receivables from financially troubled communications
companies
|
·
|
our
ability to successfully negotiate collective bargaining agreements
on
reasonable terms without work
stoppages
|
·
|
regulatory
limits on our ability to change the prices for telephone services
in
response to industry changes
|
·
|
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
|
·
|
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
|
·
|
the
lack of assurance that we can compete effectively against
better-capitalized competitors
|
·
|
the
impact of network disruptions on our
business
|
·
|
the
effects of adverse weather on our customers or
properties
|
·
|
other
risks referenced in this report and from time to time in our other
filings
with the Securities and Exchange
Commission
|
·
|
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 costs
\ 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
\ failures
in our internal controls that could result in inaccurate public disclosures
or
fraud
\ changes
in our 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, including the
possible future unavailability of Statement of Financial Accounting Standards
No. 71 to our wireline subsidiaries.
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 any of our
forward-looking statements, which speak only as of the date made. Additional
risks that we currently deem immaterial or that are not presently known to
us
could also cause our actual results to differ materially from those expected
in
our forward-looking statements. 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, changed circumstances, or
otherwise.
Investors
should also be aware that while we do, at various times, communicate with
securities analysts, it is against our policy to disclose to them any material
non-public information or other confidential information. Accordingly, investors
should not assume that we agree with any statement or report issued by an
analyst irrespective of the content of the statement or report. To the extent
that reports issued by securities analysts contain any projections, forecasts
or
opinions, such reports are not our responsibility.
|
Unresolved
Staff Comments
|
Not
applicable.
Our
properties consist principally of telephone lines, central office equipment,
and
land and buildings related to telephone operations. As of December 31, 2006
and
2005, our gross property, plant and equipment of approximately $7.9 billion
and
$7.8 billion, respectively, consisted of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Cable
and wire
|
|
|
53.5
|
%
|
|
52.9
|
|
Central
office
|
|
|
32.0
|
|
|
32.4
|
|
General
support
|
|
|
9.6
|
|
|
9.9
|
|
Fiber
transport
|
|
|
2.8
|
|
|
2.4
|
|
Construction
in progress
|
|
|
0.7
|
|
|
1.0
|
|
Other
|
|
|
1.4
|
|
|
1.4
|
|
|
|
|
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” consists of network assets and equipment to provide fiber transport
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 our telephone subsidiaries are subject to mortgages
securing the debt of such companies. We own substantially all of the central
office buildings, local administrative buildings, warehouses, and storage
facilities used in our telephone operations.
For
further information on the location and type of our properties, see the
descriptions of our operations in Item 1.
In
Barbrasue
Beattie and James Sovis, on behalf of themselves and all others similarly
situated, v. CenturyTel, Inc.,
filed
on October 28, 2002, in the United States District Court for the Eastern
District of Michigan (Case No. 02-10277), the plaintiffs allege that we unjustly
and unreasonably billed customers for inside wire maintenance services, and
seek
unspecified monetary damages and injunctive relief under various legal theories
on behalf of a purported class of over two million customers in our telephone
markets. On March 10, 2006, the Court certified a class of plaintiffs and
issued
a ruling that the billing descriptions we used for these services during
an
approximately 18-month period between October 2000 and May 2002 were legally
insufficient. We have appealed this class certification decision, although
we
cannot predict the length of time before this appeal will be adjudicated.
Our
preliminary analysis indicates that we billed less than $9 million for inside
wire maintenance services under the billing descriptions and time periods
specified in the District Court ruling described above. Should other billing
descriptions be determined to be inadequate or if claims are allowed for
additional time periods, the amount of our potential exposure could increase
significantly. The Court’s order does not specify the award of damages, the
scope and amounts of which, if any, remain subject to additional
fact-finding and resolution of what we believe are valid defenses to
plaintiff’s
claims. Accordingly, we cannot reasonably estimate the amount or range of
possible loss at this time. However, considering the one-time nature of any
adverse result, we do not believe that the ultimate outcome of this litigation
will have a material adverse effect on our financial position or
on-going results of operations.
In
March
2006, we filed a complaint against AT&T Corp. and AT&T Communications,
Inc. (collectively, “AT&T”) in the United States District Court for the
District of New Jersey. This lawsuit currently includes 24 other local exchange
company plaintiffs. Our complaint seeks recovery from AT&T of unpaid and
underpaid access charges for calls made using AT&T’s prepaid calling cards
and calls that used Internet Protocol (“IP”) for a portion of their
transmission. We believe AT&T improperly classified certain of the prepaid
calling card calls as interstate traffic rather than intrastate traffic,
thereby
depriving us of the higher access rates associated with intrastate calls.
We
also believe that AT&T improperly classified the calls that used IP for a
portion of their transmission as local calls, thereby depriving us of access
rates entirely. AT&T has filed a counterclaim against us, asserting that we
improperly billed AT&T terminating intrastate access charges on certain
wireless roaming traffic. At this time, the likely outcome of these cases
cannot
be predicted, nor can a reasonable estimate of the amount of recovery or
payment, if any, be made. Accordingly, we have not recognized any amounts
with
respect to these matters in our consolidated financial statements.
From
time
to time, we are involved in other proceedings incidental to our 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, proceedings by or against
taxing authorities, and miscellaneous third party tort actions. The outcome
of
these other proceedings is not predictable. However, we do not believe that
the
ultimate resolution of these other proceedings, after considering available
insurance coverage, will have a material adverse effect on our financial
position, results of operations or cash flows.
|
Submission
of Matters to a Vote of Security
Holders.
|
Not
applicable.
Executive
Officers of the Registrant
Information
concerning our Executive Officers, set forth at Item 10 in Part III hereof,
is
incorporated in Part I of this Report by reference.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchase of Equity
Securities
|
Our
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
|
|
2006:
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
39.90
|
|
|
32.54
|
|
|
.0625
|
|
Second
quarter
|
|
$
|
40.00
|
|
|
34.79
|
|
|
.0625
|
|
Third
quarter
|
|
$
|
40.14
|
|
|
35.38
|
|
|
.0625
|
|
Fourth
quarter
|
|
$
|
44.11
|
|
|
39.34
|
|
|
.0625
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
35.47
|
|
|
32.31
|
|
|
.06
|
|
Second
quarter
|
|
$
|
35.00
|
|
|
29.55
|
|
|
.06
|
|
Third
quarter
|
|
$
|
36.50
|
|
|
33.20
|
|
|
.06
|
|
Fourth
quarter
|
|
$
|
35.28
|
|
|
31.14
|
|
|
.06
|
|
Common
stock dividends during 2006 and 2005 were paid each quarter. As of February
15,
2007, there were approximately 5,600 stockholders of record of our common
stock.
As of February 28, 2007, the closing stock price of our common stock was
$44.75.
In
February 2006, our Board of Directors authorized a $1.0 billion share repurchase
program under which, in February 2006, we repurchased $500 million (or
approximately 14.36 million shares) of our common stock under accelerated
share
repurchase agreements with certain investment banks at an initial average
price
of $34.83. The investment banks completed their repurchases in mid-July 2006
and
in connection therewith we paid an aggregate of approximately $28.4 million
cash
to the investment banks to compensate them for the difference between their
weighted average purchase price during the repurchase period and the initial
average price.
In
August
2006, we began repurchasing our common stock in open-market transactions
under
the remaining $500 million of our $1.0 billion program. The following table
reflects our repurchases of common stock during the fourth quarter of
2006.
Period
|
|
Total
Number of Shares Purchased
|
|
Average
Price Per
Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs
|
|
Approximate
Dollar Value of Shares (or Units) that May Yet Be Purchased
Under the
Plans or
Programs*
|
|
|
|
|
|
|
|
|
|
|
|
October
1 - October 31, 2006
|
|
|
1,031,981
|
|
$
|
40.28
|
|
|
1,031,981
|
|
$
|
390,871,887
|
|
November
1 - November 30, 2006
|
|
|
1,126,283
|
|
$
|
41.11
|
|
|
1,126,283
|
|
$
|
344,570,675
|
|
December
1 - December 31, 2006
|
|
|
1,039,400
|
|
$
|
42.72
|
|
|
1,039,400
|
|
$
|
300,164,091
|
|
Total
|
|
|
3,197,664
|
|
$
|
41.36
|
|
|
3,197,664
|
|
$
|
300,164,091
|
|
_______________
*Authority
to purchase under this program runs through June 30, 2007.
For
information regarding shares of our common stock authorized for issuance
under
our equity compensation plans, see Item 12.
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, 2006:
Selected
Income Statement Data
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(Dollars,
except per share amounts, and shares expressed in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
2,447,730
|
|
|
2,479,252
|
|
|
2,407,372
|
|
|
2,367,610
|
|
|
1,971,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
665,538
|
|
|
736,403
|
|
|
753,953
|
|
|
750,396
|
|
|
575,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
370,027
|
|
|
334,479
|
|
|
337,244
|
|
|
344,707
|
|
|
193,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share from continuing operations
|
|
$
|
3.17
|
|
|
2.55
|
|
|
2.45
|
|
|
2.40
|
|
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share from continuing operations
|
|
$
|
3.07
|
|
|
2.49
|
|
|
2.41
|
|
|
2.35
|
|
|
1.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
.25
|
|
|
.24
|
|
|
.23
|
|
|
.22
|
|
|
.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
116,671
|
|
|
130,841
|
|
|
137,215
|
|
|
143,583
|
|
|
141,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
122,229
|
|
|
136,087
|
|
|
142,144
|
|
|
148,779
|
|
|
144,408
|
|
Selected
Balance Sheet Data
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(Dollars
in thousands)
|
|
Net
property, plant and equipment
|
|
$
|
3,109,277
|
|
|
3,304,486
|
|
|
3,341,401
|
|
|
3,455,481
|
|
|
3,531,645
|
|
Goodwill
|
|
$
|
3,431,136
|
|
|
3,432,649
|
|
|
3,433,864
|
|
|
3,425,001
|
|
|
3,427,281
|
|
Total
assets
|
|
$
|
7,441,007
|
|
|
7,762,707
|
|
|
7,796,953
|
|
|
7,895,852
|
|
|
7,770,408
|
|
Long-term
debt
|
|
$
|
2,412,852
|
|
|
2,376,070
|
|
|
2,762,019
|
|
|
3,109,302
|
|
|
3,578,132
|
|
Stockholders'
equity
|
|
$
|
3,190,951
|
|
|
3,617,273
|
|
|
3,409,765
|
|
|
3,478,516
|
|
|
3,088,004
|
|
The
following table presents certain selected consolidated operating data as
of the
following dates:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone
access lines (1)
|
|
|
2,094,000
|
|
|
2,214,000
|
|
|
2,314,000
|
|
|
2,376,000
|
|
|
2,415,000
|
|
High-speed
Internet customers
|
|
|
369,000
|
|
|
249,000
|
|
|
143,000
|
|
|
83,000
|
|
|
53,000
|
|
(1) Excluding
adjustments during 2006 to reflect (i) the removal of test lines, (ii) database
conversion and clean-up and (iii) the sale of our Arizona properties, access
line losses for 2006 were approximately 107,000.
See
Items
1 and 2 in Part I and Items 7 and 8 elsewhere herein for additional
information.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
RESULTS
OF OPERATIONS
OVERVIEW
CenturyTel,
Inc., together with its subsidiaries, is an integrated communications company
engaged primarily in providing an array of communications services, including
local and long distance voice, Internet access and broadband services, to
customers in 25 states. We currently derive our revenues from providing (i)
local exchange and long distance voice services, (ii) network access services,
(iii) data services, which includes both high-speed (“DSL”) and dial-up Internet
services, as well as special access and private line services, (iv) fiber
transport, competitive local exchange and security monitoring services and
(v)
other related services.
Our
results of operations in 2006 were adversely impacted as a result of (i)
lower
Universal Service Fund and intrastate access revenues, (ii) declines in access
lines, (iii) the recognition of stock option expense in accordance with SFAS
123(R) and (iv) expenses associated with expanding our new video and wireless
service offerings. See below for additional information.
On
June
30, 2005, we acquired fiber assets in 16 metropolitan markets from KMC Telecom
Holdings, Inc. (“KMC”) for approximately $75.5 million cash.
On
March
1 and August 31, 2006, we announced workforce reductions involving an aggregate
of approximately 400 jobs and, in connection therewith, incurred a net pre-tax
charge of approximately $7.5 million (consisting of a $9.4 million charge
to
operating expenses, net of a $1.9 million favorable revenue impact related
to
such expenses) for severance and related costs. See Note 8 for additional
information.
In
the
second quarter of 2006, we (i) recorded a one-time pre-tax gain of approximately
$117.8 million upon redemption of our investment in the stock of the Rural
Telephone Bank (“RTB”) and (ii) sold our local exchange operations in Arizona.
See Note 15 for additional information.
Our
net
income for 2006 was $370.0 million, compared to $334.5 million during 2005
and
$337.2 million during 2004. Diluted earnings per share for 2006 was $3.07
compared to $2.49 in 2005 and $2.41 in 2004. The increase in diluted earnings
per share is primarily attributable to lower average shares outstanding in
2006
compared to prior years due to share repurchases that have occurred during
the
past two years and to the gain recorded upon redemption of our investment
in RTB
stock.
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
665,538
|
|
|
736,403
|
|
|
753,953
|
|
Interest
expense
|
|
|
(195,957
|
)
|
|
(201,801
|
)
|
|
(211,051
|
)
|
Other
income (expense)
|
|
|
121,568
|
|
|
3,168
|
|
|
4,470
|
|
Income
tax expense
|
|
|
(221,122
|
)
|
|
(203,291
|
)
|
|
(210,128
|
)
|
Net
income
|
|
$
|
370,027
|
|
|
334,479
|
|
|
337,244
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
3.17
|
|
|
2.55
|
|
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
3.07
|
|
|
2.49
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
116,671
|
|
|
130,841
|
|
|
137,215
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
122,229
|
|
|
136,087
|
|
|
142,144
|
|
Operating
income decreased $70.9 million in 2006 due to a $31.5 million decrease in
operating revenues and a $39.3 million increase in operating expenses. Operating
income decreased $17.6 million in 2005 as a $71.9 million increase in operating
revenues was more than offset by an $89.4 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 our control. 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;
our
ability to effectively manage our expansion opportunities, including
successfully financing, consummating and integrating pending acquisitions
and
retaining and hiring key personnel; possible changes in the demand for, or
pricing of, our products and services; our ability to successfully introduce
new
product or service offerings on a timely and cost-effective basis; our ability
to collect our receivables from financially troubled communications companies;
our ability to successfully negotiate collective bargaining agreements on
reasonable terms without work stoppages; the effects of adverse weather;
other
risks referenced from time to time in this report or other of our 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 our business are described in greater
detail in Item 1A included herein. You should be aware that new factors may
emerge from time to time and it is not possible for us to identify all such
factors nor can we predict the impact of each such factor on the business
or the
extent to which any one or more factors may cause actual results to differ
from
those reflected in any forward-looking statements. You are further cautioned
not
to place undue reliance on these forward-looking statements, which speak
only as
of the date of this report. We undertake no obligation to update any of our
forward-looking statements for any reason.
All
references to “Notes” in this Item 7 refer to the Notes to Consolidated
Financial Statements included in Item 8 of this annual report.
OPERATING
REVENUES
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$
|
860,741
|
|
|
892,272
|
|
|
903,025
|
|
Network
access
|
|
|
878,702
|
|
|
959,838
|
|
|
966,011
|
|
Data
|
|
|
351,495
|
|
|
318,770
|
|
|
275,777
|
|
Fiber
transport and CLEC
|
|
|
149,088
|
|
|
115,454
|
|
|
74,409
|
|
Other
|
|
|
207,704
|
|
|
192,918
|
|
|
188,150
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
2,447,730
|
|
|
2,479,252
|
|
|
2,407,372
|
|
As
a
result of increased bundling of our local exchange and long distance service
offerings, beginning in 2006, we have combined the revenues of such offerings
into a category entitled “Voice”. We have restated prior periods to insure
comparability.
Voice
revenues. We
derive
voice revenues by providing local exchange telephone services and retail
long
distance services to customers in our service areas. The $31.5 million (3.5%)
decrease in voice revenues in 2006 is primarily due to (i) a $22.3 million
decrease due a 4.8% decline in the number of access lines served and (ii)
a
$26.1 million decline as a result of a decrease in minutes of use in extended
area calling plans in certain areas. Such decreases were partially offset
by (i)
a $12.6 million increase in long distance revenues primarily attributable
to an
increase in the number of long distance lines and increased long distance
minutes of use, both of which were partially offset by a decline in the average
rate we charged our long distance customers and (ii) a $9.9 million increase
due
to providing custom calling features to more customers. The $10.8 million
(1.2%)
decrease in voice revenues in 2005 is primarily due to (i) a $16.5 million
decrease due to a decrease in the average rate we charged our long distance
customers, (ii) a $16.1 million decrease due a 3.3% decline in the average
number of access lines served, and (iii) a $7.5 million decline as a result
of a
decrease in minutes of use in extended area calling plans in certain areas.
Such
decreases were partially offset by (i) a $21.2 million increase in long distance
revenues attributable to a 12.0% increase in the average number of long distance
lines served and a 12.8% increase in minutes of use and (ii) an $8.7 million
increase due to providing custom calling features to more customers.
Excluding
(i) the sale of our Arizona telephone operations in May 2006 and (ii) the
net
impact of removing test lines from our access line counts and adding lines
as a
result of converting and correcting our databases during 2006, access lines
declined 107,000 (4.8%) during 2006 compared to a decline of 99,500 (4.3%)
in
2005. We believe the decline in the number of access lines during the past
few
years is primarily due to the displacement of traditional wireline telephone
services by other competitive services. We expect access lines to decline
between 4.5% and 6.0% during 2007.
Network
access revenues.
We
derive our network access revenues primarily from (i) providing services
to
various carriers and customers in connection with the use of our facilities
to
originate and terminate their interstate and intrastate voice and data
transmissions and (ii) receiving universal support funds which allows us
to
recover a portion of our costs under federal and state cost recovery mechanisms.
Certain of our interstate network access revenues are based on tariffed access
charges filed directly with the Federal Communications Commission (“FCC”); the
remainder of such revenues (except for DSL-related 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 $81.1 million (8.5%) in 2006 and decreased $6.2
million (0.6%) in 2005 due to the following factors:
|
|
2006
|
|
2005
|
|
|
|
increase
|
|
increase
|
|
|
|
(decrease)
|
|
(decrease)
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Recovery
from the federal Universal Service High Cost Loop support
program
|
|
$
|
(11,637
|
)
|
|
(13,065
|
)
|
Intrastate
revenues due to decreased minutes of use, decreased access rates
in
certain states and recovery from state
support funds
|
|
|
(16,326
|
)
|
|
(13,392
|
)
|
Partial
recovery of operating costs through revenue sharing arrangements
with
other telephone companies, interstate access revenues and return
on rate
base
|
|
|
(16,825
|
)
|
|
6,819
|
|
Rate
changes in certain jurisdictions
|
|
|
(2,875
|
)
|
|
(3,457
|
)
|
Prior
year revenue settlement agreements
|
|
|
(31,219
|
)
|
|
15,947
|
|
Other,
net
|
|
|
(2,254
|
)
|
|
975
|
|
|
|
$
|
(81,136
|
)
|
|
(6,173
|
)
|
Our
revenues from the Universal Service High Cost Loop Fund decreased approximately
$11.6 million in 2006 and $13.1 million in 2005, primarily due to an increase
in
the nationwide average cost per loop factor used by the FCC to allocate funds
among all recipients. We anticipate our 2007 revenues from the federal Universal
Service High Cost Loop support program will be approximately the same as
2006
levels.
In
2006,
we experienced a reduction in our intrastate revenues of approximately $16.3
million primarily due to a reduction in intrastate minutes (partially due
to the
displacement of minutes by wireless, electronic mail and other optional calling
services). The corresponding decrease in 2005 compared to 2004 was $13.4
million. We believe intrastate minutes will continue to decline in 2007,
although the magnitude of such decrease is uncertain.
Prior
year revenue settlement agreements for 2005 included the recognition of
approximately $35.9 million of revenue settlements for prior periods that
did
not recur in 2006. Of the $35.9 million recognized, $24.5 million was reflected
in network access revenues and $11.4 million was reflected in data revenues.
Data
revenues.
We
derive our data revenues primarily by providing Internet access services
(both
DSL and dial-up services) and data transmission services over special circuits
and private lines. Data revenues increased $32.7 million (10.3%) in 2006
and
$43.0 million (15.6%) in 2005. The 2006 increase was substantially due to
a
$54.0 million increase in DSL-related revenues primarily due to growth in
the
number of high-speed Internet customers. Such increase was partially offset
by a
decrease in prior year revenue settlements due to the above-described
recognition of approximately $11.4 million of revenue in the third quarter
of
2005 and a $4.9 million decrease due to a reduced number of dial-up Internet
customers.
The
$43.0
million increase in 2005 was primarily due to (i) a $24.8 million increase
in
Internet revenues due primarily to growth in the number of high-speed Internet
customers, partially offset by a decrease in the number of dial-up customers,
(ii) a $10.8 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 our increased operating expenses through revenue sharing arrangements
with
other telephone companies, and (iii) an $8.6 million net increase in revenues
related to prior year settlement agreements driven principally by the
above-described non-recurring increase in the third quarter of
2005.
Fiber
transport and CLEC. Our
fiber
transport and CLEC revenues include revenues from our fiber transport,
competitive local exchange carrier (“CLEC”) and security monitoring businesses.
Fiber transport and CLEC revenues increased $33.6 million (29.1%) in 2006,
of
which $24.4 million was due to revenues from the fiber assets acquired on
June
30, 2005 from KMC and $8.5 million was attributable to growth in our incumbent
fiber transport business. Fiber transport and CLEC revenues increased $41.0
million (55.2%) in 2005, of which $27.7 million was due to revenue from the
June
30, 2005 acquisition of fiber assets from KMC and $12.4 million was attributable
to growth in our incumbent fiber transport business.
Other
revenues.
We
derive other revenues primarily by (i) leasing, selling, installing and
maintaining customer premise telecommunications equipment and wiring, (ii)
providing billing and collection services for third parties, (iii) participating
in the publication of local directories and (iv) providing new service
offerings, principally consisting of our new video and wireless reseller
services. Other revenues increased $14.8 million (7.7%) during 2006 primarily
due to a $12.1 million increase in revenues of our video and wireless reseller
offerings and $2.5 million increase in directory revenues. Other revenues
increased $4.8 million (2.5%) during 2005 primarily due to a $4.5 million
increase in directory revenues.
OPERATING
EXPENSES
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$
|
888,414
|
|
|
821,929
|
|
|
755,413
|
|
Selling,
general and administrative
|
|
|
370,272
|
|
|
388,989
|
|
|
397,102
|
|
Depreciation
and amortization
|
|
|
523,506
|
|
|
531,931
|
|
|
500,904
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
$
|
1,782,192
|
|
|
1,742,849
|
|
|
1,653,419
|
|
Cost
of services and products.
Cost of
services and products increased $66.5 million (8.1%) in 2006 primarily due
to
(i) an $18.9 million increase in expenses incurred by the properties acquired
from KMC; (ii) an $18.3 million increase in costs associated with growth
in our
long distance business; (iii) a $14.3 million increase in expenses associated
with our video and wireless reseller service offerings; (iv) an $11.5 million
increase in Internet operating expenses primarily due to growth in the number
of
high-speed Internet customers; and (v) $8.6 million of severance and related
costs associated with our workforce reduction (see Note 8).
Cost
of
services and products increased $66.5 million (8.8%) in 2005 primarily due
to
(i) a $21.9 million increase in expenses incurred by the properties acquired
from KMC in June 2005; (ii) a $16.4 million increase in expenses associated
with
our Internet operations primarily due to an increase in the number of high-speed
Internet customers; (iii) a $10.6 million increase in costs associated with
growth in our fiber transport business; (iv) a $9.0 million increase in salaries
and benefits; (v) an $8.2 million increase in access expenses; (vi) a $5.3
million increase due to start-up costs associated with our new video and
wireless reseller services; and (vii) a $4.3 million increase in costs
associated with growth in our long distance business. Such increases were
partially offset by (i) a $3.9 million decrease in expenses caused by us
settling certain pole attachment disputes in 2005 for amounts less than those
previously accrued and (ii) a $3.4 million decrease in customer service
expense.
Selling,
general and administrative. Selling,
general and administrative expenses decreased $18.7 million (4.8%) in 2006
primarily due to an $11.0 million decrease in marketing expenses; a $10.6
million reduction in information technology expenses; an $8.7 million reduction
in bad debt expense; and a $5.8 million decrease in operating taxes. These
decreases were partially offset by a $9.9 million increase in salaries and
benefits and a $5.5 million increase in expenses incurred from the properties
acquired from KMC.
Selling,
general and administrative expenses decreased $8.1 million (2.0%) in 2005
primarily due to (i) a $12.4 million decrease in operating taxes (primarily
due
to an $8.6 million one-time charge in the third quarter of 2004); (ii) an
$11.2
million reduction in bad debt expense, and (iii) a $4.6 million decrease
in
expenses attributable to our Sarbanes-Oxley internal controls compliance
effort.
Such decreases were partially offset by (i) $7.9 million of expenses incurred
by
the properties acquired from KMC; (ii) a $5.9 million increase in customer
service and marketing costs associated with growth in our Internet business
and
(iii) a $2.8 million increase in sales and marketing costs associated with
our
new video and wireless reseller services.
Depreciation
and amortization.
Depreciation and amortization decreased $8.4 million (1.6%) in 2006, primarily
due to a $25.3 million reduction in depreciation expense due to certain assets
becoming fully depreciated. Such decreases were partially offset by (i) a
$16.6
million increase due to higher levels of plant in service and (ii) a $3.1
million increase due to depreciation and amortization of the properties acquired
from KMC.
Depreciation
and amortization increased $31.0 million (6.2%) in 2005. The year 2004 included
a one-time reduction in depreciation expense of $13.2 million to adjust the
balances of certain over-depreciated property, plant and equipment accounts.
The
remaining $17.8 million increase in 2005 is primarily due to (i) a $19.0
million
increase due to higher levels of plant in service, (ii) a $6.1 million increase
associated with amortization of our new billing system and (iii) a $2.8 million
increase due to depreciation and amortization incurred by the properties
acquired from KMC. Such increases were partially offset by (i) a $7.8 million
reduction in depreciation expense due to certain assets becoming fully
depreciated and (ii) the non-recurrence in 2005 of a $3.1 million one-time
increase recorded in 2004 related to the depreciation of fixed assets associated
with our new billing system.
Other.
For
additional information regarding certain matters that have impacted or may
impact our operations, see “Regulation and Competition”.
INTEREST
EXPENSE
Interest
expense decreased $5.8 million (2.9%) in 2006 compared to 2005 as a $10.5
million decrease due primarily to a decrease in average debt outstanding
was
partially offset by a $7.1 million increase due to higher average interest
rates.
Interest
expense decreased $9.3 million (4.4%) in 2005 compared to 2004 as a $16.1
million decrease due primarily to a decrease in average debt outstanding
was
partially offset by a $7.7 million increase due to higher average interest
rates.
OTHER
INCOME (EXPENSE)
Other
income (expense) includes the effects of certain items not directly related
to
our core operations, including gains/losses from asset dispositions and
impairments, our share of income from our 49% interest in a cellular
partnership, interest income and allowance for funds used during construction.
Other income (expense) was $121.6 million in 2006, $3.2 million in 2005 and
$4.5
million in 2004. The years 2006, 2005 and 2004 were impacted by certain charges
and credits that are not expected to occur in the future. Included in 2006
were
pre-tax gains of approximately $118.6 million, substantially all of which
related to the redemption of our RTB stock upon dissolution of the RTB, which
were partially offset by pre-tax charges of approximately $11.7 million due
to
the impairment of certain non-operating investments. Included in 2005 was
(i) a
$16.2 million pre-tax charge due to the impairment of a non-operating
investment; (ii) a $4.8 million debt extinguishment expense related to
purchasing and retiring approximately $400 million of our Senior J notes;
(iii)
$3.2 million of non-recurring interest income related to the settlement of
various income tax audits; and (iv) a $3.5 million gain from the sale of
a
non-operating investment. Included in 2004 was a $3.6 million prepayment
expense
paid in connection with the redemption of $100 million aggregate principal
amount of our Series B senior notes in May 2004 and a $2.5 million charge
related to the impairment of a non-operating investment.
INCOME
TAX EXPENSE
Our
effective income tax rate was 37.4%, 37.8% and 38.4% in 2006, 2005 and 2004,
respectively. Income tax expense was reduced by approximately $6.4 million
in
2006 due to the resolution of various income tax audit issues. Income tax
expense for 2005 was increased by $19.5 million as a result of increasing
the
valuation allowance related to net state operating loss carryforwards. This
increase was primarily due to changes in state income tax laws and other
factors
which impacted the projections of future taxable income. This tax expense
increase was more than offset by (i) a reduction of state income tax reserves
($11.6 million, net of federal income tax benefit); (ii) a reduction in our
composite state income tax rate due to more income being apportioned to states
with lower state tax rates ($8.5 million); and (iii) the favorable settlement
of
various federal income tax audits ($1.3 million).
ACCOUNTING
PRONOUNCEMENTS
In
June
2006, the Financial Accounting Standards Board issued Interpretation No.
48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the
accounting for uncertainty in income taxes recognized in financial statements.
FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting
and disclosing in the financial statements tax positions taken or expected
to be
taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We do not expect the impact of adopting FIN 48 to have
a
material adverse effect on our consolidated financial position or results
of
operations.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”).
SFAS 157 defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements required or permitted
under other accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the impact
of
adopting SFAS 157.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 158, “Employers’ Accounting for Defined
Benefit Plans and Other Postretirement Plans” (“SFAS 158”). SFAS 158 was
effective for our December 31, 2006 balance sheet and requires us to recognize
the overfunded or underfunded status of our defined benefit and postretirement
plans as an asset or liability on our balance sheet and to recognize changes
in
that funded status in the year in which the changes occur through adjustments
to
other comprehensive income (loss) and to stockholders’ equity, reflected in
accumulated other comprehensive loss. As a result of the implementation of
SFAS
158, our non-current assets decreased $64.7 million, our current liabilities
decreased $898,000, our non-current liabilities (excluding deferred income
taxes) increased approximately $99.5 million, our deferred income taxes
decreased approximately $65.4 million and our stockholders’ equity (reflected in
accumulated other comprehensive loss) decreased approximately $97.9 million.
See
Note 1 for additional information.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB
108 addresses how the effects of prior year uncorrected misstatements should
be
considered when quantifying misstatements in current year financial statements.
SAB 108 requires companies to quantify misstatements using both a balance
sheet
approach and income statement approach and to evaluate whether either approach
results in quantifying an error that is material in light of the relevant
quantitative and qualitative factors. We adopted SAB 108 in the fourth quarter
of 2006. Upon the implementation of SAB 108, we recognized a net $9.7 million
increase to beginning of the year retained earnings for the cumulative effect
of
correcting prior year uncorrected misstatements. See Note 1 for additional
information.
On
January 1, 2003, we 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 we generally have no legal obligation to remove
obsolete assets, depreciation rates of certain assets established by regulatory
authorities for our 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 us 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, we did not
adopt
the provisions of SFAS 143 for our telephone operations subject to SFAS 71.
For
our telephone operations acquired from Verizon in 2002 (which are not subject
to
SFAS 71) and our other non-regulated operations, we have not accrued a liability
for anticipated removal costs related to tangible long-lived assets through
an
adjustment to our depreciation rates for these assets. For these reasons,
the
adoption of SFAS 143 did not have a material effect on our financial
statements.
On
March 31, 2005, the Financial Accounting Standards Board issued
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”
(“FIN 47”), an interpretation of SFAS 143. FIN 47, which was effective for
fiscal years ending after December 15, 2005, clarifies that the recognition
and
measurement provisions of SFAS 143 apply to asset retirement obligations in
which the timing or method of settlement may be conditional on a future event
that may or may not be within control of the entity. We identified conditional
asset retirement obligations for (i) asbestos removal in buildings, (ii)
removal
of underground storage tanks, (iii) our property located on public and private
rights-of way and (iv) our property that is attached to poles owned by other
utilities and municipalities. Due to a lack of historical experience from
which
to reasonably estimate a settlement date or range of settlement dates, we
concluded that an asset retirement obligation associated with our property
located on rights-of-way is indeterminate. We also concluded that our
conditional asset retirement obligations related to the removal of asbestos,
underground storage tanks and our property that is attached to other entities’
poles was immaterial to our financial condition and results of operations
and
therefore has not been recognized.
CRITICAL
ACCOUNTING POLICIES
Our
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 assumptions that affect
the
reported amounts of assets, liabilities, revenues and expenses. We continually
evaluate our estimates and assumptions including those related to (i) revenue
recognition, (ii) allowance for doubtful accounts, (iii) pension and
postretirement benefits, (iv) long-lived assets and (v) income taxes. Actual
results may differ from these estimates and assumptions. We believe these
critical accounting policies discussed below involve a higher degree of judgment
or complexity.
Revenue
recognition.
Certain
of our 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, with the exception of DSL-related revenues
which
were removed from our pooled interstate tariff filing effective July 1, 2006
and
are now recognized as revenues when billed. During 2004, we began generally
recognizing such interstate network access revenues at the authorized rate
of
return, unless the actual achieved or projected 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 our telephone subsidiaries file interstate
tariffs with the FCC using this streamlined filing approach. Since July 2004,
we
have recognized billings from our tariffs as revenue since we believe such
tariffs are “deemed lawful”. There is no assurance that our future tariff
filings will be “deemed lawful”. For those billings from tariffs prior to July
2004, we initially recorded as a liability our earnings in excess of the
authorized rate of return, and may thereafter recognize as revenue some or
all
of these amounts at the end of the applicable settlement period or as our
legal
entitlement thereto becomes certain. We recorded approximately $35.9 million
as
revenue in the third quarter of 2005 as the settlement period related to
the
2001/2002 monitoring period lapsed on September 30, 2005. The amount of our
earnings in excess of the authorized rate of return reflected as a liability
on
the balance sheet as of December 31, 2006 for the 2003/2004 monitoring period
aggregated approximately $43 million. The settlement period related to the
2003/2004 monitoring period lapses on September 30, 2007.
Allowance
for doubtful accounts.
In
evaluating the collectibility of our accounts receivable, we assess a number
of
factors, including a specific customer’s or carrier’s ability to meet its
financial obligations to us, the length of time the receivable has been past
due
and historical collection experience. Based on these assessments, we record
both
specific and general reserves for uncollectible accounts receivable to reduce
the related accounts receivable to the amount we ultimately expect to collect
from customers and carriers. If circumstances change or economic conditions
worsen such that our past collection experience is no longer relevant, we
may
need to increase our reserves from the levels reflected in our accompanying
consolidated balance sheet.
Pension
and postretirement benefits.
The
amounts recognized in our 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 our pension and postretirement expense is the expected
long-term rate of return on plan assets. For 2006 and 2005, we utilized an
expected long-term rate of return on plan assets of 8.25%, which we believe
reflects the expected long-term rates of return in the financial markets.
Another
assumption used in the determination of our pension and postretirement benefit
plan obligations is the appropriate discount rate. Our discount rate at December
31, 2006 ranged from 5.75-5.80% compared to 5.5% at December 31, 2005, which
we
believe is the appropriate rate at which the pension and postretirement benefits
could be effectively settled. Such rates were determined based on a discounted
cash flow analysis of our expected cash outflows of our benefit plans. A
25
basis point decrease in the assumed discount rate would increase annual combined
pension and postretirement expense approximately $3.0 million.
Intangible
and long-lived assets.
We are
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. We completed the required annual test of goodwill impairment
(as of September 30, 2006) under SFAS 142 and determined our goodwill was
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.
Income
taxes.
We
estimate our current and deferred income taxes based on our assessment of
the
future tax consequences of transactions that have been reflected in our
financial statements or applicable tax returns. Actual income taxes paid
could
vary from these estimates due to future changes in income tax law or the
resolution of audits by federal and state taxing authorities. We maintain
income
tax contingency reserves for potential assessments from the various taxing
authorities. These reserves are estimated based on our judgment of the probable
outcome of the tax contingencies and are adjusted periodically based on changing
facts and circumstances. Changes to the tax contingency reserves could
materially affect operating results in the period of change.
For
additional information on our critical accounting policies, see “Accounting
Pronouncements” and “Regulation and Competition - Other Matters” below, and the
footnotes to our consolidated financial statements included elsewhere
herein.
INFLATION
Historically,
we have mitigated the effects of increased costs by recovering over time
certain
costs applicable to our regulated telephone operations through the rate-making
process. However, LECs operating over 65% of our total access lines are now
governed by state alternative regulation plans, some of which restrict or
delay
our ability to recover increased costs. Additional future regulatory changes
may
further alter our ability to recover increased costs in our 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. As operating
expenses in our nonregulated lines of business increase as a result of
inflation, we, to the extent permitted by competition, attempt to recover
the
costs by increasing prices for our services and equipment.
MARKET
RISK
We
are
exposed to market risk from changes in interest rates on our long-term debt
obligations. We have estimated our 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, 2006, the fair value of our long-term debt was estimated to
be $2.5
billion based on the overall weighted average rate of our long-term debt
of 6.9%
and an overall weighted maturity of 8 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 our long-term debt resulting from
a
hypothetical increase of 69 basis points in interest rates (ten percent of
our
overall weighted average borrowing rate). Such an increase in interest rates
would result in approximately an $89.6 million decrease in the fair value
of our
long-term debt. As of December 31, 2006, after giving effect to interest
rate
swaps currently in place, approximately 80% of our long-term and short-term
debt
obligations were fixed rate.
We
seek
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, we use derivative instruments to (i) lock-in or swap our
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.
We
have established policies and procedures for risk assessment and the approval,
reporting and monitoring of derivative instrument activities. We do not hold
or
issue derivative financial instruments for trading or speculative purposes.
We
periodically review our exposure to interest rate fluctuations and implement
strategies to manage the exposure.
At
December 31, 2006, we had outstanding four fair value interest rate hedges
associated with the full $500 million aggregate principal amount of our 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 our
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. During 2006, we realized an average interest rate under these
hedges of 9.03%. Interest expense was increased by $5.8 million during 2006
as a
result of these hedges. The aggregate fair market value of these hedges was
$20.6 million at December 31, 2006 and is reflected both as a liability and
as a
decrease in our underlying long-term debt on the December 31, 2006 balance
sheet. With respect to each of these hedges, market risk is estimated as
the
potential change in the fair value of the hedge resulting from a hypothetical
10% increase in the forward rates used to determine the fair value. A
hypothetical 10% increase in the forward rates would result in a $13.3 million
decrease in the fair value of these hedges at December 31, 2006, and would
also
increase our interest expense.
Certain
shortcomings are inherent in the method of analysis presented in the computation
of fair value of financial instruments. Actual values may differ from those
presented if market conditions vary from assumptions used in the fair value
calculations. The analysis above incorporates only those risk exposures that
existed as of December 31, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Excluding
cash used for acquisitions, we rely on cash provided by operations to provide
for our cash needs. Our operations have historically provided a stable source
of
cash flow which has helped us continue our long-term program of capital
improvements.
Operating
activities.
Net cash
provided by operating activities was $840.7 million, $964.7 million and $955.8
million in 2006, 2005 and 2004, respectively. Our accompanying consolidated
statements of cash flows identify major differences between net income and
net
cash provided by operating activities for each of those years. As relief
from
the effects of Hurricane Katrina, certain of our affected subsidiaries were
granted a deferral from making their remaining 2005 estimated federal income
and
excise tax payments until 2006. During 2006, we made payments of approximately
$75 million to satisfy our remaining 2005 estimated payments. For additional
information relating to our operations, see “Results of Operations”
above.
Investing
activities.
Net cash
used in investing activities was $193.7 million, $481.4 million and $413.3
million in 2006, 2005 and 2004, respectively. We received approximately $122.8
million cash from the redemption of our RTB stock upon dissolution of the
RTB
during 2006. See Note 15 for additional information. Cash used for acquisitions
was $75.5 million in 2005 (due to the acquisition of fiber assets in 16
metropolitan markets from KMC). Capital expenditures during 2006, 2005 and
2004
were $314.1 million, $414.9 million and $385.3 million, respectively.
Financing
activities.
Net cash
used in financing activities was $780.2 million in 2006, $491.7 million in
2005
and $578.5 million in 2004. Payments of debt were $82.0 million in 2006,
$693.3
million in 2005 and $179.4 million in 2004. In accordance with previously
announced stock repurchase programs, we repurchased 21.4 million shares (for
$802.2 million), 16.4 million shares (for $551.8 million), and 13.4 million
shares (for $401.0 million) in 2006, 2005 and 2004, respectively. The 2006
repurchases include 14.36 million shares repurchased (for an aggregate final
price of approximately $528.4 million) under accelerated share repurchase
agreements with investment banks (see Note 9 for additional information).
We
initially funded purchases under these agreements principally through borrowings
under our $750 million credit facility and cash on hand and subsequently
refinanced the credit facility borrowings through the issuance of short-term
commercial paper. The 2005 repurchases include 12.9 million shares repurchased
(for an aggregate final price of $437.5 million) under accelerated share
repurchase agreements (see below and Note 9 to the accompanying financial
statements for additional information).
In
February 2005, we remarketed substantially all of our $500 million of
outstanding Series J senior notes due 2007 at an interest rate of 4.628%.
We
received no proceeds in connection with the remarketing as all proceeds were
held in trust to secure the obligation of our equity unit holders to purchase
common stock from us on May 16, 2005. In connection with the remarketing,
we
purchased and retired approximately $400 million of the notes, resulting
in
approximately $100 million remaining outstanding. We incurred a pre-tax charge
of approximately $6 million in the first quarter of 2005 related to purchasing
and retiring the notes. We purchased such notes with proceeds from the February
2005 issuance of $350 million of 5% senior notes, Series M, due 2015 and
cash on
hand.
On
May
16, 2005, upon settlement of 15.9 million of our outstanding equity units,
we
received proceeds of approximately $398.2 million and issued approximately
12.9
million common shares. In late May 2005, we entered into accelerated share
repurchase agreements with investment banks whereby we repurchased and retired
12.9 million shares of common stock for an aggregate final price of $437.5
million, the proceeds of which came from the settlement of the equity units
mentioned above and cash on hand.
Other.
For
2007, we have budgeted $325 million for capital expenditures. In 2006, we
concluded that our prior extensive capital investment in our wireline network
permitted us to reduce network capital spending to maintenance levels. We
expect
this to be the case for the foreseeable future. Our 2007 capital expenditure
budget also includes amounts for expanding our new service offerings and
expanding our data networks.
The
following table contains certain information concerning our material contractual
obligations as of December 31, 2006.
|
|
Payments
due by period
|
|
Contractual
obligations
|
|
Total
|
|
2007
|
|
2008-2009
|
|
2010-2011
|
|
After
2011
|
|
|
|
(Dollars
in thousands)
|
|
Long-term
debt, including current maturities and capital lease obligations
(1)
|
|
$
|
2,567,864
|
|
|
155,012
|
|
|
296,100
|
|
|
691,268
|
(2)
|
|
1,425,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on long-term debt obligations
|
|
$
|
1,549,609
|
|
|
169,565
|
|
|
301,167
|
|
|
251,086
|
|
|
827,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRCC
purchase price
obligation (3)
|
|
$
|
336,000
|
|
|
336,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(1)
For
additional information on the terms of our outstanding debt instruments,
see
Note 5 to the consolidated financial statements included in Item 8 of this
annual report.
(2)
Includes $165 million aggregate principal amount of our convertible debentures,
Series K, due 2032, which can be put to us at various dates beginning in
2010.
(3)
This
amount represents an estimated purchase price based on MRCC’s net indebtedness
as of September 30, 2006 (see below for additional information).
In
December 2006, we entered into a stock purchase agreement with Madison River
Communications Corp. (“MRCC”) and its owner, Madison River Telephone Company,
LLC. Under this agreement, we agreed to purchase all of the capital stock
of
MRCC in exchange for $830 million less MRCC’s net indebtedness on the
transaction’s closing date (which was approximately $494 million at September
30, 2006), subject to certain closing adjustments. We expect to initially
fund
this acquisition using borrowings under our existing credit facility and
are
currently reviewing our longer term options for repaying or refinancing these
borrowings.
We
continually evaluate the possibility of acquiring additional communications
operations and expect to continue our long-term strategy of pursuing the
acquisition of attractively-priced communications properties in exchange
for
cash, securities or both. At any given time, we may be engaged in discussions
or
negotiations regarding additional acquisitions. We generally do not announce
our
acquisitions or dispositions until we have entered into a preliminary or
definitive agreement. We may require additional financing in connection with
any
such acquisitions, the consummation of which could have a material impact
on our
financial condition or operations. Approximately 4.1 million shares of our
common stock and 200,000 shares of our preferred stock remain available for
future issuance in connection with acquisitions under our acquisition shelf
registration statement. We also have access to debt and equity capital
markets.
In
December 2006, we secured a new five-year, $750 million revolving credit
facility. The credit facility contains financial covenants that require us
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 our choice of several prevailing commercial lending rates plus an additional
margin that varies depending on our credit ratings and aggregate borrowings
under the facility. We must pay a quarterly commitment fee on the unutilized
portion of the facility, the amount of which varies based on our credit ratings.
Up to $150 million of the credit facility can be used for letters of credit,
which reduces the amount available for other extensions of credit. Available
borrowings under our credit facility are also effectively reduced by any
outstanding borrowings under our commercial paper program. Our commercial
paper
program borrowings in turn are effectively limited to the total amount available
under our credit facility. As of December 31, 2006, we had no amounts
outstanding under our new credit facility but did have $23 million outstanding
under our commercial paper program.
Moody’s
Investors Service (“Moody’s”) rates our long-term debt Baa2 (with a stable
outlook) and Standard & Poor’s (“S&P”) rates our long-term debt BBB
(with a negative outlook). Our commercial paper program is rated P2 by Moody’s
and A3 by S&P. Any downgrade in our credit ratings will increase our
borrowing costs and commitment fees under our $750 million revolving credit
facility. Downgrades could also restrict our access to the capital markets,
accelerate the conversion rights of holders of our outstanding convertible
securities, increase our borrowing costs under new or replacement debt
financings, or otherwise adversely affect the terms of future borrowings
by,
among other things, increasing the scope of our debt covenants and decreasing
our financial or operating flexibility.
The
following table reflects our 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:
|
|
2006
|
|
2005
|
|
2004
|
|
Debt
to total capitalization
|
|
|
44.8
|
%
|
|
42.3
|
|
|
46.9
|
|
Ratio
of earnings to fixed charges
and preferred stock dividends*
|
|
|
3.97
|
|
|
3.60
|
|
|
3.57
|
|
*
For
purposes of the chart above, “earnings” consist of income before income taxes
and fixed charges, and “fixed charges” include our interest expense, including
amortized debt issuance costs, and our preferred stock dividend
costs.
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.
Wireless
telephone services increasingly constitute a significant source of competition
with LEC services, especially since wireless carriers have begun to compete
effectively on the basis of price with more traditional telephone services.
As a
result, some customers have chosen to completely forego use of traditional
wireline phone service and instead rely solely on wireless service for voice
services. We anticipate this trend will continue, particularly if wireless
service providers continue to expand their coverage areas, reduce their rates,
improve the quality of their services, and offer enhanced new services.
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 our 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.
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.
Federal
USF programs have recently undergone substantial changes, and are expected
to
experience more changes in the coming years. As mandated by the 1996 Act,
in May
2001 the FCC modified its existing universal service support mechanism for
rural
telephone companies by adopting an interim mechanism for a five-year period
based on embedded, or historical, costs that provides relatively predictable
levels of support to many LECs, including substantially all of our LECs.
In May
2006, the FCC extended this interim mechanism until such time that new high-cost
support rules are adopted for rural telephone companies. Wireless and other
competitive service providers continue to seek eligible telecommunications
carrier status in order to receive USF support, which, coupled with changes
in
usage of telecommunications services, have placed stress on the funding
mechanism of the USF, which is subject to annual caps on disbursements. These
developments have placed additional financial pressure on the amount of money
that is necessary to provide support to all eligible service providers,
including support payments we receive from the USF High Cost Loop support
program. Increases in the nationwide average cost per loop factor used to
allocate funds among all USF recipients caused our revenues from the USF
High
Cost Loop support program to decrease in 2005 and 2006 from the amounts received
in the prior year. However, based on recent FCC filings, we anticipate our
2007
revenues from the USF High Cost Loop support program will approximate our
2006
levels.
During
2004, a joint board named by the FCC 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
us. In
addition, the FCC has taken various other steps in anticipation of restructuring
universal service support mechanisms, which in the aggregate could substantially
impact these support payments. In August 2005, the joint board sought comments
on four separate proposals to modify the distribution of High Cost Loop support
funds. In August 2006, the joint board sought comment on the viability of
using
competitive bidding to determine the amount of high-cost funding for all
eligible carriers. We anticipate that the joint board will make reform
suggestions to the FCC by mid-2007, at which time the FCC would be required
to
seek comments. Due to the pending nature of these proposals, we cannot estimate
the impact that such proposals would have on our operations.
Recent
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. Recently several large electric utilities
have announced plans to offer communications services that compete with LECs.
Recent improvements in the quality of "Voice-over-Internet Protocol" ("VoIP")
service have led several cable, Internet, data and other communications
companies, as well as start-up companies, to substantially increase their
offerings of VoIP service to business and residential customers. VoIP providers
frequently use existing broadband networks to deliver flat-rate, all distance
calling plans that may offer features that cannot readily be provided by
traditional LECs and may be priced below those currently charged for traditional
local and long distance telephone services. Beginning in late 2003, the FCC
initiated rulemaking proceedings to address the regulation of VoIP, and has
adopted orders establishing some initial broad regulatory guidelines. There
can
be no assurance that future rulemaking will be on terms favorable to ILECs,
or
that VoIP providers will not successfully compete for our
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 industry negotiations
are continuing with the goal of developing a consensus plan that addresses
the
concerns of carriers from all industry segments. Until the FCC’s proceeding
concludes and the changes, if any, to the existing rules are established,
we
cannot estimate the impact this proceeding will have on our results of
operations.
Many
cable, entertainment, technology or other communication companies that
previously offered a limited range of services are now, like us, offering
diversified bundles of services. As such, a growing number of companies are
competing to serve the communications needs of the same customer base. Several
of these companies started offering full service bundles before us, which
could
give them an advantage in building customer loyalty.
Recent
events affecting us.
During
the last few years, all of the states in which we provide telephone services
have taken 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 our 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 our LECs have
also
affected revenue growth recently. These alternative regulation plans now
govern
over 65% of our access lines.
Certain
long distance carriers continue to request that certain of our LECs reduce
their
intrastate access tariffed rates. In addition, we have recently experienced
reductions in intrastate traffic, partially due to the displacement of minutes
by wireless, electronic mail and other optional calling services. In 2006
we
incurred a reduction in our intrastate revenues of approximately $16.3 million
compared to 2005 primarily due to these factors. The corresponding decrease
in
2005 compared to 2004 was $13.4 million. We believe this trend of decreased
intrastate minutes will continue in 2007, although the magnitude of such
decrease is uncertain.
While
we
expect our operating revenues in 2007 to continue to experience downward
pressure primarily due to continued access line losses and reduced network
access revenues, we expect such declines to be partially offset by increased
demand for our fiber transport, high-speed Internet and other nonregulated
product offerings (including our new video and wireless
initiatives).
For
a
more complete description of regulation and competition impacting our operations
and various attendant risks, please see Items 1 and 1A of this annual
report.
Other
matters. Our
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. We are monitoring the ongoing applicability of
SFAS
71 to our 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 our 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 our 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 us 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, we did not adopt the provisions
of
SFAS 143 for our 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.
Our
consolidated balance sheet as of December 31, 2006 included regulatory
liabilities of approximately $186.4 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 $71.3 million.
When
and
if our regulated operations no longer qualify for the application of SFAS
71, we
currently do not expect to record any impairment charge related to the carrying
value of the property, plant and equipment of our regulated telephone
operations. Additionally, upon the discontinuance of SFAS 71, we would be
required to revise the lives of our property, plant and equipment to reflect
the
estimated useful lives of the assets. We currently do not expect such revisions
in asset lives will have a material impact on our results of operations.
Upon
the discontinuance of SFAS 71, we also would be required to eliminate certain
intercompany transactions with regulated affiliates that currently are not
eliminated under the application of SFAS 71. For the year ended December
31,
2006, approximately $120 million of revenues (and related costs) would have
been
eliminated had we not been subject to the provisions of SFAS 71. Such
elimination would have had no impact on total operating income. For regulatory
purposes, the accounting and reporting of our telephone subsidiaries will
not be
affected by the discontinued application of SFAS 71.
We
have
certain obligations based on federal, state and local laws relating to the
protection of the environment. Costs of compliance through 2006 have not
been
material, and we currently do not believe that such costs will become
material.
|
Quantitative
and Qualitative Disclosure About Market
Risk
|
For
information pertaining to the our market risk disclosure, see “Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk”.
|
Financial
Statements and Supplementary
Data
|
Report
of Management
The
Shareholders
CenturyTel,
Inc.:
Management
has prepared and is responsible for the integrity and objectivity of our
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.
Our
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, we 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 our internal control over financial reporting was
effective as of December 31, 2006. Management’s assessment of the effectiveness
of our internal control over financial reporting as of December 31, 2006
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. 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
1,
2007
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(1). In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in Item 15a(2). 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, 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, effective January
1, 2006, the Company changed its method of accounting for share-based payments.
In addition, as discussed in Note 1 to the consolidated financial statements,
the Company changed its method of accounting for pension and postretirement
benefits as of December 31, 2006.
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, 2006, 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 1, 2007 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
1,
2007
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, 2006, 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, 2006, 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, 2006, 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)(1) and 15(a)(2), respectively, and our report dated
March
1, 2007 expressed
an unqualified opinion on those consolidated financial statements and related
financial statement schedule. Such report includes an explanatory paragraph
regarding the Company’s change in the method of accounting for share-based
payments and pension and postretirement benefits in 2006.
/s/
KPMG
LLP
Shreveport,
Louisiana
March
1,
2007
CENTURYTEL,
INC.
Consolidated
Statements of Income
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
|
$
|
2,447,730
|
|
|
2,479,252
|
|
|
2,407,372
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
|
888,414
|
|
|
821,929
|
|
|
755,413
|
|
Selling,
general and administrative
|
|
|
370,272
|
|
|
388,989
|
|
|
397,102
|
|
Depreciation
and amortization
|
|
|
523,506
|
|
|
531,931
|
|
|
500,904
|
|
Total
operating expenses
|
|
|
1,782,192
|
|
|
1,742,849
|
|
|
1,653,419
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
665,538
|
|
|
736,403
|
|
|
753,953
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(195,957
|
)
|
|
(201,801
|
)
|
|
(211,051
|
)
|
Other
income (expense)
|
|
|
121,568
|
|
|
3,168
|
|
|
4,470
|
|
Total
other income (expense)
|
|
|
(74,389
|
)
|
|
(198,633
|
)
|
|
(206,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX EXPENSE
|
|
|
591,149
|
|
|
537,770
|
|
|
547,372
|
|
Income
tax expense
|
|
|
221,122
|
|
|
203,291
|
|
|
210,128
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
370,027
|
|
|
334,479
|
|
|
337,244
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
$
|
3.17
|
|
|
2.55
|
|
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
$
|
3.07
|
|
|
2.49
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER COMMON SHARE
|
|
$
|
.25
|
|
|
.24
|
|
|
.23
|
|
AVERAGE
BASIC SHARES OUTSTANDING
|
|
|
116,671
|
|
|
130,841
|
|
|
137,215
|
|
AVERAGE
DILUTED SHARES OUTSTANDING
|
|
|
122,229
|
|
|
136,087
|
|
|
142,144
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Statements of Comprehensive Income
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
370,027
|
|
|
334,479
|
|
|
337,244
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME, NET OF TAXES
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment:
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment, net of $965, $1,438 and ($5,916)
tax
|
|
|
1,548
|
|
|
2,307
|
|
|
(9,491
|
)
|
Unrealized
holding gain:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains related to marketable securities arising during the
period,
net of $411, $165 and $940 tax
|
|
|
659
|
|
|
264
|
|
|
1,508
|
|
Derivative
instruments:
|
|
|
|
|
|
|
|
|
|
|
Net
losses on derivatives hedging variability of cash flows, net of
($0),
($2,606) and ($219) tax
|
|
|
-
|
|
|
(4,180
|
)
|
|
(351
|
)
|
Reclassification
adjustment for losses included in
net income, net of $234 and $202 tax
|
|
|
375
|
|
|
324
|
|
|
-
|
|
Net
change in other comprehensive income (loss) (net
of reclassification adjustment), net of taxes
|
|
|
2,582
|
|
|
(1,285
|
)
|
|
(8,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
372,609
|
|
|
333,194
|
|
|
328,910
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Balance Sheets
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
25,668
|
|
|
158,846
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
Customers,
less allowance of $11,321 and $11,312
|
|
|
150,892
|
|
|
154,367
|
|
Interexchange
carriers and other, less allowance of $9,584 and $10,409
|
|
|
76,454
|
|
|
82,347
|
|
Materials
and supplies, at average cost
|
|
|
6,628
|
|
|
6,998
|
|
Other
|
|
|
30,475
|
|
|
20,458
|
|
Total
current assets
|
|
|
290,117
|
|
|
423,016
|
|
|
|
|
|
|
|
|
|
NET
PROPERTY, PLANT AND EQUIPMENT
|
|
|
3,109,277
|
|
|
3,304,486
|
|
|
|
|
|
|
|
|
|
GOODWILL
AND OTHER ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,431,136
|
|
|
3,432,649
|
|
Other
|
|
|
610,477
|
|
|
602,556
|
|
Total
goodwill and other assets
|
|
|
4,041,613
|
|
|
4,035,205
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
7,441,007
|
|
|
7,762,707
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
155,012
|
|
|
276,736
|
|
Short-term
debt
|
|
|
23,000
|
|
|
-
|
|
Accounts
payable
|
|
|
129,350
|
|
|
104,444
|
|
Accrued
expenses and other current liabilities
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
54,100
|
|
|
60,521
|
|
Income
taxes
|
|
|
60,522
|
|
|
110,521
|
|
Other
taxes
|
|
|
46,890
|
|
|
58,660
|
|
Interest
|
|
|
73,725
|
|
|
71,580
|
|
Other
|
|
|
23,352
|
|
|
14,851
|
|
Advance
billings and customer deposits
|
|
|
51,614
|
|
|
48,917
|
|
Total
current liabilities
|
|
|
617,565
|
|
|
746,230
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
2,412,852
|
|
|
2,376,070
|
|
|
|
|
|
|
|
|
|
DEFERRED
CREDITS AND OTHER LIABILITIES
|
|
|
1,219,639
|
|
|
1,023,134
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock, $1.00 par value, authorized 350,000,000 shares, issued and
outstanding 113,253,889 and 131,074,399 shares
|
|
|
113,254
|
|
|
131,074
|
|
Paid-in
capital
|
|
|
24,256
|
|
|
129,806
|
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(104,942
|
)
|
|
(9,619
|
)
|
Retained
earnings
|
|
|
3,150,933
|
|
|
3,358,162
|
|
Preferred
stock - non-redeemable
|
|
|
7,450
|
|
|
7,850
|
|
Total
stockholders' equity
|
|
|
3,190,951
|
|
|
3,617,273
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
7,441,007
|
|
|
7,762,707
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Statements of Cash Flows
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
370,027
|
|
|
334,479
|
|
|
337,244
|
|
Adjustments
to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
523,506
|
|
|
531,931
|
|
|
500,904
|
|
Gain
on asset dispositions
|
|
|
(118,649
|
)
|
|
(3,500
|
)
|
|
-
|
|
Deferred
income taxes
|
|
|
49,685
|
|
|
69,530
|
|
|
74,374
|
|
Income
from unconsolidated cellular entity
|
|
|
(5,861
|
)
|
|
(4,910
|
)
|
|
(7,067
|
)
|
Changes
in current assets and current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
7,909
|
|
|
(685
|
)
|
|
2,937
|
|
Accounts
payable
|
|
|
24,906
|
|
|
(37,174
|
)
|
|
15,514
|
|
Accrued
taxes
|
|
|
(49,735
|
)
|
|
72,971
|
|
|
27,040
|
|
Other
current assets and other current liabilities, net
|
|
|
10,269
|
|
|
(8,111
|
)
|
|
12,831
|
|
Retirement
benefits
|
|
|
5,963
|
|
|
(16,815
|
)
|
|
26,954
|
|
Excess
tax benefits from share-based compensation
|
|
|
(12,034
|
)
|
|
-
|
|
|
-
|
|
(Increase)
decrease in noncurrent assets
|
|
|
9,078
|
|
|
1,973
|
|
|
(34,740
|
)
|
Increase
(decrease) in other noncurrent liabilities
|
|
|
709
|
|
|
2,638
|
|
|
(6,220
|
)
|
Other,
net
|
|
|
24,946
|
|
|
22,412
|
|
|
6,060
|
|
Net
cash provided by operating activities
|
|
|
840,719
|
|
|
964,739
|
|
|
955,831
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Payments
for property, plant and equipment
|
|
|
(314,071
|
)
|
|
(414,872
|
)
|
|
(385,316
|
)
|
Proceeds
from redemption of Rural Telephone Bank stock
|
|
|
122,819
|
|
|
-
|
|
|
-
|
|
Proceeds
from sale of assets
|
|
|
5,865
|
|
|
4,000
|
|
|
-
|
|
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
(75,453
|
)
|
|
(2,000
|
)
|
Investment
in debt security
|
|
|
-
|
|
|
-
|
|
|
(25,000
|
)
|
Distributions
from unconsolidated cellular entity
|
|
|
-
|
|
|
2,339
|
|
|
8,219
|
|
Investment
in unconsolidated cellular entity
|
|
|
(5,222
|
)
|
|
-
|
|
|
-
|
|
Other,
net
|
|
|
(3,122
|
)
|
|
2,594
|
|
|
(9,214
|
)
|
Net
cash used in investing activities
|
|
|
(193,731
|
)
|
|
(481,392
|
)
|
|
(413,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Payments
of debt
|
|
|
(81,995
|
)
|
|
(693,345
|
)
|
|
(179,393
|
)
|
Proceeds
from issuance of debt
|
|
|
23,000
|
|
|
344,173
|
|
|
-
|
|
Repurchase
of common stock
|
|
|
(802,188
|
)
|
|
(551,759
|
)
|
|
(401,013
|
)
|
Settlement
of equity units
|
|
|
-
|
|
|
398,164
|
|
|
-
|
|
Proceeds
from issuance of common stock
|
|
|
97,803
|
|
|
50,374
|
|
|
29,485
|
|
Settlements
of interest rate hedge contracts
|
|
|
-
|
|
|
(7,357
|
)
|
|
-
|
|
Excess
tax benefits from share-based compensation
|
|
|
12,034
|
|
|
-
|
|
|
-
|
|
Cash
dividends
|
|
|
(29,203
|
)
|
|
(31,862
|
)
|
|
(31,861
|
)
|
Other,
net
|
|
|
383
|
|
|
(104
|
)
|
|
4,296
|
|
Net
cash used in financing activities
|
|
|
(780,166
|
)
|
|
(491,716
|
)
|
|
(578,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(133,178
|
)
|
|
(8,369
|
)
|
|
(35,966
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
158,846
|
|
|
167,215
|
|
|
203,181
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
25,668
|
|
|
158,846
|
|
|
167,215
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Statements of Stockholders’ Equity
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
COMMON
STOCK (represents dollars and shares)
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
131,074
|
|
|
132,374
|
|
|
144,364
|
|
Repurchase
of common stock
|
|
|
(21,432
|
)
|
|
(16,409
|
)
|
|
(13,396
|
)
|
Issuance
of common stock upon settlement of equity units
|
|
|
-
|
|
|
12,881
|
|
|
-
|
|
Conversion
of preferred stock into common stock
|
|
|
22
|
|
|
7
|
|
|
-
|
|
Issuance
of common stock through dividend
reinvestment, incentive and benefit plans
|
|
|
3,590
|
|
|
2,221
|
|
|
1,406
|
|
Balance
at end of year
|
|
|
113,254
|
|
|
131,074
|
|
|
132,374
|
|
|
|
|
|
|
|
|
|
|
|
|
PAID-IN
CAPITAL
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
129,806
|
|
|
222,205
|
|
|
576,515
|
|
Repurchase
of common stock
|
|
|
(222,998
|
)
|
|
(535,350
|
)
|
|
(387,617
|
)
|
Issuance
of common stock upon settlement of equity units
|
|
|
-
|
|
|
385,283
|
|
|
-
|
|
Issuance
of common stock through dividend reinvestment, incentive and benefit
plans
|
|
|
94,213
|
|
|
48,153
|
|
|
28,079
|
|
Conversion
of preferred stock into common stock
|
|
|
378
|
|
|
118
|
|
|
-
|
|
Excess
tax benefits from share-based compensation
|
|
|
12,034
|
|
|
-
|
|
|
-
|
|
Share
based compensation and other
|
|
|
10,823
|
|
|
9,397
|
|
|
5,228
|
|
Balance
at end of year
|
|
|
24,256
|
|
|
129,806
|
|
|
222,205
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS, NET OF TAX
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(9,619
|
)
|
|
(8,334
|
)
|
|
-
|
|
Effect
of adoption of SFAS 158, net of tax (see Note 1)
|
|
|
(97,905
|
)
|
|
-
|
|
|
-
|
|
Net
change in other comprehensive income (loss) (net of reclassification
adjustment),
net of tax
|
|
|
2,582
|
|
|
(1,285
|
)
|
|
(8,334
|
)
|
Balance
at end of year
|
|
|
(104,942
|
)
|
|
(9,619
|
)
|
|
(8,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,358,162
|
|
|
3,055,545
|
|
|
2,750,162
|
|
Net
income
|
|
|
370,027
|
|
|
334,479
|
|
|
337,244
|
|
Repurchase
of common stock
|
|
|
(557,758
|
)
|
|
-
|
|
|
-
|
|
Cumulative
effect of adoption of SAB 108 (see Note 1)
|
|
|
9,705
|
|
|
-
|
|
|
-
|
|
Cash
dividends declared
|
|
|
|
|
|
|
|
|
|
|
Common
stock - $.25, $.24 and $.23 per share
|
|
|
(28,823
|
)
|
|
(31,466
|
)
|
|
(31,462
|
)
|
Preferred
stock
|
|
|
(380
|
)
|
|
(396
|
)
|
|
(399
|
)
|
Balance
at end of year
|
|
|
3,150,933
|
|
|
3,358,162
|
|
|
3,055,545
|
|
|
|
|
|
|
|
|
|
|
|
|
UNEARNED
ESOP SHARES
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
-
|
|
|
-
|
|
|
(500
|
)
|
Release
of ESOP shares
|
|
|
-
|
|
|
-
|
|
|
500
|
|
Balance
at end of year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK - NON-REDEEMABLE
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
7,850
|
|
|
7,975
|
|
|
7,975
|
|
Conversion
of preferred stock into common stock
|
|
|
(400
|
)
|
|
(125
|
)
|
|
-
|
|
Balance
at end of year
|
|
|
7,450
|
|
|
7,850
|
|
|
7,975
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
$
|
3,190,951
|
|
|
3,617,273
|
|
|
3,409,765
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Notes
to
Consolidated Financial Statements
December
31, 2006
(1)
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of consolidation
- Our
consolidated financial statements include the accounts of CenturyTel, Inc.
and
its majority-owned subsidiaries.
Regulatory
accounting
- Our
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. We are monitoring the ongoing applicability of
SFAS
71 to our 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 our telephone operations no longer being subject
to
SFAS 71 in the near future. Our consolidated balance sheet as of December
31,
2006 included regulatory liabilities of approximately $186.4 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 $71.3
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 our 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. Revenues from installation activities (along with the related
costs) are deferred and amortized over the estimated life of the customer
relationship.
Certain
of our telephone subsidiaries’ revenues are based on tariffed access charges
filed directly with the Federal Communications Commission; the remainder
of our
telephone subsidiaries participate in revenue sharing arrangements with other
telephone companies for interstate revenue (except for broadband related
revenues) 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 our estimates.
Allowance
for doubtful accounts.
In
evaluating the collectibility of our accounts receivable, we assess a number
of
factors, including a specific customer’s or carrier’s ability to meet its
financial obligations to us, the length of time the receivable has been past
due
and historical collection experience. Based on these assessments, we record
both
specific and general reserves for uncollectible accounts receivable to reduce
the stated amount of applicable accounts receivable to the amount we ultimately
expect to collect.
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% to
20%.
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. We test
impairment of goodwill at least annually by comparing the fair value of the
reporting unit to its carrying value (including goodwill). We base our estimates
of the fair value of the reporting unit 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.
Affiliated
transactions
-
Certain of our service subsidiaries provide installation and maintenance
services, materials and supplies, and managerial, operational, technical,
accounting and administrative services to other 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 our 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
- We
file a consolidated federal income tax return with our eligible subsidiaries.
We
use 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.
Postretirement
and pension plans
- We
adopted the provisions of Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Plans and Other Postretirement Plans”
(“SFAS 158”) as of December 31, 2006. SFAS 158 requires us to recognize the
overfunded or underfunded status of our defined benefit and postretirement
plans
as an asset or a liability on our balance sheet, with an adjustment to
stockholders’ equity (reflected as an increase or decrease in accumulated other
comprehensive income or loss). The incremental effect of applying SFAS 158
on
individual line items of our balance sheet as of December 31, 2006 were as
follows:
|
|
Before
Application of SFAS
158
|
|
Adjustments
|
|
After
Application of SFAS
158
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
$
|
675,215
|
|
|
(64,738
|
)
|
|
610,477
|
|
Total
assets
|
|
$
|
7,505,745
|
|
|
(64,738
|
)
|
|
7,441,007
|
|
Accrued
expenses and other current liabilities
|
|
$
|
259,487
|
|
|
(898
|
)
|
|
258,589
|
|
Deferred
credits and other liabilities (excluding deferred income
taxes)
|
|
$
|
447,066
|
|
|
99,512
|
|
|
546,578
|
|
Deferred
income taxes
|
|
$
|
738,508
|
|
|
(65,447
|
)
|
|
673,061
|
|
Total
liabilities
|
|
$
|
4,216,889
|
|
|
33,167
|
|
|
4,250,056
|
|
Accumulated
other comprehensive loss, net of tax
|
|
$
|
(7,037
|
)
|
|
(97,905
|
)
|
|
(104,942
|
)
|
Total
stockholders’ equity
|
|
$
|
3,288,856
|
|
|
(97,905
|
)
|
|
3,190,951
|
|
Cumulative
effect adjustment
- In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, “Considering the Effect of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Results” (“SAB 108”). SAB
108 addresses how the effects of prior year uncorrected misstatements should
be
considered when quantifying misstatements in current year financial statements.
SAB 108 requires companies to quantify misstatements using both a balance
sheet
approach and income statement approach and to evaluate whether either approach
results in quantifying an error that is material in light of the relevant
quantitative and qualitative factors.
We
identified two misstatements that previously were deemed immaterial using
the
income statement approach that are now deemed material upon application of
the
balance sheet approach. Such misstatements relate to (i) the failure to
capitalize interest in connection with the development of our billing system,
which began in the late 1990’s; and (ii) the failure to defer the revenues and
costs associated with installation activities related to our service offerings.
Using the guidance of SAB 108, we have recorded a net cumulative effect
adjustment to retained earnings (as of January 1, 2006), which increased
retained earnings approximately $9.7 million (presented on an after-tax basis).
Of the $9.7 million net increase to retained earnings, approximately $14.0
million related to the capitalized interest adjustment, which was partially
offset by a reduction to retained earnings of approximately $4.3 million
related
to the installation activities adjustment. We have adjusted our results of
operations for the first, second and third quarters of 2006 to reflect the
ongoing application of the above. Such adjustments were immaterial to each
quarter.
Stock-based
compensation - Effective January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based
Payment", which requires us to measure our cost of awarding employees with
equity instruments based upon the fair value of the award on the grant
date. Prior to January 1, 2006, we accounted for stock compensation plans
using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25. See Note 14 for additional information.
Derivative
financial instruments
- We
account 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, we designate 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. We also formally assess,
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 we determine that a derivative
is not, or is no longer, highly effective as a hedge, we would discontinue
hedge
accounting prospectively. We recognize all derivatives on the balance sheet
at
their fair value. Changes in the fair value of derivative financial instruments
are either recognized in income or stockholders’ equity (as a component of
accumulated other comprehensive income (loss)), depending on whether the
derivative is being used to hedge changes in the fair value or cash flows.
We do
not hold or issue derivative financial instruments for trading or speculative
purposes. Management periodically reviews our 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 applicable accounting period.
Diluted earnings per share gives effect to all potential dilutive common
shares
that were outstanding during the period. See Note 13 for additional
information.
Cash
equivalents
- We
consider short-term investments with a maturity at date of purchase of three
months or less to be cash equivalents.
On
June
30, 2005, we acquired fiber assets in 16 metropolitan markets from KMC Telecom
Holdings, Inc. (“KMC”) for approximately $75.5 million. The assets acquired and
liabilities assumed have been reflected in our consolidated balance sheet
based
on a purchase price allocation determined by independent third parties. The
vast
majority of the purchase price was allocated to property, plant and equipment.
See Note 3 for information concerning amounts allocated to certain intangible
assets as a result of the KMC acquisition. The results of operations of the
KMC
properties are included in our results of operations from and after the
acquisition date.
(3)
|
GOODWILL
AND OTHER ASSETS
|
Goodwill
and other assets at December 31, 2006 and 2005 were composed of the
following:
December
31,
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,431,136
|
|
|
3,432,649
|
|
Billing
system development costs, less accumulated amortization of $26,752
and
$14,899
|
|
|
204,597
|
|
|
193,579
|
|
Cash
surrender value of life insurance contracts
|
|
|
94,788
|
|
|
94,801
|
|
Deferred
costs associated with installation activities
|
|
|
73,256
|
|
|
-
|
|
Pension
asset
|
|
|
16,187
|
|
|
73,360
|
|
Intangible
assets not subject to amortization
|
|
|
36,690
|
|
|
36,690
|
|
Marketable
securities
|
|
|
32,235
|
|
|
29,195
|
|
Deferred
interest rate hedge contracts
|
|
|
23,134
|
|
|
25,624
|
|
Investment
in debt security
|
|
|
22,209
|
|
|
21,611
|
|
Intangible
assets subject to amortization
|
|
|
|
|
|
|
|
Customer
base, less accumulated amortization of $7,022 and $5,349
|
|
|
18,072
|
|
|
19,745
|
|
Contract
rights, less accumulated amortization of $3,256 and $1,861
|
|
|
930
|
|
|
2,326
|
|
Other
|
|
|
88,379
|
|
|
105,625
|
|
|
|
$
|
4,041,613
|
|
|
4,035,205
|
|
Our
goodwill was derived from numerous previous acquisitions whereby the purchase
price exceeded the fair value of the net assets acquired. We test for goodwill
impairment annually under SFAS 142 and, based on our analysis performed as
of
September 30, 2006, determined our goodwill was not impaired.
We
accounted for the costs to develop an integrated billing and customer care
system 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 $231.3 million
and
are being amortized over a twenty-year period. We adjusted the aggregate
capitalized costs as of January 1, 2006 to include previously unrecognized
capitalized interest. See Note 1 - Cumulative effect adjustment for additional
information.
In
connection with the application of SAB 108 (see Note 1), we established deferred
revenues and costs associated with installation activities effective as of
January 1, 2006.
In
the
third quarter of 2004, we entered into a three-year agreement with EchoStar
Communications Corporation (“EchoStar”) to provide co-branded satellite
television services to our customers. As part of the transaction, we 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 our contractual right to provide video service and is being
amortized over a three-year period.
In
connection with the acquisitions of properties from Verizon Communications,
Inc.
(“Verizon”) in 2002, we 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). In 2005, we assigned $1.4 million of the purchase
price
of our acquisition of KMC fiber assets as an intangible asset. Such assets
have
an indefinite life and therefore are not subject to amortization currently.
We
assigned $22.7 million of the purchase price to a customer base intangible
asset
in connection with the acquisitions of Verizon properties in 2002. In 2005,
$2.4
million of the purchase price of our acquisition of KMC fiber assets was
assigned to a customer base intangible asset. Such assets are being amortized
over 15 years. In addition, as mentioned above, in 2004 we established an
intangible asset related to the contractual rights to provide video service.
Total amortization expense for these customer base and contractual right
intangible assets for 2006, 2005 and 2004 was $3.1 million, $3.0 million
and
$2.0 million, respectively, and is expected to be $2.6 million in 2007 and
$1.7
million annually thereafter through 2010.
(4)
|
PROPERTY,
PLANT AND EQUIPMENT
|
Net
property, plant and equipment at December 31, 2006 and 2005 was composed
of the
following:
December
31,
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Cable
and wire
|
|
$
|
4,224,453
|
|
|
4,123,805
|
|
Central
office
|
|
|
2,522,940
|
|
|
2,532,034
|
|
General
support
|
|
|
760,170
|
|
|
768,972
|
|
Fiber
transport
|
|
|
222,595
|
|
|
188,451
|
|
Information
origination/termination
|
|
|
62,060
|
|
|
59,838
|
|
Construction
in progress
|
|
|
59,198
|
|
|
81,532
|
|
Other
|
|
|
42,344
|
|
|
46,745
|
|
|
|
|
7,893,760
|
|
|
7,801,377
|
|
Accumulated
depreciation
|
|
|
(4,784,483
|
)
|
|
(4,496,891
|
)
|
Net
property, plant and equipment
|
|
$
|
3,109,277
|
|
|
3,304,486
|
|
Depreciation
expense was $520.4 million, $528.9 million and $498.9 million in 2006, 2005
and
2004, respectively.
Our
long-term debt as of December 31, 2006 and 2005 was as follows:
December
31,
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
CenturyTel
|
|
|
|
|
|
Senior
notes and debentures:
|
|
|
|
|
|
7.20%
Series D, due 2025
|
|
$
|
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
|
|
|
100,908
|
|
|
100,908
|
|
4.75%
Series K, due 2032
|
|
|
165,000
|
|
|
165,000
|
|
7.875%
Series L, due 2012
|
|
|
500,000
|
|
|
500,000
|
|
5.0%
Series M, due 2015
|
|
|
350,000
|
|
|
350,000
|
|
Unamortized
net discount
|
|
|
(5,640
|
)
|
|
(6,578
|
)
|
Net
fair value of derivative instruments:
|
|
|
|
|
|
|
|
Series
H senior notes
|
|
|
10,853
|
|
|
13,716
|
|
Series
L senior notes
|
|
|
(20,593
|
)
|
|
(17,645
|
)
|
Other
|
|
|
-
|
|
|
39
|
|
Total
CenturyTel
|
|
|
2,365,528
|
|
|
2,370,440
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
|
|
First
mortgage debt
|
|
|
|
|
|
|
|
5.34%*
notes, payable to agencies of the U. S. government and cooperative
lending
associations, due in installments through 2028
|
|
|
133,738
|
|
|
146,905
|
|
7.98%
notes, due through 2016
|
|
|
4,420
|
|
|
4,700
|
|
Other
debt
|
|
|
|
|
|
|
|
6.6%*
unsecured medium-term notes, due through 2008
|
|
|
61,499
|
|
|
122,499
|
|
9.40%*
notes, due in installments through 2028
|
|
|
971
|
|
|
4,931
|
|
5.55%*
capital lease obligations, due through 2008
|
|
|
1,708
|
|
|
3,331
|
|
Total
subsidiaries
|
|
|
202,336
|
|
|
282,366
|
|
Total
long-term debt
|
|
|
2,567,864
|
|
|
2,652,806
|
|
Less
current maturities
|
|
|
155,012
|
|
|
276,736
|
|
Long-term
debt, excluding current maturities
|
|
$
|
2,412,852
|
|
|
2,376,070
|
|
*
Weighted average interest rate at December 31, 2006
The
approximate annual debt maturities for the five years subsequent to December
31,
2006 are as follows: 2007 - $155.0 million; 2008 - $280.6 million; 2009 -
$15.5
million; 2010 - $679.2 million; and 2011 - $12.1 million.
Certain
of our loan agreements 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, 2006, restricted net assets
of
subsidiaries were $145.8 million and subsidiaries’ retained earnings in excess
of amounts restricted by debt covenants totaled $1.6 billion. At December
31,
2006, approximately $2.2 billion of our consolidated retained earnings reflected
on the balance sheet was available under our 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 indenture does not contain any financial
covenants, but does include restrictions that limit our 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 impacted by our credit
ratings, or that restrict the issuance of new securities in the event of
a
material adverse change to us.
Approximately
15% of our property, plant and equipment is pledged to secure the long-term
debt
of subsidiaries.
In
May
2002, we issued
and sold in an underwritten public offering $500 million of equity units,
each
of which were priced at $25 and consisted initially of a beneficial interest
in
a CenturyTel senior unsecured note (Series J, due 2007 and remarketable in
2005)
with a principal amount of $25 and a contract to purchase shares of CenturyTel
common stock no later than May 2005. Each purchase contract generally required
the holder to purchase between .6944 and .8741 of a share of CenturyTel common
stock on May 16, 2005 in exchange for $25, subject to certain adjustments
and
exceptions.
In
February 2005, we remarketed substantially all of our $500 million of
outstanding Series J senior notes due 2007 (the notes described above), at
an
interest rate of 4.628%. We received no proceeds in connection with the
remarketing as all net proceeds were held in trust to secure the equity unit
holders’ obligation to purchase common stock from us on May 16, 2005. In
connection with the remarketing, we purchased and retired approximately $400
million of the notes, resulting in approximately $100 million remaining
outstanding. We incurred a pre-tax charge of approximately $6.0 million in
the
first quarter of 2005 related to purchasing and retiring the notes. Proceeds
to
purchase such notes came from the February 2005 issuance of $350 million
of 5%
senior notes, Series M, due 2015 and cash on hand.
Between
April 15, 2005 and May 4, 2005, we repurchased and cancelled an aggregate
of
approximately 4.1 million of our equity units in privately-negotiated
transactions with six institutional holders at an average price of $25.18
per
unit. The remaining 15.9 million equity units outstanding on May 16, 2005
were
settled in stock in accordance with the terms and conditions of the purchase
contract that formed a part of such unit. Accordingly,
on May 16, 2005, we received proceeds of approximately $398.2 million and
issued
approximately 12.9 million common shares in the aggregate. See Note 9 for
information on our accelerated share repurchase program which mitigated the
dilutive impact of issuing these 12.9 million shares.
As
of
December 31, 2006, we had available a $750 million five-year revolving credit
facility, which had no amounts outstanding at December 31, 2006. Our commercial
paper program had $23 million outstanding as of December 31,
2006.
In
2002,
we 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 us to purchase all or a portion of the debentures on 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. For purchases on or after
August 1, 2010, we may choose to pay the purchase price in cash or shares
of our
common stock, or any combination thereof (except that we will pay any accrued
and unpaid interest in cash).
(6)
|
DERIVATIVE
INSTRUMENTS
|
In
2003,
we entered into four separate fair value interest rate hedges associated
with
the full $500 million principal amount of our 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 our 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.
During 2006, we realized an average interest rate under these hedges of 9.03%.
Interest expense was increased by $5.8 million during 2006 as a result of
these
hedges. The aggregate fair value of such hedges at December 31, 2006 was
$20.6
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 our
underlying long-term debt.
In
late
2004 and early 2005, we entered into several cash flow hedges that effectively
locked in the interest rate on a majority of certain anticipated debt
transactions that we ultimately completed in February 2005. We locked in
the
interest rate on (i) $100 million of 2.25-year debt (remarketed in February
2005) at 3.9%; (ii) $75 million of 10-year debt (issued in February 2005)
at
5.4%; and (iii) $225 million of 10-year debt (issued in February 2005) at
5.5%.
In February 2005, upon settlement of such hedges, we (i) received $366,000
related to the 2.25-year debt remarketing, which is being 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 is being amortized
as
an increase in interest expense over the 10-year term of the
debt.
(7)
|
DEFERRED
CREDITS AND OTHER LIABILITIES
|
Deferred
credits and other liabilities at December 31, 2006 and 2005 were composed
of the
following:
December
31,
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Deferred
federal and state income taxes
|
|
$
|
673,061
|
|
|
670,420
|
|
Accrued
postretirement benefit costs
|
|
|
327,337
|
|
|
241,153
|
|
Deferred
revenue
|
|
|
99,669
|
|
|
19,554
|
|
Accrued
pension costs
|
|
|
36,784
|
|
|
-
|
|
Fair
value of interest rate swap
|
|
|
20,593
|
|
|
17,645
|
|
Additional
minimum pension liability
|
|
|
-
|
|
|
11,662
|
|
Minority
interest
|
|
|
9,226
|
|
|
8,372
|
|
Other
|
|
|
52,969
|
|
|
54,328
|
|
|
|
$
|
1,219,639
|
|
|
1,023,134
|
|
In
connection with the application of SAB 108 (see Note 1), we established deferred
revenues and costs associated with installation activities effective as of
January 1, 2006.
(8)
|
REDUCTION
IN WORKFORCE
|
On
March
1, 2006 and August 30, 2006, we announced workforce reductions involving
an
aggregate of approximately 400 jobs, or 6% of our workforce, primarily due
to
increased competitive pressures and the loss of access lines over the last
several years. For 2006, we incurred a net pre-tax charge of approximately
$7.5
million (consisting of a $9.4 million charge to operating expenses, net of
a
$1.9 million favorable revenue impact related to such expenses) in connection
with severance and related costs. Of the $9.4 million charged to operating
expenses, approximately $8.6 million was reflected in cost of services and
products and $845,000 was reflected in selling, general and administrative
expenses. The following table reflects additional information regarding the
severance-related liability for 2006 (in thousands):
Balance
at December 31, 2005
|
|
$
|
-
|
|
Amount
accrued to expense
|
|
|
9,431
|
|
Adjustments
to accrual amounts
|
|
|
(529
|
)
|
Amount
paid
|
|
|
(8,445
|
)
|
Balance
at December 31, 2006
|
|
$
|
457
|
|
Common
stock
-
Unissued shares of CenturyTel common stock were reserved as
follows:
December
31,
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Incentive
compensation programs
|
|
|
7,669
|
|
Acquisitions
|
|
|
4,064
|
|
Employee
stock purchase plan
|
|
|
4,552
|
|
Dividend
reinvestment plan
|
|
|
315
|
|
Conversion
of convertible preferred stock
|
|
|
406
|
|
Other
employee benefit plans
|
|
|
1,505
|
|
|
|
|
18,511
|
|
In
accordance with previously announced stock repurchase programs, we repurchased
21.4 million shares (for $802.2 million), 16.4 million shares (for $551.8
million) and 13.4 million shares (for $401.0 million) in 2006, 2005 and 2004,
respectively. The 2006 and 2005 repurchases included 14.36 million and 12.9
million shares, respectively, repurchased (for a total price of $528.4 and
$437.5 million, respectively) under accelerated share repurchase agreements
(see
below for additional information).
On
February 21, 2006, our Board of Directors approved a stock repurchase program
authorizing us to repurchase up to $1.0 billion of our common stock and
terminated the approximately $13 million remaining balance of our existing
$200
million share repurchase program approved in February 2005. In February 2006,
we
repurchased the first $500 million of common stock through accelerated share
repurchase agreements entered into with various investment banks, repurchasing
and retiring approximately 14.36 million shares of common stock at an average
initial price of $34.83 per share. We funded repurchases under these agreements
through short-term borrowings and cash on hand. As part of the accelerated
share
repurchase transactions, we simultaneously entered into forward contracts
with
the investment banks whereby the investment banks purchased an aggregate
of
14.36 million shares of our common stock during the terms of the contracts.
At
the end of the repurchase period in mid-July 2006, we paid an aggregate of
approximately $28.4 million cash to the investment banks to compensate them
for
the difference between their weighted average purchase price during the
repurchase period and the initial average price. We reflected such settlement
amount as an adjustment to retained earnings in our financial statements
during
2006.
In
late
May 2005, we entered into accelerated share repurchase agreements with three
investment banks whereby we repurchased and retired approximately 12.9 million
shares of our common stock for an aggregate of $416.5 million cash (or an
initial average price of $32.34 per share). We funded this purchase using
the
proceeds received from the settlement of the equity units mentioned in Note
5
and from cash on hand. As part of the accelerated share repurchase transactions,
we simultaneously entered into forward contracts with the investment banks
whereby the investment banks purchased an aggregate of 12.9 million shares
of
our common stock during the term of the contracts. At the end of the repurchase
period, we paid an aggregate of approximately $21.0 million cash to the
investment banks to compensate them for the difference between their weighted
average purchase price during the repurchase period and the initial average
price. We reflected such settlement amount as an adjustment to paid-in capital.
During
2006, our stockholders’ equity was reduced by approximately $97.9 million upon
the adoption of SFAS 158 and increased approximately $9.7 million upon the
application of SAB 108. See Note 1 for additional information.
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, 2006, the holders of 5.0 million shares
of
common stock were entitled to ten votes per share.
Preferred
stock
- As of
December 31, 2006, we had 2.0 million shares of authorized preferred stock,
$25
par value per share. At December 31, 2006 and 2005, there were 298,000 and
314,000 shares, respectively, of outstanding convertible 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
- On
November 1, 2006, our 1996 rights agreement (and each preference share purchase
right issued thereunder) lapsed in accordance with its stated
terms.
(10)
|
POSTRETIREMENT
BENEFITS
|
We
sponsor 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”). We believe that
certain drug benefits offered under our postretirement health care plans
will
qualify for subsidy under Medicare Part D. In the third quarter of 2004,
we
estimated that the effect of the Act on us would not be material and reflected
the effects of the Act as of the December 31, 2004 measurement date. As of
this
date, we estimated that the reduction in our accumulated benefit obligation
attributable to prior service cost was approximately $7 million and reflected
such amount as an actuarial gain.
In
2005,
in connection with negotiating certain union contracts, we amended certain
retiree contribution and retirement eligibility provisions of our plan.
The
following is a reconciliation of the beginning and ending balances for the
benefit obligation and the plan assets.
December
31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
353,942
|
|
|
305,720
|
|
|
311,421
|
|
Service
cost
|
|
|
6,982
|
|
|
6,289
|
|
|
6,404
|
|
Interest
cost
|
|
|
18,980
|
|
|
16,718
|
|
|
17,585
|
|
Participant
contributions
|
|
|
1,583
|
|
|
1,637
|
|
|
1,362
|
|
Plan
amendments
|
|
|
(7,978
|
)
|
|
23,289
|
|
|
2,529
|
|
Direct
subsidy receipts
|
|
|
717
|
|
|
-
|
|
|
-
|
|
Actuarial
(gain) loss
|
|
|
319
|
|
|
16,391
|
|
|
(18,185
|
)
|
Benefits
paid
|
|
|
(17,128
|
)
|
|
(16,102
|
)
|
|
(15,396
|
)
|
Benefit
obligation at end of year
|
|
$
|
357,417
|
|
|
353,942
|
|
|
305,720
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
29,545
|
|
|
29,570
|
|
|
29,877
|
|
Return
on assets
|
|
|
3,280
|
|
|
1,440
|
|
|
2,377
|
|
Employer
contributions
|
|
|
12,800
|
|
|
13,000
|
|
|
11,350
|
|
Participant
contributions
|
|
|
1,583
|
|
|
1,637
|
|
|
1,362
|
|
Benefits
paid
|
|
|
(17,128
|
)
|
|
(16,102
|
)
|
|
(15,396
|
)
|
Fair
value of plan assets at end of year
|
|
$
|
30,080
|
|
|
29,545
|
|
|
29,570
|
|
Net
periodic postretirement benefit cost for 2006, 2005 and 2004 included the
following components:
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
6,982
|
|
|
6,289
|
|
|
6,404
|
|
Interest
cost
|
|
|
18,980
|
|
|
16,718
|
|
|
17,585
|
|
Expected
return on plan assets
|
|
|
(2,437
|
)
|
|
(2,440
|
)
|
|
(2,465
|
)
|
Amortization
of unrecognized actuarial loss
|
|
|
3,719
|
|
|
2,916
|
|
|
3,611
|
|
Amortization
of unrecognized prior service credit
|
|
|
(855
|
)
|
|
(1,876
|
)
|
|
(3,648
|
)
|
Net
periodic postretirement benefit cost
|
|
$
|
26,389
|
|
|
21,607
|
|
|
21,487
|
|
The
following table sets forth the amounts recognized as liabilities for
postretirement benefits at December 31, 2006, 2005 and 2004.
December
31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Benefit
obligation
|
|
$
|
(357,417
|
)
|
|
(353,942
|
)
|
|
(305,720
|
)
|
Fair
value of plan assets
|
|
|
30,080
|
|
|
29,545
|
|
|
29,570
|
|
Unamortized
prior service credit
|
|
|
-
|
|
|
(1,726
|
)
|
|
(26,891
|
)
|
Unrecognized
net actuarial loss
|
|
|
-
|
|
|
82,660
|
|
|
68,185
|
|
Accrued
benefit cost
|
|
$
|
(327,337
|
)
|
|
(243,463
|
)
|
|
(234,856
|
)
|
In
accordance with SFAS 158, the unamortized prior service credit ($8.8 million
as
of December 31, 2006) and unrecognized net actuarial loss ($78.4 million
as of
December 31, 2006) components have been reflected as a $69.6 million net
reduction ($40.1 million after-tax) to accumulated other comprehensive loss
within stockholders’ equity. The estimated amount of amortization expense
(income) of the above unrecognized items that will be amortized from accumulated
other comprehensive loss and reflected as a component of net periodic pension
cost during 2007 are (i) ($2.0 million) for the prior service credit and
(ii)
$3.2 million for the net actuarial loss. See Note 1 for additional
information.
Assumptions
used in accounting for postretirement benefits as of December 31, 2006 and
2005
were:
|
|
2006
|
|
2005
|
|
Determination
of benefit obligation
|
|
|
|
|
|
Discount
rate
|
|
|
5.75
|
%
|
|
5.5
|
|
Healthcare
cost increase trend rates (Medical/Prescription Drug)
|
|
|
|
|
|
|
|
Following
year
|
|
|
8.0/11.0
|
%
|
|
9.0/14.0
|
|
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
|
|
|
2010/2013
|
|
|
2010/2015
|
|
|
|
|
|
|
|
|
|
Determination
of benefit cost
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.50
|
%
|
|
5.75
|
|
Expected
return on plan assets
|
|
|
8.25
|
%
|
|
8.25
|
|
We
employ
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. We measure and monitor investment
risk
on an ongoing basis through annual liability measurements, periodic asset
studies and periodic portfolio reviews.
Our
postretirement benefit plan weighted-average asset allocations at December
31,
2006 and 2005 by asset category are as follows:
|
|
2006
|
|
2005
|
|
Equity
securities
|
|
|
60.1
|
%
|
|
60.2
|
|
Debt
securities
|
|
|
27.9
|
|
|
31.4
|
|
Other
|
|
|
12.0
|
|
|
8.4
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
|
In
determining the expected return on plan assets, we study historical markets
and
apply the widely-accepted capital market principle that assets with higher
volatility and risk generate a greater return over the long term. We evaluate
current market factors such as inflation and interest rates before determining
long-term capital market assumptions. We also review peer data and historical
returns 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
Point Increase
|
|
1-Percentage
Point Decrease
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Effect
on annual total of service and interest cost components
|
|
$
|
243
|
|
|
(312
|
)
|
Effect
on postretirement benefit obligation
|
|
$
|
3,775
|
|
|
(4,729
|
)
|
We
expect
to contribute approximately $16.7 million to our postretirement benefit plan
in
2007.
Our
estimated future projected benefit payments under our postretirement benefit
plan are as follows:
Year
|
|
Before
Medicare
Subsidy
|
|
Medicare
Subsidy
|
|
Net
of
Medicare
Subsidy
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
18,067
|
|
|
(1,327
|
)
|
|
16,740
|
|
2008
|
|
$
|
20,120
|
|
|
(1,576
|
)
|
|
18,544
|
|
2009
|
|
$
|
22,242
|
|
|
(1,814
|
)
|
|
20,428
|
|
2010
|
|
$
|
24,393
|
|
|
(1,801
|
)
|
|
22,592
|
|
2011
|
|
$
|
26,152
|
|
|
(1,533
|
)
|
|
24,619
|
|
2012-2016
|
|
$
|
141,920
|
|
|
(2,781
|
)
|
|
139,139
|
|
(11)
|
DEFINED
BENEFIT AND OTHER RETIREMENT PLANS
|
We
sponsor defined benefit pension plans for substantially all employees. We
also
sponsor a Supplemental Executive Retirement Plan to provide certain officers
with supplemental retirement, death and disability benefits. We use a December
31 measurement date for all our plans.
The
following is a reconciliation of the beginning and ending balances for the
aggregate benefit obligation and the plan assets for our above-referenced
defined benefit plans.
December
31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
460,599
|
|
|
418,630
|
|
|
390,833
|
|
Service
cost
|
|
|
17,679
|
|
|
15,332
|
|
|
14,175
|
|
Interest
cost
|
|
|
25,935
|
|
|
23,992
|
|
|
23,156
|
|
Plan
amendments
|
|
|
(3,827
|
)
|
|
31
|
|
|
428
|
|
Actuarial
loss
|
|
|
6,789
|
|
|
28,016
|
|
|
16,304
|
|
Settlements
|
|
|
(13,232
|
)
|
|
-
|
|
|
-
|
|
Benefits
paid
|
|
|
(19,641
|
)
|
|
(25,402
|
)
|
|
(26,266
|
)
|
Benefit
obligation at end of year
|
|
$
|
474,302
|
|
|
460,599
|
|
|
418,630
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
407,367
|
|
|
363,981
|
|
|
348,308
|
|
Return
on plan assets
|
|
|
46,297
|
|
|
25,453
|
|
|
35,892
|
|
Employer
contributions
|
|
|
31,503
|
|
|
43,335
|
|
|
6,047
|
|
Benefits
paid
|
|
|
(32,874
|
)
|
|
(25,402
|
)
|
|
(26,266
|
)
|
Fair
value of plan assets at end of year
|
|
$
|
452,293
|
|
|
407,367
|
|
|
363,981
|
|
Net
periodic pension expense for 2006, 2005 and 2004 included the following
components:
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
17,679
|
|
|
15,332
|
|
|
14,175
|
|
Interest
cost
|
|
|
25,935
|
|
|
23,992
|
|
|
23,156
|
|
Expected
return on plan assets
|
|
|
(32,706
|
)
|
|
(29,225
|
)
|
|
(28,195
|
)
|
Settlements
|
|
|
3,344
|
|
|
-
|
|
|
1,093
|
|
Recognized
net losses
|
|
|
9,670
|
|
|
6,328
|
|
|
5,525
|
|
Net
amortization and deferral
|
|
|
19
|
|
|
289
|
|
|
279
|
|
Net
periodic pension expense
|
|
$
|
23,941
|
|
|
16,716
|
|
|
16,033
|
|
The
following table sets forth the combined plans’ funded status and amounts
recognized in our consolidated balance sheet at December 31, 2006, 2005 and
2004.
December
31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Benefit
obligation
|
|
$
|
(474,302
|
)
|
|
(460,599
|
)
|
|
(418,630
|
)
|
Fair
value of plan assets
|
|
|
452,293
|
|
|
407,367
|
|
|
363,981
|
|
Unrecognized
transition asset
|
|
|
-
|
|
|
(396
|
)
|
|
(648
|
)
|
Unamortized
prior service cost
|
|
|
-
|
|
|
3,109
|
|
|
3,618
|
|
Unrecognized
net actuarial loss
|
|
|
-
|
|
|
123,879
|
|
|
98,479
|
|
Net
amount recognized
|
|
$
|
(22,009
|
)
|
|
73,360
|
|
|
46,800
|
|
In
accordance with SFAS 158, the unrecognized transition asset ($144,000 as
of
December 31, 2006), unamortized prior service credit ($989,000 as of December
31, 2006) and unrecognized net actuarial loss ($104.1 million as of December
31,
2006) components have been reflected as a $102.9 million net reduction ($63.4
million after-tax) to accumulated other comprehensive loss within stockholders’
equity. The estimated amount of amortization expense (income) of the above
unrecognized amounts that will be amortized from accumulated other comprehensive
loss and reflected as a component of net periodic pension cost for 2007 are
(i)
($144,000) for the transition asset; (ii) $165,000 for the prior service
cost
and (iii) $5.9 million for the net actuarial loss.
Amounts
recognized on the balance sheet consist of:
December
31,
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Pension
asset (reflected in Other Assets)*
|
|
$
|
16,187
|
|
|
73,360
|
|
Accrued
expenses and other current liabilities*
|
|
|
(1,412
|
)
|
|
-
|
|
Other
deferred credits*
|
|
|
(36,784
|
)
|
|
-
|
|
Additional
minimum pension liability (reflected in Deferred Credits and Other
Liabilities)
|
|
|
-
|
|
|
(11,662
|
)
|
Accumulated
Other Comprehensive Loss
|
|
|
-
|
|
|
11,662
|
|
Net
amount recognized
|
|
$
|
(22,009
|
)
|
|
73,360
|
|
*
For
2006, in accordance with SFAS 158, those plans that are overfunded are reflected
as assets; those plans that are underfunded are reflected as
liabilities.
Our
aggregate accumulated benefit obligation as of December 31, 2006 and 2005
was
$407.2 million and $392.3 million, respectively.
Assumptions
used in accounting for the pension plans as of December 2006 and 2005
were:
|
|
2006
|
|
2005
|
|
Determination
of benefit obligation
|
|
|
|
|
|
Discount
rate
|
|
|
5.8
|
%
|
|
5.5
|
|
Weighted
average rate of compensation increase
|
|
|
4.0
|
%
|
|
4.0
|
|
|
|
|
|
|
|
|
|
Determination
of benefit cost
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.5
|
%
|
|
5.75
|
|
Weighted
average rate of compensation increase
|
|
|
4.0
|
%
|
|
4.0
|
|
Expected
long-term rate of return on assets
|
|
|
8.25
|
%
|
|
8.25
|
|
We
employ
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. We measure and monitor investment
risk
on an ongoing basis through annual liability measurements, periodic asset
studies and periodic portfolio reviews.
Our
pension plans weighted-average asset allocations at December 31, 2006 and
2005
by asset category are as follows:
|
|
2006
|
|
2005
|
|
Equity
securities
|
|
|
71.7
|
%
|
|
69.5
|
|
Debt
securities
|
|
|
25.8
|
|
|
28.0
|
|
Other
|
|
|
2.5
|
|
|
2.5
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
|
In
determining the expected return on plan assets, we study historical markets
and
apply the widely-accepted capital market principle that assets with higher
volatility and risk generate a greater return over the long term. We evaluate
current market factors such as inflation and interest rates before determining
long-term capital market assumptions. We also review peer data and historical
returns to check for reasonableness.
The
amount of the 2007 contribution will be determined based on a number of factors,
including the results of the 2007 actuarial valuation report. At this time,
the
amount of the 2007 contribution is not known.
Our
estimated future projected benefit payments under our defined benefit pension
plans are as follows: 2007 - $24.3 million; 2008 - $27.1 million; 2009 -
$29.0
million; 2010 - $31.4 million; 2011 - $33.9 million; and 2012-2016 - $199.5
million.
Through
December 31, 2006, we also sponsored an Employee Stock Ownership Plan (“ESOP”)
which covers most employees with one year of service and is funded by our
contributions determined annually by the Board of Directors. Our expense
related
to the ESOP during 2006, 2005 and 2004 was $7.9 million, $7.3 million, and
$8.1
million, respectively. At December 31, 2006, the ESOP owned an aggregate
of 3.4
million shares of CenturyTel common stock. After 2006, our contribution to
the
ESOP will be discontinued.
We
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. Our matching contributions to the 401(k) Plans were $8.6 million
in 2006, $8.5 million in 2005 and $9.1 million in 2004. Our matching
contribution to the 401(k) Plans will increase in 2007, but such increase
will
be less than the reduction from the discontinuance of the ESOP contributions
mentioned above.
Income
tax expense included in the Consolidated Statements of Income for the years
ended December 31, 2006, 2005 and 2004 was as follows:
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
Federal
|
|
|
|
|
|
|
|
Current
|
|
$
|
146,201
|
|
|
139,836
|
|
|
121,374
|
|
Deferred
|
|
|
37,687
|
|
|
35,499
|
|
|
59,973
|
|
State
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
25,236
|
|
|
(6,075
|
)
|
|
14,380
|
|
Deferred
|
|
|
11,998
|
|
|
34,031
|
|
|
14,401
|
|
|
|
$
|
221,122
|
|
|
203,291
|
|
|
210,128
|
|
Income
tax expense was allocated as follows:
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Income
tax expense in the consolidated statements of income
|
|
$
|
221,122
|
|
|
203,291
|
|
|
210,128
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense for tax purposes in excess of amounts recognized for financial
reporting purposes
|
|
|
(12,034
|
)
|
|
(6,261
|
)
|
|
(3,244
|
)
|
Tax
effect of the change in accumulated other comprehensive income
(loss)
|
|
|
(63,837
|
)
|
|
(801
|
)
|
|
(5,195
|
)
|
The
following is a reconciliation from the statutory federal income tax rate
to our
effective income tax rate:
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(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
|
|
|
4.1
|
|
|
3.4
|
|
|
3.4
|
|
Other,
net
|
|
|
(1.7
|
)
|
|
(.6
|
)
|
|
-
|
|
Effective
income tax rate
|
|
|
37.4
|
%
|
|
37.8
|
|
|
38.4
|
|
The
tax
effects of temporary differences that gave rise to significant portions of
the
deferred tax assets and deferred tax liabilities at December 31, 2006 and
2005
were as follows:
December
31,
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
Deferred
tax assets
|
|
|
|
|
|
Postretirement
and pension benefit costs
|
|
$
|
131,890
|
|
|
65,318
|
|
Net
state operating loss carryforwards
|
|
|
61,875
|
|
|
56,506
|
|
Other
employee benefits
|
|
|
24,907
|
|
|
21,176
|
|
Other
|
|
|
45,628
|
|
|
42,657
|
|
Gross
deferred tax assets
|
|
|
264,300
|
|
|
185,657
|
|
Less
valuation allowance
|
|
|
(61,049
|
)
|
|
(54,412
|
)
|
Net
deferred tax assets
|
|
|
203,251
|
|
|
131,245
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
Property,
plant and equipment, primarily due to depreciation
differences
|
|
|
(334,521
|
)
|
|
(334,011
|
)
|
Goodwill
|
|
|
(503,126
|
)
|
|
(447,850
|
)
|
Other
|
|
|
(27,010
|
)
|
|
(19,804
|
)
|
Gross
deferred tax liabilities
|
|
|
(864,657
|
)
|
|
(801,665
|
)
|
Net
deferred tax liability
|
|
$
|
(661,406
|
)
|
|
(670,420
|
)
|
Of
the
$661.4 million net deferred tax liability as of December 31, 2006, approximately
$673.1 million is reflected as a net long-term liability (in “Other deferred
credits”) and approximately $11.7 million is reflected as a net current deferred
tax asset (in “Other current assets”).
We
establish valuation allowances when necessary to reduce the deferred tax
assets
to amounts we expect to realize. As of December 31, 2006, we had available
tax
benefits associated with net state operating loss carryforwards, which expire
through 2026, of $61.9 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. We consider
our scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. As a result
of
such assessment, we reserved $61.0 million through the valuation allowance
as of
December 31, 2006 as it is more likely than not that this amount of net
operating loss carryforwards will not be utilized prior to expiration. Income
tax expense was reduced by approximately $6.4 million in 2006 due to the
resolution of various income tax audit issues. Income tax expense for 2005
was
increased by $19.5 million as a result of increasing the valuation allowance
related to net state operating loss carryforwards. This increase was primarily
due to changes in state income tax laws and other factors which impacted
the
projections of future taxable income.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations:
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
|
|
Income
(Numerator):
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
370,027
|
|
|
334,479
|
|
|
337,244
|
|
Dividends
applicable to preferred stock
|
|
|
(380
|
)
|
|
(396
|
)
|
|
(399
|
)
|
Net
income applicable to common stock for computing basic earnings
per
share
|
|
|
369,647
|
|
|
334,083
|
|
|
336,845
|
|
Interest
on convertible debentures, net of tax
|
|
|
4,828
|
|
|
4,875
|
|
|
4,829
|
|
Dividends
applicable to preferred stock
|
|
|
380
|
|
|
396
|
|
|
399
|
|
Net
income as adjusted for purposes of computing diluted
earnings per share
|
|
$
|
374,855
|
|
|
339,354
|
|
|
342,073
|
|
Shares
(Denominator):
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
during period
|
|
|
117,363
|
|
|
131,044
|
|
|
137,225
|
|
Nonvested
restricted stock
|
|
|
(692
|
)
|
|
(203
|
)
|
|
-
|
|
Employee
Stock Ownership Plan shares not committed
to be released
|
|
|
-
|
|
|
-
|
|
|
(10
|
)
|
Weighted
average number of shares outstanding during period for computing
basic
earnings per share
|
|
|
116,671
|
|
|
130,841
|
|
|
137,215
|
|
Incremental
common shares attributable to dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable under convertible securities
|
|
|
4,493
|
|
|
4,511
|
|
|
4,514
|
|
Shares
issuable upon settlement of accelerated share repurchase
agreements
|
|
|
365
|
|
|
378
|
|
|
-
|
|
Shares
issuable under incentive compensation plans
|
|
|
700
|
|
|
357
|
|
|
415
|
|
Number
of shares as adjusted for purposes of computing
diluted earnings per share
|
|
|
122,229
|
|
|
136,087
|
|
|
142,144
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
3.17
|
|
|
2.55
|
|
|
2.45
|
|
Diluted
earnings per share
|
|
$
|
3.07
|
|
|
2.49
|
|
|
2.41
|
|
In
connection with calculating our diluted earnings per share for our accelerated
share repurchase program discussed in Note 9, we assumed the accelerated
share
repurchase market price adjustment would be settled through our issuance
of
additional shares of common stock, which was allowed (at our discretion)
in the
agreement. Accordingly, the estimated shares issuable based on the fair value
of
the forward contract was included in the weighted average shares outstanding
for
the computation of diluted earnings per share.
The
weighted average number of shares of common stock subject to issuance under
outstanding options 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 1.0 million for 2006, 1.8 million for
2005
and 2.4 million for 2004.
(14)
|
STOCK
COMPENSATION PROGRAMS
|
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS
123(R) requires us to measure our cost of awarding employees with equity
instruments based upon the fair value of the award on the grant date. Such
cost
will be recognized as compensation expense over the period during which the
employee is required to provide service in exchange for the award. Compensation
cost is also recognized over the applicable remaining vesting period for
any
outstanding options that were not fully vested as of January 1, 2006. We
did not
have any unvested outstanding options as of January 1, 2006 since our Board
of
Directors accelerated the vesting of all unvested options effective as of
December 31, 2005, as described below. We elected the modified prospective
transition method as permitted by SFAS 123(R); accordingly, we did not restate
prior period results.
We
currently maintain programs which allow the Board of Directors, through its
Compensation Committee, to grant incentives to certain employees and our
outside
directors in any one or a combination of several forms, including incentive
and
non-qualified stock options; stock appreciation rights; restricted stock;
and
performance shares. As of December 31, 2006, we had reserved approximately
7.7
million shares of common stock which may be issued in connection with incentive
awards made in the future under our current incentive programs. We also offer
an
Employee Stock Purchase Plan whereby employees can purchase our common stock
at
a 15% discount based on the lower of the beginning or ending stock price
during
recurring six-month periods stipulated in such program.
As
of
December 31, 2005, we had approximately 6.0 million options outstanding from
prior grants, all of which were issued with exercise prices either equal
to or
exceeding the then-current market price. All of these options were exercisable
as a result of actions taken by our Board of Directors in December 2005 to
accelerate the vesting of all unvested options outstanding, effective as
of
December 31, 2005, in order to eliminate the recognition of compensation
expense
which otherwise would have been required upon the effectiveness of SFAS
123(R).
During
2006 we granted 1,007,175 stock options with exercise prices at market value.
All of these options expire ten years after the date of grant and have a
three-year vesting period. The weighted average fair value of each option
was
estimated as of the date of grant to be $12.75 using a Black-Scholes option
pricing model using the following assumptions: dividend yield - .7%; expected
volatility - 30%; weighted average risk free interest rate - 4.65% (rates
ranged
from 4.28% to 5.22%); and expected term - 7 years (executive officers) and
5
years (all other employees).
During
2005 we granted 1,015,025 stock options with exercise prices at market value.
The weighted average fair value of each of the 2005 options was estimated
as of
the date of grant to be $12.68 using an option-pricing model with the following
assumptions: dividend yield - .7%; expected volatility - 30%; weighted average
risk-free interest rate - 4.2%; and expected option life - seven
years.
During
2004 we granted 952,975 stock options with exercise prices at market value.
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.
The
expected volatility was based on the historical volatility of our common
stock
over the 7- and 5- year terms mentioned above. The expected term was determined
based on the historical exercise and forfeiture rates for similar
grants.
Stock
option transactions during 2006, 2005 and 2004 were as follows:
|
|
Number
of
options
|
|
Average
price
|
|
Remaining
contractual term
(in years)
|
|
Aggregate
intrinsic value
|
|
Outstanding
December 31, 2003
|
|
|
6,734,572
|
|
$
|
28.14
|
|
|
|
|
|
|
|
Granted
|
|
|
952,975
|
|
|
22.96
|
|
|
|
|
|
|
|
Exercised
|
|
|
(827,486
|
)
|
|
28.22
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(146,503
|
)
|
|
27.90
|
|
|
|
|
|
|
|
Outstanding
December 31, 2004
|
|
|
6,713,558
|
|
$
|
28.79
|
|
|
|
|
|
|
|
Granted
|
|
|
1,015,025
|
|
|
25.04
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,664,625
|
)
|
|
33.69
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(68,500
|
)
|
|
31.40
|
|
|
|
|
|
|
|
Outstanding
December 31, 2005
|
|
|
5,995,458
|
|
$
|
30.63
|
|
|
|
|
|
|
|
Granted
|
|
|
1,007,175
|
|
|
35.98
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,047,918
|
)
|
|
29.15
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(58,916
|
)
|
|
32.54
|
|
|
|
|
|
|
|
Outstanding
December 31, 2006
|
|
|
3,895,799
|
|
$
|
33.14
|
|
|
6.5
|
|
$
|
40,967,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
December 31, 2006
|
|
|
2,918,724
|
|
$
|
32.20
|
|
|
5.7
|
|
$
|
33,452,000
|
|
In
addition, during 2006, we issued 293,943 shares of restricted stock to certain
employees and our outside directors at a weighted-average price of $36.02
per
share. During 2005, we issued 286,123 shares of restricted stock at a
weighted-average price of $33.47 per share, and during 2004, we issued 227,075
shares of restricted stock at a weighted-average price of $27.63 per share.
Such
restricted stock vests over a five-year period (for employees) and a three-year
period (for outside directors). Nonvested restricted stock transactions during
2006 were as follows:
|
|
Number
of
shares
|
|
Average
grant date
fair value
|
|
Nonvested
at January 1, 2006
|
|
|
511,919
|
|
$
|
30.92
|
|
Granted
|
|
|
293,943
|
|
|
36.02
|
|
Vested
|
|
|
(80,641
|
)
|
|
32.58
|
|
Forfeited
|
|
|
(13,133
|
)
|
|
30.70
|
|
Nonvested
at December 31, 2006
|
|
|
712,088
|
|
$
|
32.84
|
|
The
total
compensation cost for share-based payment arrangements in 2006, 2005 and
2004
was $11.9 million, $4.7 million and $1.3 million, respectively. We recognized
a
tax benefit related to such arrangements of approximately $4.5 million in
2006,
$1.8 million in 2005 and $491,000 in 2004. As of December 31, 2006, there
was
$22.0 million of total unrecognized compensation cost related to the share-based
payment arrangements, which is expected to be recognized over a weighted-average
period of 3.0 years.
We
received net cash proceeds of $88.8 million during 2006 in connection with
option exercises. The total intrinsic value of options exercised (the amount
by
which the market price of the stock on the date of exercise exceeded the
market
price of the stock on the date of grant) was $31.0 million during 2006, $16.3
million during 2005 and $8.6 million during 2004. The excess tax benefit
realized from stock options exercised and restricted stock released during
2006
was $12.0 million. The total fair value of restricted stock that vested during
2006, 2005 and 2004 was $2.6 million, $208,000 and $1.3 million, respectively.
Prior
to
January 1, 2006, we accounted 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, we did not recognize compensation
cost
in connection with issuing stock options prior to January 1, 2006. If
compensation cost for our options had been determined consistent with SFAS
123(R), our net income and earnings per share on a pro forma basis for 2005
and
2004 would have been as follows:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
334,479
|
|
|
337,244
|
|
Add:
Stock-based compensation expense reflected in net income, net of
tax
|
|
|
96
|
|
|
-
|
|
Less:
Total stock-based compensation expense determined under fair value
based
method, net of tax
|
|
|
(12,537
|
)
|
|
(9,767
|
)
|
Pro
forma net income
|
|
$
|
322,038
|
|
|
327,477
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
2.55
|
|
|
2.45
|
|
Pro
forma
|
|
$
|
2.46
|
|
|
2.38
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
2.49
|
|
|
2.41
|
|
Pro
forma
|
|
$
|
2.40
|
|
|
2.34
|
|
(15)
|
GAIN
ON ASSET DISPOSITIONS
|
In
April
2006, upon dissolution of the Rural Telephone Bank (“RTB”), we received $122.8
million in cash for redemption of our investment in stock of the RTB and
recorded a pre-tax gain of approximately $117.8 million in the second quarter
of
2006 related to this transaction. In May 2006, we sold the assets of our
local
exchange operations in Arizona for approximately $5.9 million cash and recorded
a pre-tax gain of approximately $866,000 in the second quarter of 2006. Such
gains are included in “Other income (expense)” on our Consolidated Statements of
Income.
(16)
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES
|
The
amount of interest actually paid, net of amounts capitalized of $1.9 million,
$2.8 million and $762,000 during 2006, 2005 and 2004, respectively, was $191.9
million, $194.8 million and $207.2 million during 2006, 2005 and 2004,
respectively. Income taxes paid were $212.4 million in 2006, $88.8 million
in
2005 and $129.9 million in 2004. Income tax refunds totaled $3.0 million
in
2006, $4.9 million in 2005 and $8.9 million in 2004.
We
have
consummated the acquisitions of various operations, along with certain other
assets, during the three years ended December 31, 2006. In connection with
these
acquisitions, the following assets were acquired and liabilities assumed:
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
-
|
|
|
66,450
|
|
|
-
|
|
Goodwill
|
|
|
-
|
|
|
-
|
|
|
5,274
|
|
Deferred
credits and other liabilities
|
|
|
-
|
|
|
-
|
|
|
(3,381
|
)
|
Other
assets and liabilities, excluding cash
and cash equivalents
|
|
|
5,222
|
|
|
9,003
|
|
|
107
|
|
Decrease
in cash due to acquisitions
|
|
$
|
5,222
|
|
|
75,453
|
|
|
2,000
|
|
(17)
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The
following table presents the carrying amounts and estimated fair values of
certain of our financial instruments at December 31, 2006 and 2005.
|
|
Carrying
Amount
|
|
Fair
value
|
|
|
|
(Dollars
in thousands)
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets
|
|
$
|
110,134
|
|
|
110,134
|
(2)
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
Long-term
debt (including current maturities)
|
|
$
|
2,567,864
|
|
|
2,522,347
|
(1)
|
Interest
rate swaps
|
|
$
|
20,593
|
|
|
20,593
|
(2)
|
Other
|
|
$
|
51,614
|
|
|
51,614
|
(2)
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets
|
|
$
|
110,912
|
|
|
228,651
|
(2)
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
Long-term
debt (including current maturities)
|
|
$
|
2,652,806
|
|
|
2,648,843
|
(1)
|
Interest
rate swaps
|
|
$
|
17,645
|
|
|
17,645
|
(2)
|
Other
|
|
$
|
48,917
|
|
|
48,917
|
(2)
|
(1)
|
Fair
value was estimated by discounting the scheduled payment streams
to
present value based upon rates currently available to us for similar
debt.
|
(2)
|
Fair
value was estimated by us to approximate carrying value or is based
on
current market information (see below for further
information).
|
Included
in Financial Assets at December 31, 2005 was our investment in stock of the
RTB.
The carrying value of our investment in RTB stock ($5.1 million) was reflected
on the balance sheet on the cost basis and did not include the cumulative
stock
dividends earned. In 2006, upon dissolution of the RTB, we received $122.8
million in cash for redemption of our investment in stock of the RTB and
recorded a pre-tax gain of approximately $117.8 million in 2006 related to
this
transaction.
We
believe the carrying amount of cash and cash equivalents, accounts receivable,
short-term debt, 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.
We
are an
integrated communications company engaged primarily in providing an array
of
communications services to our customers, including local exchange, long
distance, Internet access and broadband services. We strive to maintain our
customer relationships by, among other things, bundling our service offerings
to
provide our customers with a complete offering of integrated communications
services. As a result of increased bundling of our local exchange and long
distance service offerings, beginning in 2006, we have combined the revenues
of
such offerings into a category entitled “Voice”. Prior periods have been
restated to insure comparability.
Our
operating revenues for our products and services include the following
components:
Year
ended December 31,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$
|
860,741
|
|
|
892,272
|
|
|
903,025
|
|
Network
access
|
|
|
878,702
|
|
|
959,838
|
|
|
966,011
|
|
Data
|
|
|
351,495
|
|
|
318,770
|
|
|
275,777
|
|
Fiber
transport and CLEC
|
|
|
149,088
|
|
|
115,454
|
|
|
74,409
|
|
Other
|
|
|
207,704
|
|
|
192,918
|
|
|
188,150
|
|
Total
operating revenues
|
|
$
|
2,447,730
|
|
|
2,479,252
|
|
|
2,407,372
|
|
For
a
description of each of the sources of revenues, see Management’s Discussion and
Analysis of Financial Condition 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.
(19)
|
COMMITMENTS
AND CONTINGENCIES
|
Construction
expenditures and investments in vehicles, buildings and equipment during
2007
are estimated to be $325 million. We generally do not enter into firm, committed
contracts for such activities.
In
Barbrasue
Beattie and James Sovis, on behalf of themselves and all others similarly
situated, v. CenturyTel, Inc.,
filed
on October 28, 2002, in the United States District Court for the Eastern
District of Michigan (Case No. 02-10277), the plaintiffs allege that we unjustly
and unreasonably billed customers for inside wire maintenance services, and
seek
unspecified monetary damages and injunctive relief under various legal theories
on behalf of a purported class of over two million customers in our telephone
markets. On March 10, 2006, the Court certified a class of plaintiffs and
issued
a ruling that the billing descriptions we used for these services during
an
approximately 18-month period between October 2000 and May 2002 were legally
insufficient. We have appealed this class certification decision, although
we
cannot predict the length of time before this appeal will be adjudicated.
Our
preliminary analysis indicates that we billed less than $9 million for inside
wire maintenance services under the billing descriptions and time periods
specified in the District Court ruling described above. Should other
billing descriptions be determined to be inadequate or if claims are allowed
for
additional time periods, the amount of our potential exposure could increase
significantly. The Court’s order does not specify the award of damages, the
scope and amounts of which, if any, remain subject to additional
fact-finding and resolution of what we believe are valid defenses to plaintiff's
claims. Accordingly, we cannot reasonably estimate the amount or range of
possible loss at this time. However, considering the one-time nature of any
adverse result, we do not believe that the ultimate outcome of this
litigation will have a material adverse effect on our financial position
or
on-going 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 our telephone subsidiaries file interstate
tariffs with the FCC using this streamlined filing approach. Since July 2004,
we
have recognized billings from our tariffs as revenue since we believe such
tariffs are “deemed lawful”. For those billings from tariffs prior to July 2004,
we initially recorded as a liability our earnings in excess of the authorized
rate of return, and may thereafter recognize as revenue some or all of these
amounts at the end of the applicable settlement period or as our legal
entitlement thereto becomes certain. As of December 31, 2006, the amount
of our
earnings in excess of the authorized rate of return reflected as a liability
on
the balance sheet for the 2003/2004 monitoring period aggregated approximately
$43 million. The settlement period related to the 2003/2004 monitoring period
lapses on September 30, 2007.
As
discussed above in Note 15, we received approximately $122.8 million in cash
from the dissolution of the Rural Telephone Bank (“RTB”). Some portion of the
gain recognized in connection with the receipt of these proceeds, while not
estimable at this time, is currently or may be subject to review by regulatory
authorities which may result in us recording a regulatory
liability.
In
March
2006, we filed a complaint against AT&T Corp. and AT&T Communications,
Inc. (collectively, “AT&T”) in the United States District Court for the
District of New Jersey. This lawsuit currently includes 24 other local exchange
company plaintiffs. Our complaint seeks recovery from AT&T of unpaid and
underpaid access charges for calls made using AT&T’s prepaid calling cards
and calls that used Internet Protocol (“IP”) for a portion of their
transmission. We believe AT&T improperly classified certain of the prepaid
calling card calls as interstate traffic rather than intrastate traffic,
thereby
depriving us of the higher access rates associated with intrastate calls.
We
also believe that AT&T improperly classified the calls that used IP for a
portion of their transmission as local calls, thereby depriving us of access
rates entirely. AT&T has filed a counterclaim against us, asserting that we
improperly billed AT&T terminating intrastate access charges on certain
wireless roaming traffic. At this time, the likely outcome of these cases
cannot
be predicted, nor can a reasonable estimate of the amount of recovery or
payment, if any, be made. Accordingly, we have not recognized any amounts
with
respect to these matters in our consolidated financial statements.
From
time
to time, we are involved in other proceedings incidental to our 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, we do not believe that the ultimate resolution of these other
proceedings, after considering available insurance coverage, will have a
material adverse effect on our financial position, results of operations
or cash
flows.
*
* * * *
* * * *
CENTURYTEL,
INC.
Consolidated
Quarterly Income Statement Information
(Unaudited)
|
|
First
quarter
|
|
Second
quarter
|
|
Third
quarter
|
|
Fourth
quarter
|
|
|
|
(Dollars
in thousands, except per share amounts)
|
|
2006
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
611,291
|
|
|
608,907
|
|
|
619,837
|
|
|
607,695
|
|
Operating
income
|
|
$
|
157,924
|
|
|
164,993
|
|
|
168,942
|
|
|
173,679
|
|
Net
income
|
|
$
|
69,260
|
|
|
152,210
|
|
|
76,324
|
|
|
72,233
|
|
Basic
earnings per share
|
|
$
|
.57
|
|
|
1.32
|
|
|
.66
|
|
|
.63
|
|
Diluted
earnings per share
|
|
$
|
.55
|
|
|
1.26
|
|
|
.64
|
|
|
.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
595,282
|
|
|
606,413
|
|
|
657,085
|
|
|
620,472
|
|
Operating
income
|
|
$
|
176,860
|
|
|
185,882
|
|
|
201,242
|
|
|
172,419
|
|
Net
income
|
|
$
|
79,616
|
|
|
85,118
|
|
|
91,411
|
|
|
78,334
|
|
Basic
earnings per share
|
|
$
|
.60
|
|
|
.65
|
|
|
.70
|
|
|
.60
|
|
Diluted
earnings per share
|
|
$
|
.59
|
|
|
.64
|
|
|
.68
|
|
|
.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The
first, second and third quarters of 2006 have been adjusted to reflect the
application of SAB 108 (see Note 1 for additional information).
The
fourth quarter of 2006 included an $11.7 million pre-tax charge related to
the
impairment of certain non-operating investments.
The
second quarter of 2006 included a $117.8 million pre-tax gain recorded upon
the
redemption of Rural Telephone Bank stock and a $6.4 million net tax benefit
due
to the resolution of various income tax audit issues.
The
fourth quarter of 2005 included a $6.3 million pre-tax charge related to
the
impairment of a non-operating investment.
The
third
quarter of 2005 included the following amounts presented on a pre-tax basis:
(i)
the recognition of $35.9 million of revenue as the settlement period related
to
the 2001/2002 monitoring period lapsed; (ii) $5.8 million of expenses related
to
Hurricanes Katrina and Rita; (iii) a $9.9 million charge related to the
impairment of a non-operating investment; and (iv) a $3.5 million gain on
the
sale of a separate non-operating investment.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
None.
Evaluation
of Disclosure Controls and Procedures.
We
maintain disclosure controls and procedures designed to provide reasonable
assurances that information required to be disclosed by us in the reports
we
file under the Securities Exchange Act of 1934 is timely recorded, processed,
summarized and reported as required. Our Chief Executive Officer, Glen F.
Post,
III, and our Chief Financial Officer, R. Stewart Ewing, Jr., have evaluated
our
disclosure controls and procedures as of December 31, 2006. Based on the
evaluation, Messrs. Post and Ewing concluded that our 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 our 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 our 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.
We
incorporate by reference into this Item 9A the reports appearing at the
forefront of Item 8, “Financial Statements and Supplementary Data”.
On
February 26, 2007, the Compensation Committee of the Board granted equity
awards
and took other related actions, including establishing for senior management
annual bonus targets for 2007 based upon attaining
certain specified levels of operating cash flow and end-user
revenues.
PART
III
|
Directors
and Executive Officers of the
Registrant
|
The
name,
age and office(s) held by each of our 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
|
|
54
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
|
|
|
|
|
Karen
A. Puckett
|
|
46
|
|
President
and Chief Operating Officer
|
|
|
|
|
|
R.
Stewart Ewing, Jr.
|
|
55
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
|
|
|
David
D. Cole
|
|
49
|
|
Senior
Vice President - Operations Support
|
|
|
|
|
|
Stacey
W. Goff
|
|
41
|
|
Senior
Vice President, General Counsel and Secretary
|
|
|
|
|
|
Michael
Maslowski
|
|
59
|
|
Senior
Vice President and Chief Information
Officer
|
Each
of
our executive officers has served as an officer of CenturyTel and one or
more of
its subsidiaries in varying capacities for more than the past five years.
Prior
to
being elected to serve as our President and Chief Operating Officer in August
2002, Ms. Puckett served as our Executive Vice President and Chief Operating
Officer from July 2000 through August 2002.
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
our definitive proxy statement relating to our 2007 annual meeting of
stockholders (the "Proxy Statement"), which Proxy Statement will be filed
pursuant to Regulation 14A within the first 120 days of 2007.
The
information required by Item 11 is incorporated by reference to the Proxy
Statement.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
The
following table provides information about shares of CenturyTel common stock
authorized for issuance under our existing equity compensation plans as of
December 31, 2006.
Plan
category
|
|
(a)
Number
of securities to be issued upon conversion of
outstanding options
|
|
(b)
Weighted-average
exercise price of outstanding
options
|
|
(c)
Number
of securities remaining available for future issuance under plans
(excluding securities reflected in column
(a))
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
3,895,799
|
|
$
|
33.14
|
|
|
3,773,251
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan approved by shareholders
|
|
|
-
|
|
|
-
|
|
|
4,552,448
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security
holders
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
3,895,799
|
|
$
|
33.14
|
|
|
8,325,699
|
|
The
balance of the information required by Item 12 is incorporated by reference
to
the Proxy Statement.
|
Certain
Relationships and Related
Transactions
|
The
information required by Item 13 is incorporated by reference to the Proxy
Statement.
|
Principal
Accountant Fees and
Services
|
The
information required by Item 14 is incorporated by reference to the Proxy
Statement.
PART
IV
|
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, 2006, 2005
and
2004
|
|
Consolidated
Statements of Comprehensive Income for the years ended December
31, 2006,
2005 and 2004
|
|
Consolidated
Balance Sheets - December 31, 2006 and
2005
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006,
2005 and
2004
|
|
Consolidated
Statements of Stockholders' Equity for the years ended December
31, 2006,
2005 and 2004
|
|
Notes
to Consolidated Financial
Statements
|
|
Consolidated
Quarterly Income Statement Information
(unaudited)
|
|
(2)
|
The
attached Schedule II, Valuation and Qualifying Accounts, is the
only
applicable schedule that we are required to
file.
|
|
3.1
|
Amended
and Restated Articles of Incorporation, dated as of May 6, 1999
(incorporated by reference to Exhibit 3(i) to our Quarterly Report
on Form
10-Q for the quarter ended June 30,
1999).
|
|
3.2
|
Bylaws,
as amended through August 26, 2003 (incorporated by reference to
Exhibit
3.1 of our Current Report on Form 8-K dated August 29, 2003 and
filed on
September 2, 2003).
|
|
3.3
|
Corporate
Governance Guidelines, as amended through February 21, 2006 (incorporated
by reference to Exhibit 3.3 of our Annual Report on Form 10-K for
the year
ended December 31, 2005).
|
|
3.4
|
Charters
of Committees of Board of Directors
|
|
|
Charter
of the Audit Committee of the Board of Directors, as amended through
November 15, 2006, 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 our
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 our 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 our
Annual Report on Form 10-K for the year ended December 31,
2003).
|
|
4.1
|
Form
of common stock certificate (incorporated by reference to Exhibit
4.3 of
our Annual Report on Form 10-K for the year ended December 31,
2000).
|
|
4.2
|
Instruments
relating to our public senior debt
|
|
(a)
|
Indenture
dated as of March 31, 1994 between CenturyTel and Regions Bank
(formerly
First American Bank & Trust of Louisiana), as Trustee (incorporated by
reference to Exhibit 4.1 of our Registration Statement on Form
S-3,
Registration No. 33-52915).
|
|
(b)
|
Resolutions
designating the terms and conditions of CenturyTel’s 7.2% Senior Notes,
Series D, due 2025 (incorporated by reference to Exhibit 4.27 to
our
Annual Report on Form 10-K for the year ended December 31,
1995).
|
|
(c)
|
Resolutions
designating the terms and conditions of CenturyTel’s 6.30% Senior Notes,
Series F, due 2008; and 6.875% Debentures, Series G, due 2028,
(incorporated by reference to Exhibit 4.9 to our Annual Report
on Form
10-K for the year ended December 31,
1997).
|
|
(d)
|
Form
of 8.375% Senior Notes, Series H, Due 2010, issued October 19,
2000
(incorporated by reference to Exhibit 4.2 of our Quarterly Report
on Form
10-Q for the quarter ended September 30,
2000).
|
|
(e)
|
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 our Registration
Statement on Form S-3, File No.
333-84276).
|
|
(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 our Registration Statement on Form S-3, File No.
333-100481).
|
|
(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 our Registration Statement on Form S-4, File No.
333-100480).
|
|
(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 our 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)).
|
|
|
$750
Million Five-Year Revolving Credit Facility, dated December 14,
2006,
between CenturyTel and the lenders named therein, included elsewhere
herein.
|
|
4.4
|
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 our Quarterly Report
on Form
10-Q for the quarter ended September 30,
1998).
|
|
10.1
|
Qualified
Employee Benefit Plans (excluding several narrow-based qualified
plans
that cover union employees or other limited groups of
employees)
|
|
|
CenturyTel
Dollars & Sense 401(k) Plan and Trust, as amended and restated as of
December 31, 2006, included elsewhere
herein.
|
|
|
CenturyTel
Union 401(k) Plan and Trust, as amended and restated through December
31,
2006, included elsewhere
herein.
|
|
|
Amended
and Restated Retirement Plan, effective as of December 31, 2006,
included
elsewhere herein.
|
|
10.2
|
Stock-based
Incentive Plans
|
|
(a)
|
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 our
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 our 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 our 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 our
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 our Annual Report on Form 10-K for the year ended December 31,
2001).
|
|
(b)
|
1995
Incentive Compensation Plan approved by CenturyTel’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 our 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 our 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
our
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 February 24, 1997, entered into by CenturyTel and
its
officers (incorporated by reference to Exhibit 10.4 to our Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997).
|
|
(ii)
|
Form
of Stock Option Agreement, pursuant to 1995 Incentive Compensation
Plan
and dated as of February 21, 2000, entered into by CenturyTel and
its
officers (incorporated by reference to Exhibit 10.1 (t) to our
Annual
Report on Form 10-K for the year ended December 31,
1999).
|
|
(c)
|
Amended
and Restated 2000 Incentive Compensation Plan, as amended through
May 23,
2000 (incorporated by reference to Exhibit 10.2 to our 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 our
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 CenturyTel and
its
officers (incorporated by reference to Exhibit 10.2(e) to our 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 CenturyTel
and its
officers (incorporated by reference to Exhibit 10.2(d)(ii) of our
Annual
Report on Form 10-K for the year ended December 31,
2002).
|
|
(d)
|
Amended
and Restated 2002 Directors Stock Option Plan, dated as of February
25,
2004 (incorporated by reference to Exhibit 10.2(e) of our 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 our
Annual Report on Form 10-K for the year ended December 31,
2003).
|
|
(iii) |
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 7, 2004 (incorporated by reference
to
Exhibit 10.2(d)(iii) of our Annual Report on Form 10-K for the
year ended
December 31, 2005).
|
|
(e)
|
Amended
and Restated 2002 Management Incentive Compensation Plan, dated
as of
February 25, 2004 (incorporated by reference to Exhibit 10.2(f)
of our
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 our 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 CenturyTel and its officers
(incorporated by reference to Exhibit 10.2(f)(ii) of our 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 CenturyTel and its officers
(incorporated by reference to Exhibit 10.2(f)(iii) of our 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 CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.1 of our Quarterly
Report on Form 10-Q for the period ended March 31,
2003).
|
|
(v)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and
dated as
of February 25, 2004, entered into by CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.2(f)(v) of our
Quarterly
Report on Form 10-Q for the period ended March 31,
2004).
|
|
(vi)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan and dated
as of
February 17, 2005, entered into by CenturyTel and its executive
officers
(incorporated by reference to Exhibit 10.2(e)(v) of our Annual
Report on
From 10-K for the year ended December 31,
2004).
|
|
(vii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and
dated as
of February 17, 2005, entered into by CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.2(e)(vi) of our
Annual
Report on Form 10-K for the year ended December 31, 2004).
|
|
(f)
|
2005
Directors Stock Option Plan (incorporated by reference to our 2005
Proxy
Statement filed April 15, 2005).
|
|
(i)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan,
entered
into between CenturyTel and each of its outside directors as of
May 13,
2005 (incorporated by reference to Exhibit 10.4 of our Current
Report on
Form 8-K dated May 13, 2005).
|
|
(ii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan,
entered
into between CenturyTel and each of its outside directors as of
May 12,
2006.
|
|
(g)
|
2005
Management Incentive Compensation Plan (incorporated by reference
to our
2005 Proxy Statement filed April 15,
2005).
|
|
(i)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered
into
between CenturyTel and certain officers and key employees at various
dates
since May 12, 2005 (incorporated by reference to Exhibit 10.2 of
our
Quarterly Report on Form 10-Q for the period ended September 30,
2005).
|
|
(ii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan,
entered
into between CenturyTel and certain officers and key employees
at various
dates since May 12, 2005 (incorporated by reference to Exhibit
10.3 of our
Quarterly Report on Form 10-Q for the period ended September 30,
2005).
|
|
(iii)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan and dated
as of
February 21, 2006, entered into between CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.2(g)(iii) of
our Annual
Report on Form 10-K for the year ended December 31,
2005).
|
|
(iv)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and
dated as
of February 21, 2006, entered into between CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.2(g)(iv) of our
Annual
Report on Form 10-K for the year ended December 31,
2005).
|
|
10.3
|
Other
Non-Qualified Employee Benefit
Plans
|
|
(a)
|
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 our 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 our 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 our 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 our 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 our Annual Report on Form 10-K for the year ended December 31,
2001).
|
|
|
Amended
and Restated Supplemental Executive Retirement Plan, 2006 Restatement,
included elsewhere herein.
|
|
|
Supplemental
Dollars & Sense Plan, 2006 Restatement, effective as of January 1,
2005, included elsewhere herein.
|
|
|
Amended
and Restated Supplemental Defined Benefit Plan, effective as of
January 1,
2005, included elsewhere herein.
|
|
(e)
|
Amended
and Restated Salary Continuation (Disability) Plan for Officers,
dated
November 26, 1991 (incorporated by reference to Exhibit 10.16 of
our
Annual Report on Form 10-K for the year ended December 31,
1991).
|
|
(f)
|
2005
Executive Officer Short-Term Incentive Program (incorporated by
reference
to our 2005 Proxy Statement filed April 5,
2005).
|
|
(g)
|
2001
Employee Stock Purchase Plan (incorporated by reference to our
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 CenturyTel (incorporated by reference to Exhibit
10.1(b) to
our 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
CenturyTel and David D. Cole, R. Stewart Ewing and Michael E. Maslowski
(incorporated by reference exhibit 10.1(c) to the our 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
CenturyTel and Karen A. Puckett (incorporated by reference to Exhibit
10.1(c) of our 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
CenturyTel and Stacey W. Goff (incorporated by reference to Exhibit
10.1(c) of our Quarterly Report on Form 10-Q for the period ended
March
31, 2000).
|
|
(e)
|
Form
of Indemnification Agreement for Officers and Directors (incorporated
by
reference to Exhibit 10.4(e) of our Annual Report on Form 10-K
for the
year ended December 31, 2005).
|
|
14
|
Corporate
Compliance Program (incorporated by reference to Exhibit 14 of
our Annual
Report on Form 10-K for the year ended December 31,
2003).
|
|
|
Subsidiaries
of CenturyTel, included elsewhere
herein.
|
|
|
Independent
Registered Public Accounting Firm Consent, included elsewhere
herein.
|
|
|
Chief
Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, included elsewhere
herein.
|
|
|
Chief
Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, included elsewhere
herein.
|
|
|
Chief
Executive Officer and Chief Financial Officer certification pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002, included elsewhere
herein.
|
The
following item was reported in Form 8-Ks during the fourth quarter of 2006,
which
was
filed on the date indicated.
November
2, 2006
Items
2.02 and 9.01. Results of Operations and Financial Condition - News release
announcing third quarter 2006 operating results.
December
20, 2006
Items
1.01, 8.01 and 9.01. Entry Into a Material Definitive Agreement - Entry into
a
Stock Purchase Agreement with Madison River Communications Corp.
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:
February 27, 2007
|
|
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.
/s/
Glen F. Post, III
|
|
Chairman
of the Board and
|
|
|
Glen
F. Post, III
|
|
Chief
Executive Officer
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
R. Stewart Ewing, Jr.
|
|
Executive
Vice President and
|
|
|
R.
Stewart Ewing, Jr.
|
|
Chief
Financial Officer
|
|
February
27, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/
Neil A. Sweasy
|
|
Vice
President and Controller
|
|
|
Neil
A. Sweasy
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
William R. Boles, Jr.
|
|
Director
|
|
|
William
R. Boles, Jr.
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
Virginia Boulet
|
|
Director
|
|
|
Virginia
Boulet
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
Calvin Czeschin
|
|
Director
|
|
|
Calvin
Czeschin
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
James B. Gardner
|
|
Director
|
|
|
James
B. Gardner
|
|
|
|
February
27, 2007
|
/s/
W. Bruce Hanks
|
|
Director
|
|
|
W.
Bruce Hanks
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
Gregory J. McCray
|
|
Director
|
|
|
Gregory
J. McCray
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
C. G. Melville, Jr.
|
|
Director
|
|
|
C.
G. Melville, Jr.
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
Fred R. Nichols
|
|
Director
|
|
|
Fred
R. Nichols
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
Harvey P. Perry
|
|
Director
|
|
|
Harvey
P. Perry
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
Jim D. Reppond
|
|
Director
|
|
|
Jim
D. Reppond
|
|
|
|
February
27, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
Joseph R. Zimmel
|
|
Director
|
|
|
Joseph
R. Zimmel
|
|
|
|
February
27, 2007
|
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
CENTURYTEL,
INC.
For
the
years ended December 31, 2006, 2005 and 2004
Description
|
|
Balance
at beginning of
period
|
|
Additions
charged to costs and expenses
|
|
Deductions
from allowance
|
|
Other
changes
|
|
Balance
at end of
period
|
|
|
|
(Dollars
in thousands)
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
21,721
|
|
|
20,199
|
|
|
(21,009)
|
(1)
|
|
(6)
|
(3)
|
|
20,905
|
|
Valuation
allowance for deferred tax assets
|
|
$
|
54,412
|
|
|
6,637
|
|
|
-
|
|
|
-
|
|
|
61,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
21,187
|
|
|
30,945
|
|
|
(30,880)
|
(1)
|
|
469
|
(3)
|
|
21,721
|
|
Valuation
allowance for deferred tax assets
|
|
$
|
27,112
|
|
|
27,300
|
|
|
-
|
|
|
-
|
|
|
54,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
23,679
|
|
|
42,093
|
|
|
(44,585)
|
(1)
|
|
-
|
|
|
21,187
|
|
Valuation
allowance for deferred tax assets
|
|
$
|
19,735
|
|
|
7,377
|
|
|
-
|
|
|
-
|
|
|
27,112
|
|
(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.
|
124