2005 10K
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, 2005
or
[
]
Transition
Report Pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Commission
file number 1-7784
CENTURYTEL,
INC.
(Exact
name of Registrant as specified in its charter)
|
Louisiana
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72-0651161
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|
|
(State
or other jurisdiction of
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|
(IRS
Employer
|
|
|
incorporation
or organization)
|
|
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)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code - (318) 388-9000
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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|
Name
of each exchange on which registered
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|
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Common
Stock, par value $1.00
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|
New
York Stock Exchange
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|
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Berlin
Stock Exchange
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Preference
Share Purchase Rights
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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 Accelerated
filer o Non-accelerated
filer o
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 $3.9 billion as of June
30, 2005. As of February 28, 2006, there were 115,206,141 shares of common
stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Registrant’s Proxy Statement to be furnished in connection with the 2006
annual meeting of shareholders are incorporated by reference in Part III of
this
Report.
PART
I
General.
CenturyTel, Inc., together with its subsidiaries, is an integrated
communications company engaged primarily in providing 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. We conduct all of our operations in 26 states located within the
continental United States.
At
December 31, 2005, our local exchange telephone subsidiaries operated
approximately 2.2 million telephone access lines, primarily in rural areas
and
small to mid-size cities in 22 states, with over 70% of these lines located
in
Wisconsin, Missouri, Alabama, Arkansas and Washington. According to published
sources, we are the eighth 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.
We
have
entered into agreements to provide co-branded satellite television service
and
to resell wireless service as part of our bundled product and service offerings,
but these arrangements are not expected to contribute material revenues in
the
near term. In addition, we recently began offering our facilities-based digital
video service to certain areas of a limited number of markets in Wisconsin.
We
anticipate such offerings will dilute our earnings for 2006 by approximately
$.06 to $.08 per share.
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
digital subscriber line ("DSL") and other high speed data services within the
purchased exchanges. The acquired assets did not include Verizon's cellular,
personal communications services (“PCS”), long distance, dial-up Internet, or
directory publishing operations in these areas.
On
February 28, 2002, 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.
On
July
31, 2000 and September 29, 2000, we acquired assets utilized to provide local
exchange telephone service to over 490,000 telephone access lines from Verizon
in four separate transactions for approximately $1.5 billion in cash. Under
these transactions:
· |
On
July 31, 2000, we purchased approximately 231,000 telephone access
lines
and related assets in Arkansas for approximately $842 million in
cash.
|
· |
On
July 31, 2000, Spectra Communications Group, LLC ("Spectra") purchased
approximately 127,000 telephone access lines and related assets in
Missouri for approximately $297 million cash. At closing, we made
a
preferred equity investment in Spectra of approximately $55 million
(which
represented a 57.1% interest) and financed substantially all of the
remainder of the purchase price. In the first quarter of 2001, we
purchased an additional 18.6% interest in Spectra for $47.1 million.
In
the fourth quarter of 2003 and the first quarter of 2004, we purchased
the
remaining 24.3% interest in Spectra for an aggregate of $34.0 million
in
cash.
|
· |
On
September 29, 2000, we purchased approximately 70,500 telephone access
lines and related assets in Wisconsin for approximately $197 million
in
cash.
|
· |
On
September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA") purchased
approximately 62,900 telephone access lines and related assets in
Wisconsin for approximately $172 million in cash. We own 89% of TelUSA,
which was organized to acquire and operate these Wisconsin properties.
At
closing, we made an equity investment in TelUSA of approximately
$37.8
million and financed substantially all of the remainder of the purchase
price.
|
In
August
2000, we acquired the assets of CSW Net, Inc., a regional Internet service
provider that offers dial-up and dedicated Internet access, and web site and
domain hosting to more than 18,000 customers in 28 communities in
Arkansas.
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, other
communications interests may also be acquired and these acquisitions could
have
a material impact upon us.
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.
In
the
second quarter of 2001, we sold to Leap Wireless International, Inc. 30 PCS
operating licenses for an aggregate of $205 million.
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 2005 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 assumptions
and estimates prepared 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, 2005, we had approximately 6,900 employees, of which approximately
1,800 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, we reduced our workforce by approximately
275
jobs, or 4% of our workforce, 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 eighth largest local exchange telephone company
in the United States, based on the approximately 2.2 million access lines we
served at December 31, 2005. 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 22 states. Our local exchange companies serve an average
of
approximately 13 access lines per square mile versus a nationwide average of
approximately 51 access lines per square mile.
The
following table lists additional information regarding our access lines as
of
December 31, 2005 and 2004.
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|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
Number
of
|
|
Percent
of
|
|
Number
of
|
|
Percent
of
|
|
State
|
|
access
lines
|
|
access
lines
|
|
access
lines
|
|
access
lines
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin
(1)
|
|
|
444,089
|
|
|
20
|
%
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|
466,021
|
|
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20
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%
|
Missouri
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|
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442,138
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|
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20
|
|
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458,724
|
|
|
20
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Alabama
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|
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261,862
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|
|
12
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275,093
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|
|
12
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Arkansas
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240,841
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|
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11
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256,130
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|
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11
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Washington
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176,997
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8
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182,990
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8
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Michigan
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102,249
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|
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5
|
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108,030
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|
|
5
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|
Louisiana
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96,329
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|
|
4
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101,353
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|
|
4
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|
Colorado
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|
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92,046
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|
|
4
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94,139
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|
|
4
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|
Ohio
|
|
|
76,529
|
|
|
3
|
|
|
80,287
|
|
|
3
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|
Oregon
|
|
|
71,968
|
|
|
3
|
|
|
74,020
|
|
|
3
|
|
Montana
|
|
|
62,170
|
|
|
3
|
|
|
64,145
|
|
|
3
|
|
Texas
|
|
|
40,976
|
|
|
2
|
|
|
43,697
|
|
|
2
|
|
Minnesota
|
|
|
29,013
|
|
|
1
|
|
|
30,046
|
|
|
1
|
|
Tennessee
|
|
|
25,847
|
|
|
1
|
|
|
26,728
|
|
|
1
|
|
Mississippi
|
|
|
23,621
|
|
|
1
|
|
|
24,137
|
|
|
1
|
|
New
Mexico
|
|
|
6,176
|
|
|
*
|
|
|
6,428
|
|
|
*
|
|
Wyoming
|
|
|
5,992
|
|
|
*
|
|
|
5,905
|
|
|
*
|
|
Idaho
|
|
|
5,667
|
|
|
*
|
|
|
5,807
|
|
|
*
|
|
Indiana
|
|
|
5,163
|
|
|
*
|
|
|
5,346
|
|
|
*
|
|
Iowa
|
|
|
2,019
|
|
|
*
|
|
|
2,053
|
|
|
*
|
|
Arizona
|
|
|
1,904
|
|
|
*
|
|
|
1,995
|
|
|
*
|
|
Nevada
|
|
|
553
|
|
|
*
|
|
|
552
|
|
|
*
|
|
|
|
|
2,214,149
|
|
|
100
|
%
|
|
2,313,626
|
|
|
100
|
%
|
*
Represents
less than 1%.
(1) |
As
of December 31, 2005 and 2004, approximately 55,600 and 57,700,
respectively, of these lines were owned and operated by our 89%-owned
affiliate.
|
As
indicated in the following table, we have 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 long distance and Internet access businesses.
|
|
Year
ended or as of December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
lines
|
|
|
2,214,149
|
|
|
2,313,626
|
|
|
2,376,118
|
|
|
2,414,564
|
|
|
1,797,643
|
|
% Residential
|
|
|
75
|
%
|
|
75
|
|
|
76
|
|
|
76
|
|
|
76
|
|
% Business
|
|
|
25
|
%
|
|
25
|
|
|
24
|
|
|
24
|
|
|
24
|
|
Long
distance lines
|
|
|
1,168,201
|
|
|
1,067,817
|
|
|
931,761
|
|
|
798,697
|
|
|
564,851
|
|
% Residential
|
|
|
81
|
%
|
|
81
|
|
|
80
|
|
|
80
|
|
|
79
|
|
% Business
|
|
|
19
|
%
|
|
19
|
|
|
20
|
|
|
20
|
|
|
21
|
|
Internet
customers
|
|
|
356,852
|
|
|
271,210
|
|
|
222,625
|
|
|
184,357
|
|
|
146,945
|
|
% DSL service
|
|
|
70
|
%
|
|
53
|
|
|
37
|
|
|
29
|
|
|
17
|
|
% Dial-up service
|
|
|
30
|
%
|
|
47
|
|
|
63
|
|
|
71
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
2,479,252
|
|
|
2,407,372
|
|
|
2,367,610
|
|
|
1,971,996
|
|
|
1,679,504
|
|
Capital
expenditures
|
|
$
|
414,872
|
|
|
385,316
|
|
|
377,939
|
|
|
386,267
|
|
|
435,515
|
|
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 be made possible by 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 telephone services, (ii) network
access services, (iii) long distance services, (iv) data services, which
includes both DSL and dial-up Internet services, as well as special access
and
private line services, (v) fiber transport, competitive local exchange and
security monitoring services and (vi) other related services. The following
table reflects the percentage of operating revenues derived from these
respective services:
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Local
service
|
|
|
28.3
|
%
|
|
29.7
|
|
|
30.1
|
|
Network
access
|
|
|
38.7
|
|
|
40.1
|
|
|
42.3
|
|
Long
distance
|
|
|
7.7
|
|
|
7.8
|
|
|
7.3
|
|
Data
|
|
|
12.9
|
|
|
11.5
|
|
|
10.4
|
|
Fiber
transport and CLEC
|
|
|
4.7
|
|
|
3.1
|
|
|
1.8
|
|
Other
|
|
|
7.7
|
|
|
7.8
|
|
|
8.1
|
|
|
|
|
100.0
|
%
|
|
100.0
|
|
|
100.0
|
|
Local
service.
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
4.3% in 2005, 2.6% in 2004 and 1.6% in 2003. 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. Based on current
conditions, we expect access lines to decline between 4.5% and 5.5% for
2006.
In
exchange for additional charges, we offer enhanced voice services (such as
call
forwarding, conference calling, caller identification, selective call ringing
and call waiting) and data services (such as data private line, digital
subscriber line, frame relay and local area/wide area networks). In 2005, we
continued to expand the availability of enhanced services offered in certain
service areas.
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 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 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 directly with the FCC using this streamlined filing approach. For those
tariffs that have not yet been “deemed lawful”, we initially record as a
liability our earnings in excess of the authorized rate of return, and may
thereafter recognize as revenues some or all of these amounts at the end of
the
settlement period or as our legal entitlement thereto becomes more 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. We do not expect to have this level of revenue settlements
occur in 2006. As of December 31, 2005, 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 $31.5 million. The
settlement period related to the 2003/2004 monitoring period lapses on September
30, 2007. We will continue to monitor the legal status of any proceedings that
could impact our entitlement to these funds.
Long
distance.
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,
2005, 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. 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.
Data.
We
derive our
data
revenues primarily from monthly recurring charges for providing Internet access
services (both DSL 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 DSL Internet access services, a high-speed premium-priced data
service. As of December 31, 2005, approximately 75% of our access lines were
DSL-enabled. At December 31, 2005, we provided DSL access services to over
248,700 customers and dial-up services to over 108,000 customers. During 2005,
we added over 106,000 DSL connections.
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, 2005, our competitive local
exchange markets provided service over 1,200 miles of lit fiber.
Under
the
name “LightCore”, we sell fiber capacity to other carriers and businesses over a
network that encompassed, at December 31, 2005, over 9,200 miles of lit 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 9,000 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 for third parties, (iii) participating
in the publication of local telephone directories and (iv) offering our new
video and wireless services. We also provide printing, database management
and
direct mail services and cable television services.
During
2005, we began offering co-branded satellite television service to virtually
all
households in our service areas, except for the LaCrosse, Wisconsin market,
where we initiated our switched digital television service. We continue to
monitor the results from this initial launch of switched digital television
service and currently plan to initiate a second switched digital video trial
during 2006. In mid-2005, we completed an agreement with one wireless carrier
to
resell wireless services and, by the end of 2005, we offered wireless service
through this agreement to markets serving approximately 17% of our residential
access lines.
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.
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 19% 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 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, 2005, we maintained over 242,000 miles of copper plant and approximately
17,800 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. As we discuss in greater detail below, passage of the
Telecommunications Act of 1996 (the “1996 Act”), coupled with state legislative
and regulatory initiatives and technological changes, fundamentally altered
the
telephone industry by reducing the regulation of LECs and attracting a
substantial increase in the number of competitors and capital invested in
existing and new services. 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
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 several of the 22 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. Wisconsin, Missouri, Alabama, Arkansas and several other states
have implemented laws or rulings which require or permit LECs to opt out of
“rate of return” regulation in exchange for agreeing to alternative forms of
regulation which typically permit the LEC greater freedom to establish local
service rates in exchange for agreeing not to charge rates in excess of
specified caps. As discussed further below, subsidiaries operating over 60%
of
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 has
a
five-year term and 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.
Based
on our annual filing with the Missouri Commission effective September 2005,
we
estimate a $3.6 million annual reduction in revenues as a result of recent
declines in the inflation-based factor. If the inflation-based factor continues
to decline, our revenues will continue to be negatively impacted.
· Beginning
in 2005, our Alabama telephone properties have been subject to an alternative
regulation plan. Under this plan, residential and business basic local service
rates will remain at existing levels for two years, after which rates can be
increased up to five percent per year up to a maximum capped level. Rates for
all other retail services may be adjusted depending on the tier designation
established under the plan.
· Our
Arkansas LECs, excluding the properties acquired from Verizon in 2000, are
regulated under an alternative regulation plan adopted in 1997, which initially
froze basic local and access rates for three years, after which time such rates
can be adjusted based on an inflation-based factor. Other local rates can be
adjusted without commission approval; however, such rates are subject to
commission review under certain conditions.
Notwithstanding
the movement toward alternative regulation, LECs operating approximately 38%
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.
FCC
regulation.
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.
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 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. Various concepts are under
consideration that would attempt to unify all intercarrier rates for all types
of traffic to the greatest extent possible. We are involved in this proceeding
and will continue to monitor the implications of these plans to our operations.
There is a chance that some type of consensus plan will be filed at the FCC
in
2006. Until this 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.
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 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.
For
example, existing provisions of the Communications Assistance for Law
Enforcement Act and FCC regulations implementing this Act require communications
carriers to ensure that their equipment, facilities, and services are able
to
facilitate authorized electronic surveillance. 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. 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. A significant portion of our support payments vary
over time based on our average cost to serve customers compared to national
cost
averages. The table below sets forth the amounts received by our telephone
subsidiaries in 2005 and 2004 from federal and state universal support
programs.
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
%
of Total
|
|
|
|
%
of Total
|
|
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
Amount
|
|
Operating
|
|
Amount
|
|
Operating
|
|
Support
Program
|
|
Received
|
|
Revenues
|
|
Received
|
|
Revenues
|
|
|
|
(amounts
in millions)
|
|
USF
High Cost Loop Support
|
|
$
|
174.9
|
|
|
7.1
|
%
|
$
|
187.9
|
|
|
7.8
|
%
|
Other
USF Support Programs
|
|
$
|
139.2
|
|
|
5.6
|
%
|
$
|
141.5
|
|
|
5.9
|
%
|
Total
Federal USF Receipts
|
|
$
|
314.1
|
|
|
12.7
|
%
|
$
|
329.4
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
Support Programs
|
|
$
|
37.6
|
|
|
1.5
|
%
|
$
|
35.8
|
|
|
1.5
|
%
|
TOTAL
|
|
$
|
351.7
|
|
|
14.2
|
%
|
$
|
365.2
|
|
|
15.2
|
%
|
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, which ends June 30, 2006, based on embedded,
or historical, costs that provides relatively predictable levels of support
to
many LECs, including substantially all of our LECs.
Wireless
and other competitive service providers continue to seek eligible
telecommunications carrier (“ETC”) status in order to receive USF support,
which, coupled with changes in usage of telecommunications services, have placed
stress on the USF’s funding mechanism. These developments have placed additional
financial pressure on the amount of money that is necessary and available to
provide support to all eligible service providers, including support payments
we
receive from the USF High Cost Loop support program. As a result of the
continued increases in the nationwide average cost per loop factor used to
allocate funds among all recipients (caused by a decrease in the size of the
High Cost Loop support program and increases in requests for support from the
USF), we believe our total payments from the USF will continue to decline in
the
near term under the FCC’s current rules. Based on recent FCC filings, we
anticipate our 2006 revenues from the USF High Cost Loop support program will
be
approximately $8-12 million lower than 2005 levels due to increases in the
nationwide average cost per loop factor.
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. In early 2004, the FSJB recommended a comprehensive general review
of
the high-cost support mechanisms for rural and non-rural carriers, coupled
with
more specific recommendations on the process of designating ETCs and disbursing
support payments. On August 16, 2004, the FSJB released a notice requesting
comments on the FCC’s current rules for the provision of high-cost support for
rural companies, including comments on whether eligibility requirements should
be amended in a manner that would adversely affect larger rural LECs such as
us.
In addition, the FCC has taken various other steps in anticipation of
restructuring universal service support mechanisms, including opening a docket
that will change the method of funding contributions. The FCC is expected to
issue soon an order addressing a new type of contribution methodology. In the
event that does not happen, we believe, but cannot assure you, that the FCC
will
likely extend the interim mechanism now in place before it lapses on June 30,
2006.
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. Due to the
pending nature of these proposals, we cannot estimate the impact, if any, 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, all of which create additional uncertainty regarding our future
receipt of support payments. 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. In December 2004, Congress passed a bill that granted the USF a
one-year exemption from the federal law that impacted the E-rate program. In
April 2005, the Chairman of the FCC publicly stated that the USF’s High Cost
Loop support program complies with the applicable rules regarding the
appropriate disbursement of funds. In December 2005, Congress passed a bill
that
granted the USF a further one-year exemption from these administrative
requirements.
In
the
second quarter of 2005, the Louisiana Public Service Commission (“LPSC”) adopted
an order that transferred the existing $42 million Louisiana Optional Service
Fund (“LOS Fund”) into a state universal service fund effective August 31, 2005.
In recent years we received approximately $21 million annually from the LOS
Fund, and we expect to receive similar amounts under the new fund. 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 served the LPSC with an appeal (currently
pending review by the Louisiana Supreme Court) of the new fund. 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. See
“-Services - Network Access” above for additional information.
Developments
affecting competition.
The
communications industry continues to undergo fundamental technological,
regulatory and legislative changes which are likely to significantly impact
the
future operations and financial performance of all communications companies.
Primarily as a result of regulatory and technological changes, competition
has
been introduced and encouraged in each sector of the telephone industry in
recent years. As a result, 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. This trend
is more pronounced among residential customers, which comprise 75% 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 late 2005,
we
began offering our CenturyTel branded wireless reseller service in select
markets and expect to expand such offering to other markets in the near
future.
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
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. While
competition through use of our network is still limited in most of our markets,
we expect to receive additional interconnection requests in the future from
a
variety of resellers and facilities-based service providers.
In
addition to these changes in federal regulation, all of the 22 states in which
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 high
population areas. CLECs provide competing services through reselling the ILECs’
local services, through use of the ILECs’ unbundled network elements or through
their own facilities. The number of companies which have requested authorization
to provide local exchange service in our service areas has increased in recent
years, especially in our Verizon markets acquired 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.
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
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 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
below those currently charged for traditional local and long distance telephone
services for several reasons, including lower network cost structures and the
current ability of VoIP providers to use ILECs’ networks without paying access
charges. 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. 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
noncarrier systems that are capable of bypassing ILECs’ local networks, either
partially or completely, through substitution of special access for switched
access or through concentration of telecommunications traffic on a few of the
ILECs’ access lines. We anticipate that all these trends will continue and lead
to increased competition with our LECs.
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, most of them
are
not subject to the same regulatory constraints as we are.
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,
long distance 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 rural, suburban and small urban areas such as those in
which we operate. We intend to actively monitor these developments, to observe
the effect of emerging competitive trends in larger markets and to continue
to
evaluate new business opportunities that may arise out of future technological,
legislative and regulatory developments.
While
we
expect our operating revenues in 2006 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, DSL 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 AT&T, MCI, Sprint,
regional phone companies and dial-around resellers. Increasingly, however,
we
have experienced competition from newer sources, including wireless and
high-speed broadband providers, and as a result of technological substitutions,
including VoIP and electronic mail.
Data
Operations.
In
connection with our data business, we face competition from Internet service
providers, satellite companies and cable companies which offer both dial-up
Internet access services and high-speed broadband services. As of December
31,
2005, we believe approximately 54% of our local exchange markets are overlapped
by Internet-operable cable systems. Many of these competitors offer content
and
other support services that we cannot match. Moreover, many of these providers
have traditionally been subject to less rigorous regulatory scrutiny than our
subsidiaries and, unlike us, were not required to offer broadband access on
a
stand-alone basis to competitors. In September 2005, however, the FCC released
an order (effective on November 16, 2005) declaring that facilities-based
wireline broadband Internet access service is an “information service” and
should be regulated in a manner similar to the largely unregulated broadband
Internet access services offered by cable companies. One year after the order’s
effective date, we will no longer be obligated to continue offering broadband
access on a stand-alone basis to competing unaffiliated Internet service
providers. In addition, this order preserves the current method of assessing
universal service contributions on DSL revenues for a 270-day period after
the
effective date of the order, or until the FCC adopts a new contribution
methodology to the universal service fund. The FCC is currently conducting
several other rulemakings considering the regulatory treatment of broadband
services, the outcomes of which 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.
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,
later this year, we expect to commence repurchasing the $500 million balance
of
the $1.0 billion program through open market or privately negotiated
transactions, or another accelerated share repurchase program. 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 report.
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
We
face competition, which could adversely affect us.
As
a
result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive, and we expect
these trends to continue. As we discuss further below, competition has resulted
in access line losses, which we expect will accelerate in 2006. 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.
We
expect
competition to intensify as a result of new competitors and the development
of
new technologies, products and services. We cannot predict which future
technologies, products or services will be important to maintain our competitive
position or what funding will be required to develop and provide these
technologies, products or services. Our ability to compete successfully will
depend on how well we market our products and services and on our ability
to
anticipate and respond to various competitive and technological factors
affecting the industry, including changes in regulation (which may affect
us
differently from our competitors), changes in consumer preferences or
demographics, and changes in the product offerings or pricing strategies
of our
competitors.
Many
of
our current and potential competitors have market presence, engineering,
technical and marketing capabilities and financial, personnel and other
resources substantially greater than ours. In addition, some of our competitors
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) our need to lower
prices
or increase marketing expenses to remain competitive and (iv) 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 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. 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 business will grow or that our diversification
efforts will be successful.
Due
to
the above-cited changes, the telephone industry has recently experienced
a
decline in access lines, intrastate minutes of use and long distance minutes
of
use. While we have not 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 4.3% in 2005 and we expect our
access lines to decline between 4.5% and 5.5% in 2006. We also earned less
intrastate revenues in 2005 due to reductions in intrastate minutes of use
(partially due to the displacement of minutes of use by wireless, electronic
mail and other optional calling services). We believe our intrastate minutes
of
use will continue to decline, although the magnitude of such decrease is
uncertain.
Until
recently, we have traditionally sought growth largely through acquisitions
of
properties similar to those currently operated by us. However, we cannot
assure
you that properties will be available for purchase on terms attractive to
us,
particularly if they are burdened by regulations, pricing plans or competitive
pressures that are new or different from those historically applicable to
our
incumbent properties. Moreover, we cannot assure you that we will be able
to
arrange additional financing on terms acceptable to us.
In
recent
years, we have attempted to broaden our service and product offerings. During
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, we recently launched our facilities-based digital video offering
to
select markets in Wisconsin. We anticipate these new offerings will dilute
our
earnings for 2006 by approximately $.06 to $.08 per share and will provide
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 few years, we have expanded our operations through acquisitions and
new
product and service offerings, and we may pursue similar growth opportunities
in
the future. Our future success depends, in part, upon our ability to manage
our
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. We cannot assure you that these
efforts will be successful, or that we will realize our expected operating
efficiencies, cost savings, revenue enhancements, synergies or other benefits.
If we are not able to meet these challenges effectively, our results of
operations may be harmed.
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 these network components to us 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.
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, 2005, approximately 26% 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 2005, this board
sought
comments on proposals to modify the distribution of certain key federal support
funds. 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 $13.1 million in 2005 compared to 2004, and
we
expect these changes will further reduce our receipts from such program by
approximately $8 to $12 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, is
placing additional financial pressure on the amount of money that is necessary
and available to provide support payments to all eligible recipients, including
us. As a result of the continued increases in the nationwide average cost
per
loop factor (caused by a decrease in the size of the USF High Cost
Loop support program and increases in requests for support from the Universal
Service Fund), we believe the aggregate level of payments we receive from
the
Universal Service Fund will continue to decline in the near term under the
FCC’s
current rules.
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 earnings reviews.
Notwithstanding the movement toward alternative state regulation, LECs operating
approximately 38% 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.
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. 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, that 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.
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 February 28, 2006, the holders of our ten-vote shares
held
approximately 41% of our total voting power. In addition, a number of other
provisions in our agreements and organizational documents, including our
shareholder rights plan, and various provisions of applicable law may delay,
defer or prevent a future takeover of CenturyTel unless the takeover is approved
by our board of directors. This could deprive our shareholders of any related
takeover premium.
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) integrate newly-acquired operations into our operations,
(ii) attract and retain technological, managerial and other key
personnel,
(iii) achieve projected growth, revenue and cost savings targets,
and (iv)
otherwise monitor our operations, costs, regulatory compliance,
and
service quality and maintain other necessary internal
controls
|
·
|
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 co-branded satellite television
service
and our wireless reseller service, (ii) expand successfully our
long
distance, Internet access and fiber transport service offerings
to new or
acquired markets and (iii) offer bundled service packages on terms
attractive to our customers
|
·
|
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:
|
v |
changes
in general industry and market conditions and growth
rates
|
v |
changes
in labor conditions, including workforce levels and labor
costs
|
v |
changes
in interest rates or other general national, regional or local
economic
conditions
|
v |
changes
in legislation, regulation or public policy, including changes
in federal
rural financing programs or changes that increase our tax
rate
|
v |
increases
in capital, operating, medical or administrative costs, or the
impact of
new business opportunities requiring significant up-front
investments
|
v |
the
continued availability of financing in amounts, and on terms and
conditions, necessary to
|
v |
changes
in our relationships with vendors, or the failure of these vendors
to
provide competitive products on a timely
basis
|
v |
failures
in our internal controls that could result in inaccurate public
disclosures or fraud
|
v |
changes
in our senior debt ratings
|
v |
unfavorable
outcomes of regulatory or legal proceedings, including rate proceedings
|
v |
losses
or unfavorable returns on our investments in other communications
companies
|
v |
delays
in the construction of our networks
|
v |
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 these
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.
Item
1B.
|
Unresolved
Staff Comments
|
Not
applicable.
OTHER
MATTERS
We
have
certain obligations based on federal, state and local laws relating to the
protection of the environment. Costs of compliance through 2005 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 Item 7
elsewhere herein, and the Consolidated Financial Statements and notes 2,
4, 5,
and 16 thereto set forth in Item 8 elsewhere herein.
Our
properties consist principally of telephone lines, central office equipment,
and
land and buildings related to telephone operations. As of December 31, 2005
and
2004, our gross property, plant and equipment of approximately $7.8 billion
and
$7.4 billion, respectively, consisted of the following:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Cable
and wire
|
|
|
52.9
|
%
|
|
53.1
|
|
Central
office
|
|
|
32.4
|
|
|
32.1
|
|
General
support
|
|
|
9.9
|
|
|
10.6
|
|
Fiber
transport
|
|
|
2.4
|
|
|
2.0
|
|
Construction
in progress
|
|
|
1.0
|
|
|
0.9
|
|
Other
|
|
|
1.4
|
|
|
1.3
|
|
|
|
|
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.
Item
3.
|
Legal
Proceedings.
|
In
Barbrasue
Beattie and James Sovis, on behalf of themselves and all others similarly
situated, v. CenturyTel, Inc.,
filed
on October 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 money 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 the class action status
of the
suit and issued a ruling that the billing descriptions we used for these
services during an approximately 18-month period between October 29, 2000
and
May 2002 were legally insufficient. We plan to appeal this decision. The
Court’s
order does not specify the award of damages, the scope of which remains
subject
to significant fact finding. At this time, we cannot reasonably estimate
the
amount or range of possible loss; however, we believe it to be significantly
below the level of revenues billed for such services during the above period.
We
do not believe that the ultimate outcome of this litigation will have a
material
adverse effect on our financial position or results of
operations.
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.
Item
4.
|
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.
Item
5.
|
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
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
33.40
|
|
|
26.20
|
|
|
.0575
|
|
Second
quarter
|
|
$
|
30.32
|
|
|
26.22
|
|
|
.0575
|
|
Third
quarter
|
|
$
|
34.47
|
|
|
29.79
|
|
|
.0575
|
|
Fourth
quarter
|
|
$
|
35.54
|
|
|
31.00
|
|
|
.0575
|
|
Common
stock dividends during 2005 and 2004 were paid each quarter. As of February
28,
2006, there were approximately 4,400 stockholders of record of our common
stock.
As of March 15, 2006, the closing stock price of our common stock was
$37.64.
In
February 2005, our board of directors approved a repurchase program authorizing
us to repurchase up to an aggregate of $200 million of either our common
stock
or equity units prior to December 31, 2005 (which was subsequently extended
to
February 28, 2006). After we implemented our accelerated share repurchase
program in May 2005, we did not purchase any securities under our $200 million
repurchase program from June 2005 through December 2005 (the completion date
of
the accelerated share repurchase program). Therefore, no shares were repurchased
during the fourth quarter of 2005 related to the $200 million program. As
of
December 31, 2005, we had authority to repurchase approximately $86.0 million
in
shares under our $200 million program. In January and February 2006, we
repurchased approximately $72.6 million in shares (2,144,800 shares at an
average price per share of $33.86). In February 2006, our board authorized
a
$1.0 billion share repurchase program that superseded the remaining portion
of
approximately $13 million of our $200 million program. See Note 18 of Notes
to
Consolidated Financial Statements included in Item 8 herein for information
related to the new share repurchase program.
For
information regarding shares of our common stock authorized for issuance
under
our equity compensation plans, see Item 12.
Item
6.
|
Selected
Financial Data.
|
The following table presents certain selected consolidated financial data
(from
continuing operations) as of and for each of the years ended in the five-year
period ended December 31, 2005:
Selected
Income Statement Data
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
(Dollars,
except per share amounts, and shares expressed in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
2,479,252
|
|
|
2,407,372
|
|
|
2,367,610
|
|
|
1,971,996
|
|
|
1,679,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
736,403
|
|
|
753,953
|
|
|
750,396
|
|
|
575,406
|
|
|
425,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring
gains and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses,
net (pre-tax)
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
|
3,709
|
|
|
33,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
334,479
|
|
|
337,244
|
|
|
344,707
|
|
|
193,533
|
|
|
149,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
$
|
2.55
|
|
|
2.45
|
|
|
2.40
|
|
|
1.36
|
|
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations, as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
goodwill amortization
|
|
$
|
2.55
|
|
|
2.45
|
|
|
2.40
|
|
|
1.36
|
|
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
$
|
2.49
|
|
|
2.41
|
|
|
2.35
|
|
|
1.35
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations, as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
goodwill amortization
|
|
$
|
2.49
|
|
|
2.41
|
|
|
2.35
|
|
|
1.35
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
.24
|
|
|
.23
|
|
|
.22
|
|
|
.21
|
|
|
.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
130,841
|
|
|
137,215
|
|
|
143,583
|
|
|
141,613
|
|
|
140,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
diluted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
136,087
|
|
|
142,144
|
|
|
148,779
|
|
|
144,408
|
|
|
142,307
|
|
Selected
Balance Sheet Data
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
property, plant and equipment
|
|
$
|
3,304,486
|
|
|
3,341,401
|
|
|
3,455,481
|
|
|
3,531,645
|
|
|
2,736,142
|
|
Goodwill
|
|
$
|
3,432,649
|
|
|
3,433,864
|
|
|
3,425,001
|
|
|
3,427,281
|
|
|
2,087,158
|
|
Total
assets
|
|
$
|
7,762,707
|
|
|
7,796,953
|
|
|
7,895,852
|
|
|
7,770,408
|
|
|
6,318,684
|
|
Long-term
debt
|
|
$
|
2,376,070
|
|
|
2,762,019
|
|
|
3,109,302
|
|
|
3,578,132
|
|
|
2,087,500
|
|
Stockholders'
equity
|
|
$
|
3,617,273
|
|
|
3,409,765
|
|
|
3,478,516
|
|
|
3,088,004
|
|
|
2,337,380
|
|
The
following table presents certain selected consolidated operating data as
of the
following dates:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone
access lines
|
|
|
2,214,149
|
|
|
2,313,626
|
|
|
2,376,118
|
|
|
2,414,564
|
|
|
1,797,643
|
|
Long
distance lines
|
|
|
1,168,201
|
|
|
1,067,817
|
|
|
931,761
|
|
|
798,697
|
|
|
564,851
|
|
DSL
customers
|
|
|
248,706
|
|
|
142,575
|
|
|
83,465
|
|
|
52,858
|
|
|
25,485
|
|
See
Items
1 and 2 in Part I and Items 7 and 8 elsewhere herein for additional
information.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
RESULTS
OF OPERATIONS
OVERVIEW
CenturyTel,
Inc., together with its subsidiaries, is an integrated communications company
engaged primarily in providing local exchange, long distance, Internet access
and broadband services to customers in 26 states. We currently derive our
revenues from providing (i) local exchange telephone services, (ii) network
access services, (iii) long distance services, (iv) data services, which
includes both digital subscriber line (“DSL”) and dial-up Internet services, as
well as special access and private line services, (v) fiber transport,
competitive local exchange and security monitoring services and (vi) other
related services.
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. Effective in the first quarter of 2004,
as a
result of our increased focus on integrated bundle offerings and the varied
discount structures associated with such offerings, we determined that our
results of operations would be more appropriately reported as a single
reportable segment under the provisions of Statement of Financial Accounting
Standards No. 131, “Disclosures about Segments of an Enterprise and Related
Information.” Therefore, the results of operations for 2005 and 2004 reflect the
presentation of a single reportable segment. Results of operations for 2003
have
been conformed to this presentation of a single reportable segment.
During
2005, we acquired fiber assets in 16 metropolitan markets from KMC Telecom
Holdings, Inc. (“KMC”) for approximately $75.5 million cash. During 2003, we
also acquired fiber transport assets in five central U.S. states (which we
operate under the name LightCore) for $55.2 million cash.
Our
results of operations in 2005 were adversely impacted as a result of (i)
lower
Universal Service Fund and intrastate access revenues, (ii) declines in access
lines, (iii) incremental amortization and operating expenses related to our
billing and customer care system and (iv) expenses associated with expanding
our
new satellite video and wireless service offerings. See below for additional
information.
Our
net
income for 2005 was $334.5 million, compared to $337.2 million during 2004
and
$344.7 million during 2003. Diluted earnings per share for 2005 was $2.49
compared to $2.41 in 2004 and $2.35 in 2003. The increase in diluted earnings
per share is attributable to lower average shares outstanding in 2005 compared
to 2004 due to share repurchases that have occurred during the past two years.
The diluted earnings per share calculation reflects the application of Emerging
Issues Task Force No. 04-8 to all periods presented. See Note 12 of Notes
to
Consolidated Financial Statements for additional information.
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars,
except per share amounts,
and
shares in thousands)
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
736,403
|
|
|
753,953
|
|
|
750,396
|
|
Interest
expense
|
|
|
(201,801
|
)
|
|
(211,051
|
)
|
|
(226,751
|
)
|
Income
from unconsolidated cellular entity
|
|
|
4,910
|
|
|
7,067
|
|
|
6,160
|
|
Other
income (expense)
|
|
|
(1,742
|
)
|
|
(2,597
|
)
|
|
2,154
|
|
Income
tax expense
|
|
|
(203,291
|
)
|
|
(210,128
|
)
|
|
(187,252
|
)
|
Net
income
|
|
$
|
334,479
|
|
|
337,244
|
|
|
344,707
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
2.55
|
|
|
2.45
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
2.49
|
|
|
2.41
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
130,841
|
|
|
137,215
|
|
|
143,583
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
136,087
|
|
|
142,144
|
|
|
148,779
|
|
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. Operating income increased $3.6 million in 2004 as a $39.8 million
increase in operating revenues was substantially offset by a $36.2 million
increase in operating expenses.
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 growth, including integrating newly-acquired
businesses into our operations and hiring adequate numbers of qualified staff;
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.
OPERATING
REVENUES
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Local
service
|
|
$
|
702,400
|
|
|
716,028
|
|
|
712,565
|
|
Network
access
|
|
|
959,838
|
|
|
966,011
|
|
|
1,001,462
|
|
Long
distance
|
|
|
189,872
|
|
|
186,997
|
|
|
173,884
|
|
Data
|
|
|
318,770
|
|
|
275,777
|
|
|
244,998
|
|
Fiber
transport and CLEC
|
|
|
115,454
|
|
|
74,409
|
|
|
43,041
|
|
Other
|
|
|
192,918
|
|
|
188,150
|
|
|
191,660
|
|
Operating
revenues
|
|
$
|
2,479,252
|
|
|
2,407,372
|
|
|
2,367,610
|
|
Local
service revenues. We
derive
local service revenues by providing local exchange telephone services in
our
service areas. The $13.6 million (1.9%) decrease in local service revenues
in
2005 is primarily due to (i) a $16.1 million decrease due a 3.3% decline
in the
average number of access lines served and (ii) 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) an $8.7 million increase
due
to our providing custom calling features to more customers and (ii) a $4.2
million increase due to the mandated implementation of extended area calling
plans in certain areas. Of the $3.5 million (.5%) increase in local service
revenues in 2004, $12.6 million was due to the provision of custom calling
features to more customers, which was partially offset by an $8.4 million
decrease due to a 2.2% decline in the average number of access lines served.
Access
lines declined 99,500 (4.3%) during 2005 compared to a decline of 62,500
(2.6%)
in 2004. We believe the decline in the number of access lines during 2005
and
2004 is primarily due to the displacement of traditional wireline telephone
services by other competitive services. Based on current conditions, we expect
access lines to decline between 4.5% and 5.5% during 2006.
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 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 $6.2 million (0.6%) in 2005 and decreased $35.5
million (3.5%) in 2004 due to the following factors:
|
|
2005
|
|
2004
|
|
|
|
increase
|
|
increase
|
|
|
|
(decrease)
|
|
(decrease)
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Recovery
from the federal Universal Service
|
|
|
|
|
|
|
|
High
Cost Loop support program
|
|
$
|
(13,065
|
)
|
|
(11,311
|
)
|
Intrastate
revenues due to decreased minutes of use and decreased
|
|
|
|
|
|
|
|
access
rates in certain states, net of increased recovery from
|
|
|
|
|
|
|
|
state
support funds
|
|
|
(13,392
|
)
|
|
(26,798
|
)
|
Partial
recovery of increased operating costs through
|
|
|
|
|
|
|
|
revenue
sharing arrangements with other telephone companies,
|
|
|
|
|
|
|
|
interstate
access revenues and return on rate base
|
|
|
6,819
|
|
|
3,980
|
|
Rate
changes in certain jurisdictions
|
|
|
(3,457
|
)
|
|
5,052
|
|
Revision
of prior year revenue settlement agreements
|
|
|
15,947
|
|
|
(3,690
|
)
|
Other,
net
|
|
|
975
|
|
|
(2,684
|
)
|
|
|
$
|
(6,173
|
)
|
|
(35,451
|
)
|
As
indicated in the chart above, in 2005 we experienced a reduction in our
intrastate revenues of approximately $13.4 million primarily due to (i) a
reduction in intrastate minutes (partially due to the displacement of minutes
by
wireless, electronic mail and other optional calling services) and (ii) the
mandated implementation of extended area calling plans in certain areas.
The
corresponding decrease in 2004 compared to 2003 was $26.8 million. We believe
intrastate minutes will continue to decline in 2006, 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 (of which $24.5 million was reflected
in
network access revenues and $11.4 million was reflected in data revenues)
as the
2001/2002 monitoring period lapsed on September 30, 2005. See Critical
Accounting Policies below and Note 17 for additional information. We do not
expect to recognize this level of revenue related to prior year revenue
settlement agreements in 2006.
We
anticipate our 2006 revenues from the federal Universal Service High Cost
Loop
support program will be approximately $8-12 million lower than 2005 levels
due
to increases in the nationwide average cost per loop factor used to allocate
funds among all recipients.
Long
distance revenues.
We
derive our long distance revenues by providing retail long distance services
to
our customers. Long distance revenues increased $2.9 million (1.5%) and $13.1
million (7.5%) in 2005 and 2004, respectively. The $2.9 million increase
in 2005
was primarily attributable to a 12.0% increase in the average number of long
distance lines served and a 12.8% increase in minutes of use (aggregating
$21.2
million), substantially offset by a decrease in the average rate we charged
our
customers ($16.5 million). The $13.1 million increase in 2004 was primarily
attributable to a 14.9% increase in the average number of long distance lines
served and a 15.3% increase in minutes of use (aggregating $21.7 million),
partially offset by a decrease in the average rate we charged our customers
($9.2 million). We anticipate that increased competition and our current
level
of customer penetration will continue to place downward pressure on rates
and
slow the growth rate of the number of long distance lines served.
Data
revenues.
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 $43.0 million (15.6%) in 2005
and
$30.8 million (12.6%) in 2004. 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 DSL 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 increase
in revenues related to prior year settlement agreements (the majority of
which
related to the revenue recorded in 2005 as the 2001/2002 monitoring period
lapsed on September 30, 2005). We do not expect to recognize this level of
revenue related to prior year revenue settlement agreements in 2006.
The
$30.8
million increase in 2004 was primarily due to (i) a $20.3 million increase
in
Internet revenues due primarily to growth in the number of DSL customers
and
(ii) an $11.3 million increase in special access revenues due to an increase
in
the number of special circuits provided and an increase in the partial recovery
of our increased operating expenses through revenue sharing arrangements
with
other telephone companies.
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 $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 the
number
of customers in our incumbent fiber transport business. Fiber transport and
CLEC
revenues increased $31.4 million (72.9%) in 2004, substantially all of which
is
attributable to our acquisitions of fiber transport assets (which are operated
under the name LightCore) in June and December 2003.
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) offering our new video and
wireless services. Other revenues increased $4.8 million (2.5%) during 2005
primarily due to a $4.5 million increase in directory revenues. Other revenues
decreased $3.5 million (1.8%) during 2004 primarily due to a $3.4 million
decrease in directory revenues due to the expiration of our rights to share
in
the revenues of yellow page directories published in certain markets acquired
from Verizon in 2002.
OPERATING
EXPENSES
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$
|
821,929
|
|
|
755,413
|
|
|
739,210
|
|
Selling,
general and administrative
|
|
|
388,989
|
|
|
397,102
|
|
|
374,352
|
|
Depreciation
and amortization
|
|
|
531,931
|
|
|
500,904
|
|
|
503,652
|
|
Operating
expenses
|
|
$
|
1,742,849
|
|
|
1,653,419
|
|
|
1,617,214
|
|
Cost
of services and products.
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 DSL
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 satellite 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.
Cost
of
services and products increased $16.2 million (2.2%) in 2004 primarily due
to
(i) a $14.6 million increase in expenses associated with operating our fiber
transport assets acquired in June and December 2003; (ii) an $8.5 million
increase in expenses associated with our Internet operations due to an increase
in the number of customers; (iii) a $7.8 million increase in customer service
and retention related expenses; and (iv) a $6.0 million increase in plant
operations expenses. Such increases were partially offset by a $13.8 million
decrease in access expenses (which included a one-time credit of $3.1 million
recorded in 2004) and a $9.2 million decrease in the cost of providing retail
long distance service primarily due to a decrease in the average cost per
minute
of use and a decrease in circuit costs.
Selling,
general and administrative.
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 satellite video and wireless reseller services.
Selling,
general and administrative expenses increased $22.8 million (6.1%) in 2004
due
to (i) a $9.0 million increase in marketing expenses; (ii) a $6.4 million
increase in expenses attributable to our Sarbanes-Oxley internal controls
compliance effort; (iii) a nonrecurring $5.0 million reduction in bad debt
expense recorded in the first quarter of 2003 due to the partial recovery
of
amounts previously written off related to the bankruptcy of MCI (formerly
WorldCom); and (iv) a $4.3 million increase in expenses associated with
operating our LightCore assets acquired in 2003. Such increases were partially
offset by a $6.6 million decrease in bad debt expense (exclusive of the MCI
recovery mentioned above).
Depreciation
and amortization.
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.
Depreciation
and amortization decreased $2.7 million (.5%) in 2004. In addition to the
$13.2
million reduction in depreciation expense mentioned above, depreciation expense
for 2004 was also reduced by $8.4 million due to certain assets becoming
fully
depreciated. Such decreases were partially offset by a $16.7 million increase
due to higher levels of plant in service, the above-mentioned $3.1 million
one-time increase in 2004 related to depreciation of fixed assets related
to our
new billing system, and a $3.0 million increase in depreciation due to the
assets acquired in connection with our LightCore operations.
Other.
For
additional information regarding certain matters that have impacted or may
impact our operations, see “Regulation and Competition”.
INTEREST
EXPENSE
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.
Interest
expense decreased $15.7 million (6.9%) in 2004 compared to 2003 partially
due to
$7.5 million of nonrecurring interest expense in 2003 associated with various
operating tax audits. The remainder of the decrease was primarily due to
a
decrease in average debt outstanding.
INCOME
FROM UNCONSOLIDATED CELLULAR ENTITY
Income
from unconsolidated cellular entity was $4.9 million in 2005, $7.1 million
in
2004 and $6.2 million in 2003. Such income represents our share of income
from
our 49% interest in a cellular partnership.
OTHER
INCOME (EXPENSE)
Other
income (expense) includes the effects of certain items not directly related
to
our core operations, including interest income and allowance for funds used
during construction. Other income (expense) was $(1.7 million) in 2005, $(2.6
million) in 2004 and $2.2 million in 2003. The years 2005 and 2004 were impacted
by certain charges and credits that are not expected to occur in the future.
Included in 2005 was (i) a $16.2 million pre-tax charge due to the impairment
of
a non-operating investment and (ii) a $4.8 million debt extinguishment expense
related to purchasing and retiring approximately $400 million of Senior J
notes.
The year 2005 was favorably impacted by (i) $3.2 million of non-recurring
interest income related to the settlement of various income tax audits; (ii)
a
$3.5 million gain from the sale of a non-operating investment and (iii) $3.9
million of higher interest income due to higher average cash balances. 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 37.8%, 38.4% and 35.2% in 2005, 2004 and 2003,
respectively. 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 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
Over
the
last several years, we have elected to account for employee stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as
allowed by Statement of Financial Accounting Standards No. 123, “Accounting for
Stock-Based Compensation”. In December 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123 (Revised
2004),
“Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, focusing primarily on accounting for transactions
in
which an entity obtains employee services in exchange for the issuance of
stock
options. SFAS 123(R) requires us to measure the cost of the employee services
received in exchange for an award of equity instruments based upon the fair
value of the award on the grant date. Such cost will be recognized as an
expense
over the period during which the employee is required to provide service
in
exchange for the award. SFAS 123(R) is effective for all awards granted after
its effective date of January 1, 2006. In accordance with SFAS 123(R),
compensation cost is also recognized over the applicable remaining vesting
period for any awards that are not fully vested as of the effective date.
In
order to eliminate the recognition of compensation expense related to
outstanding awards that are not fully vested as of January 1, 2006, on December
14, 2005, the Compensation Committee of our Board of Directors approved
accelerating the vesting of all unvested stock options outstanding (which
totaled approximately 1.5 million options), effective December 31, 2005.
As a
result of accelerating the vesting of these options, we will avoid approximately
$4.9 million of pre-tax compensation expense, of which approximately $4.1
million would have been recognized in 2006. We recognized approximately $156,000
of expense in the fourth quarter of 2005 as a result of accelerating the
vesting
of these options. We expect the adoption of SFAS 123(R) to decrease our diluted
earnings per share by approximately $.02 to $.03 in 2006.
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. 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.
In
the
fourth quarter of 2004, we adopted Emerging Issues Task Force No. 04-8, “The
Effect of Contingently Convertible Instruments on Diluted Earnings Per Share”
(“EITF 04-8”). EITF 04-8 requires securities issuable under contingently
convertible instruments be included in the diluted earnings per share
calculation. Our $165 million Series K senior notes are convertible into
common
stock under various contingent circumstances, including the common stock
attaining a specified trading price in excess of the notes’ fixed conversion
price. Beginning in the fourth quarter of 2004, our diluted earnings per
share
and diluted shares outstanding reflect the application of EITF 04-8. Prior
periods have been restated to reflect this change in accounting.
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 that
certain
critical accounting policies involve a higher degree of judgment or complexity,
including those described below.
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. In
the
second quarter of 2004, we revised certain estimates for recognizing interstate
revenues. Previously,
we initially recognized interstate revenues at a rate of return lower than
the
authorized rate of return prescribed by the FCC to allow for potential decreases
in demand or other factor changes which could decrease the achieved rate
of
return over the respective monitoring periods. As the monitoring periods
progressed, we recorded additional revenues ratably up to the achieved rate
of
return. In the second quarter of 2004, we began generally recognizing such
interstate network access revenues at the authorized rate of return, unless
the
actual achieved rate of return was lower than authorized.
The
Telecommunications Act of 1996 allows local exchange carriers to file access
tariffs on a streamlined basis and, if certain criteria are met, deems those
tariffs lawful. Tariffs that have been “deemed lawful” in effect nullify an
interexchange carrier’s ability to seek refunds should the earnings from the
tariffs ultimately result in earnings above the authorized rate of return
prescribed by the FCC. Certain of our telephone subsidiaries file interstate
tariffs directly 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 tariffs that have not yet been
“deemed lawful”, 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 more 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, 2005 for the 2003/2004 monitoring
period
aggregated approximately $31.5 million. The settlement period related to
the
2003/2004 monitoring period lapses on September 30, 2007. We will continue
to
monitor the legal status of any proceedings that could impact our entitlement
to
these funds.
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, our
estimate of the recoverability of our accounts receivable could be further
reduced 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 2005 and 2004, 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, 2005 was 5.5% compared to 5.75% at December 31, 2004, 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 pension expense
approximately $1.8 million and increase annual postretirement expense
approximately $900,000.
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, 2005) under SFAS 142 and determined our goodwill is
not
impaired as of such date.
Under
SFAS 144, the carrying value of long-lived assets other than goodwill is
reviewed for impairment whenever events or circumstances indicate that such
carrying amount cannot be recoverable by assessing the recoverability of
the
carrying value through estimated undiscounted net cash flows expected to
be
generated by the assets. If the undiscounted net cash flows are less than
the
carrying value, an impairment loss would be measured as the excess of the
carrying value of a long-lived asset over its fair value.
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 60% 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, 2005, the fair value of our long-term debt was estimated to
be $2.6
billion based on the overall weighted average rate of our long-term debt
of 6.7%
and an overall weighted maturity of 9 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 67 basis points in interest rates (ten percent
of our
overall weighted average borrowing rate). Such an increase in interest
rates
would result in approximately a $98.2 million decrease in the fair value
of our
long-term debt. As of December 31, 2005, after giving effect to interest
rate
swaps currently in place, approximately 81% of our long-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, 2005, 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. At December 31, 2005, we realized a rate under these hedges
of
8.25% and for 2005 we realized an average interest rate of 7.80%. Interest
expense was reduced by $386,000 during 2005 as a result of these hedges.
The
aggregate fair market value of these hedges was $17.6 million at December
31,
2005 and is reflected both as a liability and as a decrease in our underlying
long-term debt on the December 31, 2005 balance sheet. With respect to
these
hedges, market risk is estimated as the potential change in the fair value
of
the hedge resulting from a hypothetical 10% increase in the forward rates
used
to determine the fair value. A hypothetical 10% increase in the forward
rates
would result in a $32.4 million decrease in the fair value of these hedges
and
would also increase our interest expense.
As
of
December 31, 2004, we also had outstanding cash flow hedges that effectively
locked in the interest rate on a majority of certain anticipated debt
transactions that ultimately were completed in February 2005. 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.
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 $964.7 million, $955.8 million and
$1.068
billion in 2005, 2004 and 2003, 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. For additional
information relating to our operations, see “Results of Operations”
above.
Investing
activities.
Net cash
used in investing activities was $481.4 million, $413.3 million and $464.6
million in 2005, 2004 and 2003, respectively. Cash used for acquisitions
was
$75.5 million in 2005 (due to the acquisition of fiber assets in 16 metropolitan
markets from KMC Telecom Holdings, Inc.) and $86.2 million in 2003 (primarily
due to the acquisitions of fiber transport assets and the acquisition of
an
additional 24.3% interest in a telephone company in which we now own a
100%
interest). Capital expenditures during 2005, 2004 and 2003 were $414.9
million,
$385.3 million and $377.9 million, respectively.
Financing
activities.
Net cash
used in financing activities was $491.7 million in 2005, $578.5 million
in 2004
and $403.8 million in 2003. Payments of debt were $693.3 million in 2005
and
$179.4 million in 2004. In accordance with previously announced stock repurchase
programs, we repurchased 16.4 million shares (for $551.8 million) and 13.4
million shares (for $401.0 million) in 2005 and 2004, respectively. The
2005
repurchases include 12.9 million shares repurchased (for a total price
of $437.5
million) under accelerated share repurchase agreements (see below and Note
8 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. 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.
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 initial aggregate price of $416.5
million, the proceeds of which came from the settlement of the equity units
mentioned above and cash on hand. Under these agreements, the investment
banks
repurchased CenturyTel shares in the open market through December 2005.
At the
end of the repurchase period, we paid the investment banks a price adjustment
in
cash of approximately $21.0 million based principally upon the actual cost
of
the shares repurchased by the investment banks.
Other.
For
2006, we have budgeted $325 million for capital expenditures. We have invested
significant amounts in our wireline network in the last several years and
believe we are in a position to move closer to maintenance capital expenditure
levels for the foreseeable future for our wireline operations. Our capital
expenditure budget also includes amounts for expanding our new service
offerings
and expanding our data networks.
As
relief
from the effects of Hurricane Katrina, certain of our affected subsidiaries
were
granted a deferral from making their remaining 2005 estimated federal tax
payments until 2006. Accordingly, we made a payment of approximately $75
million
in the first quarter of 2006 to satisfy our remaining 2005 estimated
payments.
We
expect
to receive approximately $120 million of cash on a pre-tax basis in the
first
half of 2006 from the redemption of our Rural Telephone Bank stock.
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. 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 these agreements principally through borrowings
under our $750 million credit facility and cash on hand. We expect to use
cash
generated from operations during 2006 to repay these borrowings. The investment
banks are expected to repurchase an equivalent number of shares in the
open
market in the coming months. Once these repurchases are complete, we will
receive or be required to pay a price adjustment (payable at our discretion
in
either shares or cash) based principally on the actual cost of the shares
repurchased by the investment banks.
The
following table contains certain information concerning our material contractual
obligations as of December 31, 2005.
|
|
Payments
due by period
|
|
Contractual
obligations
|
|
Total
|
|
2006
|
|
|
|
2007-2008
|
|
2009-2010
|
|
After
2010
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, including
current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturities
and capital
lease obligations
(1)
|
|
$
|
2,652,806
|
|
|
276,736
|
|
|
(2
|
)
|
|
401,749
|
|
|
529,846
|
|
|
1,444,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on long-term debt obligations
|
|
$
|
1,730,951
|
|
|
178,234
|
|
|
|
|
|
320,879
|
|
|
289,855
|
|
|
941,983
|
|
(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
2006.
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.
During
2005, we secured a new five-year, $750 million revolving credit facility.
Up to
$150 million of the facility can be used for letters of credit, which reduces
the amount available for other extensions of credit. The credit facility
contains financial covenants that require 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. As of December
31, 2005,
we had no amounts outstanding under our new credit facility.
As
of
December 31, 2005, our telephone subsidiaries also had available for use
$115.9
million of commitments for long-term financing from the Rural Utilities
Service.
We have a commercial paper program that authorizes us to have outstanding
up to
$1.5 billion in commercial paper at any one time; however, borrowings are
effectively limited to the amount available under our credit facility.
As of
December 31, 2005, we had no commercial paper outstanding under such program.
We
also have access to debt and equity capital markets, including our shelf
registration statements. At December 31, 2005, we held over $158.8 million
of
cash and cash equivalents.
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+
(subject to being on CreditWatch with negative implications). Moody’s affirmed
its rating in early 2006 in connection with the announcement of our $1.0
billion
stock repurchase program. In January 2006, S&P placed our debt rating on
CreditWatch with negative implications, citing the continued loss of access
lines in the wireline industry as a whole. Our commercial paper program
is rated
P2 by Moody’s and A2 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:
|
|
2005
|
|
2004
|
|
2003
|
|
Debt
to total capitalization
|
|
|
42.3
|
%
|
|
46.9
|
|
|
47.8
|
|
Ratio
of earnings to fixed charges and preferred stock
dividends*
|
|
|
3.60
|
|
|
3.57
|
|
|
3.33
|
|
*
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. 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.
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, which ends June 30, 2006, based on embedded,
or historical, costs that will provide predictable levels of support to
rural
local exchange carriers, including substantially all of our LECs. Wireless
and
other competitive service providers continue to seek eligible telecommunications
carrier (“ETC”) status in order to be eligible to receive USF support, which,
coupled with changes in usage of telecommunications services, have placed
stresses on the USF’s funding mechanism. These developments have placed
additional financial pressure on the amount of money that is necessary
and
available to provide support to all eligible service providers, including
support payments we receive from the High Cost Loop support program. As
a result
of the continued increases in the nationwide average cost per loop factor
used
by the FCC to allocate funds among all recipients (caused by a decrease
in the
size of the High Cost Loop support program and changes in requests for
support
from the USF), we believe the aggregate level of payments we receive from
the
USF will continue to decline in the near term under the FCC’s current rules.
Based on recent FCC filings, we anticipate our 2006 revenues from the USF
High
Cost Loop support program will be approximately $8-12 million lower than
2005
levels due to increases in the nationwide average cost per loop factor.
On
August
16, 2004, the FSJB released a notice requesting comments on the FCC’s current
rules for the provision of high-cost support for rural companies, including
comments on whether eligibility requirements should be amended in a manner
that
would adversely affect larger rural LECs such as us. In addition, the FCC
has
taken various other steps in anticipation of restructuring universal service
support mechanisms and various parties have judicially challenged several
aspects of the FCC’s universal service rules, all of which has created
additional uncertainty regarding the USF’s programs, including opening a docket
that will change the method of funding contributions. The FCC is expected
to
issue soon an order addressing a new type of contribution methodology.
In the
event that does not happen, we believe, but cannot assure you, that the
FCC will
likely extend the interim mechanism now in place before it lapses on June
30,
2006.
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
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 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. Until this 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.
Recent
events affecting us.
During
the last few years, several states in which we have substantial operations
took
legislative or regulatory steps to further introduce competition into the
LEC
business. The number of companies which have requested authorization to
provide
local exchange service in 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 60% of our access lines.
Certain
long distance carriers continue to request that we reduce intrastate access
tariffed rates for certain of its LECs. 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
2005 we incurred a reduction in our intrastate revenues of approximately
$13.4
million compared to 2004 primarily due to these factors. The corresponding
decrease in 2004 compared to 2003 was $26.8 million. We believe this trend
of
decreased intrastate minutes will continue in 2006, although the magnitude
of
such decrease is uncertain.
While
we
expect our operating revenues in 2006 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, DSL 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, 2005 included regulatory
assets of
approximately $3.1 million (primarily deferred costs related to financing
costs
and regulatory proceedings) and regulatory liabilities of approximately
$183.2
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 $68.3 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.
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 2005 have not
been
material, and we currently do not believe that such costs will become
material.
Item
7A.
|
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”.
Item
8.
|
Financial
Statements and Supplementary
Data
|
Report
of Management
The
Shareholders
CenturyTel,
Inc.:
Management
has prepared and is responsible for the integrity and objectivity of 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, 2005. Management’s assessment of the effectiveness
of our internal control over financial reporting as of December 31, 2005
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
13,
2006
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, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year
period
ended December 31, 2005, 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.
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, 2005, 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 13, 2006 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
13,
2006
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, 2005, 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, 2005, 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, 2005, 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 13, 2006 expressed
an unqualified opinion on those consolidated financial statements and related
financial statement schedule.
/s/
KPMG
LLP
Shreveport,
Louisiana
March
13,
2006
CENTURYTEL,
INC.
Consolidated
Statements of Income
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars,
except per share amounts,
and
shares in thousands)
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
|
$
|
2,479,252
|
|
|
2,407,372
|
|
|
2,367,610
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
|
821,929
|
|
|
755,413
|
|
|
739,210
|
|
Selling,
general and administrative
|
|
|
388,989
|
|
|
397,102
|
|
|
374,352
|
|
Depreciation
and amortization
|
|
|
531,931
|
|
|
500,904
|
|
|
503,652
|
|
Total
operating expenses
|
|
|
1,742,849
|
|
|
1,653,419
|
|
|
1,617,214
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
736,403
|
|
|
753,953
|
|
|
750,396
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(201,801
|
)
|
|
(211,051
|
)
|
|
(226,751
|
)
|
Income
from unconsolidated cellular entity
|
|
|
4,910
|
|
|
7,067
|
|
|
6,160
|
|
Other
income (expense)
|
|
|
(1,742
|
)
|
|
(2,597
|
)
|
|
2,154
|
|
Total
other income (expense)
|
|
|
(198,633
|
)
|
|
(206,581
|
)
|
|
(218,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX EXPENSE
|
|
|
537,770
|
|
|
547,372
|
|
|
531,959
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
203,291
|
|
|
210,128
|
|
|
187,252
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
334,479
|
|
|
337,244
|
|
|
344,707
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
$
|
2.55
|
|
|
2.45
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
$
|
2.49
|
|
|
2.41
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER COMMON SHARE
|
|
$
|
.24
|
|
|
.23
|
|
|
.22
|
|
AVERAGE
BASIC SHARES OUTSTANDING
|
|
|
130,841
|
|
|
137,215
|
|
|
143,583
|
|
AVERAGE
DILUTED SHARES OUTSTANDING
|
|
|
136,087
|
|
|
142,144
|
|
|
148,779
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Statements of Comprehensive Income
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
334,479
|
|
|
337,244
|
|
|
344,707
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME, NET OF TAXES
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment:
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment, net of $1,438, ($5,916) and $19,312
tax
|
|
|
2,307
|
|
|
(9,491
|
)
|
|
35,864
|
|
Unrealized
holding gain:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gains related to marketable securities arising during
the period,
net of $165 and $940 tax
|
|
|
264
|
|
|
1,508
|
|
|
-
|
|
Derivative
instruments:
|
|
|
|
|
|
|
|
|
|
|
Net
losses on derivatives hedging variability of cash flows, net
of ($2,606),
($219) and ($36) tax
|
|
|
(4,180
|
)
|
|
(351
|
)
|
|
(67
|
)
|
Reclassification
adjustment for losses included in net income, net of $202 and
$487
tax
|
|
|
324
|
|
|
-
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
333,194
|
|
|
328,910
|
|
|
381,410
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Balance Sheets
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
158,846
|
|
|
167,215
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
Customers,
less allowance of $11,312 and $12,766
|
|
|
154,367
|
|
|
161,827
|
|
Interexchange
carriers and other, less allowance of $10,409 and $8,421
|
|
|
82,347
|
|
|
70,753
|
|
Materials
and supplies, at average cost
|
|
|
6,998
|
|
|
5,361
|
|
Other
|
|
|
20,458
|
|
|
14,691
|
|
Total
current assets
|
|
|
423,016
|
|
|
419,847
|
|
|
|
|
|
|
|
|
|
NET
PROPERTY, PLANT AND EQUIPMENT
|
|
|
3,304,486
|
|
|
3,341,401
|
|
|
|
|
|
|
|
|
|
GOODWILL
AND OTHER ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,432,649
|
|
|
3,433,864
|
|
Other
|
|
|
602,556
|
|
|
601,841
|
|
Total
goodwill and other assets
|
|
|
4,035,205
|
|
|
4,035,705
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
7,762,707
|
|
|
7,796,953
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
276,736
|
|
|
249,617
|
|
Accounts
payable
|
|
|
104,444
|
|
|
141,618
|
|
Accrued
expenses and other current liabilities
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
60,521
|
|
|
60,858
|
|
Income
taxes
|
|
|
110,521
|
|
|
54,648
|
|
Other
taxes
|
|
|
58,660
|
|
|
47,763
|
|
Interest
|
|
|
71,580
|
|
|
67,379
|
|
Other
|
|
|
14,851
|
|
|
18,875
|
|
Advance
billings and customer deposits
|
|
|
48,917
|
|
|
50,860
|
|
Total
current liabilities
|
|
|
746,230
|
|
|
691,618
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
2,376,070
|
|
|
2,762,019
|
|
|
|
|
|
|
|
|
|
DEFERRED
CREDITS AND OTHER LIABILITIES
|
|
|
1,023,134
|
|
|
933,551
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock, $1.00 par value, authorized 350,000,000 shares, issued
and
outstanding 131,074,399 and 132,373,912 shares
|
|
|
131,074
|
|
|
132,374
|
|
Paid-in
capital
|
|
|
129,806
|
|
|
222,205
|
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(9,619
|
)
|
|
(8,334
|
)
|
Retained
earnings
|
|
|
3,358,162
|
|
|
3,055,545
|
|
Preferred
stock - non-redeemable
|
|
|
7,850
|
|
|
7,975
|
|
Total
stockholders' equity
|
|
|
3,617,273
|
|
|
3,409,765
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
7,762,707
|
|
|
7,796,953
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Statements of Cash Flows
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
334,479
|
|
|
337,244
|
|
|
344,707
|
|
Adjustments
to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
531,931
|
|
|
500,904
|
|
|
503,652
|
|
Deferred income taxes
|
|
|
69,530
|
|
|
74,374
|
|
|
128,706
|
|
Income from unconsolidated cellular entity
|
|
|
(4,910
|
)
|
|
(7,067
|
)
|
|
(6,160
|
)
|
Changes in current assets and current liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(685
|
)
|
|
2,937
|
|
|
37,980
|
|
Accounts payable
|
|
|
(37,174
|
)
|
|
15,514
|
|
|
47,972
|
|
Accrued taxes
|
|
|
72,971
|
|
|
27,040
|
|
|
57,709
|
|
Other current assets and other current liabilities, net
|
|
|
(8,111
|
)
|
|
12,831
|
|
|
17,323
|
|
Retirement benefits
|
|
|
(16,815
|
)
|
|
26,954
|
|
|
(14,739
|
)
|
(Increase) decrease in noncurrent assets
|
|
|
1,973
|
|
|
(34,740
|
)
|
|
(42,880
|
)
|
Increase (decrease) in other noncurrent liabilities
|
|
|
2,638
|
|
|
(6,220
|
)
|
|
(6,151
|
) |
Other, net
|
|
|
18,912
|
|
|
6,060
|
|
|
(155
|
)
|
Net cash provided by operating activities
|
|
|
964,739
|
|
|
955,831
|
|
|
1,067,964
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Payments for property, plant and equipment
|
|
|
(414,872
|
)
|
|
(385,316
|
)
|
|
(377,939
|
)
|
Acquisitions, net of cash acquired
|
|
|
(75,453
|
)
|
|
(2,000
|
)
|
|
(86,243
|
)
|
Investment in debt security
|
|
|
-
|
|
|
(25,000
|
)
|
|
-
|
|
Distributions from unconsolidated cellular entity
|
|
|
2,339
|
|
|
8,219
|
|
|
1,104
|
|
Other, net
|
|
|
6,594
|
|
|
(9,214
|
)
|
|
(1,560
|
)
|
Net cash used in investing activities
|
|
|
(481,392
|
)
|
|
(413,311
|
)
|
|
(464,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Payments of debt
|
|
|
(693,345
|
)
|
|
(179,393
|
)
|
|
(432,258
|
)
|
Proceeds from issuance of debt
|
|
|
344,173
|
|
|
-
|
|
|
-
|
|
Repurchase of common stock
|
|
|
(551,759
|
)
|
|
(401,013
|
)
|
|
-
|
|
Settlement of equity units
|
|
|
398,164
|
|
|
-
|
|
|
-
|
|
Proceeds from issuance of common stock
|
|
|
50,374
|
|
|
29,485
|
|
|
33,980
|
|
Settlements of interest rate hedge contracts
|
|
|
(7,357
|
)
|
|
-
|
|
|
22,315
|
|
Cash dividends
|
|
|
(31,862
|
)
|
|
(31,861
|
)
|
|
(32,017
|
)
|
Other, net
|
|
|
(104
|
)
|
|
4,296
|
|
|
4,174
|
|
Net cash used in financing activities
|
|
|
(491,716
|
)
|
|
(578,486
|
)
|
|
(403,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(8,369
|
)
|
|
(35,966
|
)
|
|
199,520
|
|
Cash
and cash equivalents at beginning of year
|
|
|
167,215
|
|
|
203,181
|
|
|
3,661
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
158,846
|
|
|
167,215
|
|
|
203,181
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Statements of Stockholders’ Equity
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars,
except per share amounts,
and
shares in thousands)
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
132,374
|
|
|
144,364
|
|
|
142,956
|
|
Repurchase
of common stock
|
|
|
(16,409
|
)
|
|
(13,396
|
)
|
|
-
|
|
Issuance
of common stock upon settlement of equity units
|
|
|
12,881
|
|
|
-
|
|
|
-
|
|
Conversion
of preferred stock into common stock
|
|
|
7
|
|
|
-
|
|
|
-
|
|
Issuance
of common stock through dividend
|
|
|
|
|
|
|
|
|
|
|
reinvestment,
incentive and benefit plans
|
|
|
2,221
|
|
|
1,406
|
|
|
1,408
|
|
Balance
at end of year
|
|
|
131,074
|
|
|
132,374
|
|
|
144,364
|
|
|
|
|
|
|
|
|
|
|
|
|
PAID-IN
CAPITAL
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
222,205
|
|
|
576,515
|
|
|
537,804
|
|
Repurchase
of common stock
|
|
|
(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
|
|
|
48,153
|
|
|
28,079
|
|
|
32,572
|
|
Conversion
of preferred stock into common stock
|
|
|
118
|
|
|
-
|
|
|
-
|
|
Amortization
of unearned compensation and other
|
|
|
9,397
|
|
|
5,228
|
|
|
6,139
|
|
Balance
at end of year
|
|
|
129,806
|
|
|
222,205
|
|
|
576,515
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS,
|
|
|
|
|
|
|
|
|
|
|
NET
OF TAX
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(8,334
|
)
|
|
-
|
|
|
(36,703
|
)
|
Change
in other comprehensive income (loss) (net
|
|
|
|
|
|
|
|
|
|
|
of
reclassification adjustment), net of tax
|
|
|
(1,285
|
)
|
|
(8,334
|
)
|
|
36,703
|
|
Balance
at end of year
|
|
|
(9,619
|
)
|
|
(8,334
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,055,545
|
|
|
2,750,162
|
|
|
2,437,472
|
|
Net
income
|
|
|
334,479
|
|
|
337,244
|
|
|
344,707
|
|
Cash
dividends declared
|
|
|
|
|
|
|
|
|
|
|
Common
stock - $.24, $.23 and $.22 per share
|
|
|
(31,466
|
)
|
|
(31,462
|
)
|
|
(31,618
|
)
|
Preferred
stock
|
|
|
(396
|
)
|
|
(399
|
)
|
|
(399
|
)
|
Balance
at end of year
|
|
|
3,358,162
|
|
|
3,055,545
|
|
|
2,750,162
|
|
|
|
|
|
|
|
|
|
|
|
|
UNEARNED
ESOP SHARES
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
-
|
|
|
(500
|
)
|
|
(1,500
|
)
|
Release
of ESOP shares
|
|
|
-
|
|
|
500
|
|
|
1,000
|
|
Balance
at end of year
|
|
|
-
|
|
|
-
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK - NON-REDEEMABLE
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
7,975
|
|
|
7,975
|
|
|
7,975
|
|
Conversion
of preferred stock into common stock
|
|
|
(125
|
)
|
|
-
|
|
|
-
|
|
Balance
at end of year
|
|
|
7,850
|
|
|
7,975
|
|
|
7,975
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
$
|
3,617,273
|
|
|
3,409,765
|
|
|
3,478,516
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
132,374
|
|
|
144,364
|
|
|
142,956
|
|
Repurchase
of common stock
|
|
|
(16,409
|
)
|
|
(13,396
|
)
|
|
-
|
|
Issuance
of common stock upon settlement of equity units
|
|
|
12,881
|
|
|
-
|
|
|
-
|
|
Conversion
of preferred stock into common stock
|
|
|
7
|
|
|
-
|
|
|
-
|
|
Issuance
of common stock through dividend
|
|
|
|
|
|
|
|
|
|
|
reinvestment,
incentive and benefit plans
|
|
|
2,221
|
|
|
1,406
|
|
|
1,408
|
|
Balance
at end of year
|
|
|
131,074
|
|
|
132,374
|
|
|
144,364
|
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Notes
to
Consolidated Financial Statements
December
31, 2005
(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,
2005 included regulatory assets of approximately $3.1 million (consisting
primarily of deferred costs related to financing costs and regulatory
proceedings) and regulatory liabilities of approximately $183.2 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 $68.3
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.
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 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. Impairment
of
goodwill is tested at least annually by comparing the fair value of the
reporting unit to its carrying value (including goodwill). Estimates
of the fair
value of the reporting unit are based on valuation models using criterion
such
as multiples of earnings.
Long-lived
assets
-
Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets
(exclusive of goodwill) and also broadens the reporting of discontinued
operations to include all components of an entity with operations that
can be
distinguished from the rest of the entity and that will be eliminated
from the
ongoing operations of the entity in a disposal transaction.
Affiliated
transactions
-
Certain of our service subsidiaries provide installation and maintenance
services, materials and supplies, and managerial, operational, technical,
accounting and administrative services to subsidiaries. In addition,
CenturyTel
provides and bills management services to subsidiaries and in certain
instances
makes interest bearing advances to finance construction of plant and
purchases
of equipment. These transactions are recorded by 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.
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 highly effective as a hedge or that it has ceased to be a highly
effective 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 other comprehensive income),
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. In the fourth quarter of 2004,
we
adopted the requirements of Emerging Issues Task Force No. 04-8, “The Effect of
Contingently Convertible Instruments on Diluted Earnings Per Share,” in
calculating our diluted earnings per share. See Note 12 for additional
information.
Stock-based
compensation
- Over
the past several years, 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 have not
to date
recognized compensation cost in connection with issuing stock options.
During
2005 we granted 1,015,025 options at market price. 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 options at market price. The weighted average
fair value
of each of the 2004 options was estimated as of the date of grant to
be $10.25
using an option-pricing model with the following assumptions: dividend
yield -
.7%; expected volatility - 30%; weighted average risk-free interest rate
- 3.6%;
and expected option life - seven years.
During
2003 we granted 1,720,317 options at market price. The weighted average
fair
value of each of the 2003 options was estimated as of the date of grant
to be
$9.94 using an option-pricing model with the following assumptions: dividend
yield - .7%; expected volatility - 30%; weighted average risk-free interest
rate
- 3.4%; and expected option life - seven years.
If
compensation cost for our options had been determined consistent with
SFAS 123,
our net income and earnings per share on a pro forma basis for 2005,
2004 and
2003 would have been as follows:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands,
except
per share amounts)
|
|
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
334,479
|
|
|
337,244
|
|
|
344,707
|
|
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
|
)
|
|
(13,183
|
)
|
Pro
forma net income
|
|
$
|
322,038
|
|
|
327,477
|
|
|
331,524
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
2.55
|
|
|
2.45
|
|
|
2.40
|
|
Pro
forma
|
|
$
|
2.46
|
|
|
2.38
|
|
|
2.31
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
2.49
|
|
|
2.41
|
|
|
2.35
|
|
Pro
forma
|
|
$
|
2.40
|
|
|
2.34
|
|
|
2.26
|
|
Beginning
in the first quarter of 2006, we will adopt the provisions of Statement
of
Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payments”
(“SFAS 123(R)”). SFAS 123(R) requires us to measure the cost of the employee
services received in exchange for an award of equity instruments based
upon the
fair value of the award on the grant date. Such cost will be recognized
as an
expense over the period during which the employee is required to provide
service
in exchange for the award. In accordance with SFAS 123(R), compensation
cost is
also recognized over the applicable remaining vesting period for any
outstanding
awards that are not fully vested as of the effective date. On December
14, 2005,
the Compensation Committee of our Board of Directors approved accelerating
the
vesting of all unvested stock options outstanding (which totaled approximately
1.5 million options) under our management incentive compensation plans,
effective as of December 31, 2005. The Committee accelerated the vesting
period
to eliminate the recognition of compensation expense which would otherwise
have
been required by SFAS 123(R). The aggregate pre-tax compensation expense
that we
will avoid is approximately $4.9 million, of which approximately $4.1
million
would have been recognized in 2006. The table above includes this $4.9
million
amount as a pro forma compensation expense for 2005. We recognized approximately
$156,000 of expense ($96,000 net of tax) in the fourth quarter of 2005
upon
accelerating the vesting of all options outstanding.
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.
In
June
and December 2003, we acquired certain fiber transport assets for an
aggregate
of $55.2 million cash (of which $3.8 million was paid as a deposit in
2002). In
the fourth quarter of 2003, we purchased an additional 24.3% interest
in a
telephone company in which we owned a majority interest for $32.4 million
cash.
The
results of operations of the acquired properties are included in our
results of
operations from and after the respective acquisition dates.
(3)
|
GOODWILL
AND OTHER ASSETS
|
Goodwill
and other assets at December 31, 2005 and 2004 were composed of the
following:
December
31,
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,432,649
|
|
|
3,433,864
|
|
Billing
system development costs, less accumulated amortization of $14,899
and $4,652
|
|
|
193,579
|
|
|
202,349
|
|
Cash
surrender value of life insurance contracts
|
|
|
94,801
|
|
|
93,792
|
|
Prepaid
pension asset
|
|
|
73,360
|
|
|
46,800
|
|
Intangible
assets not subject to amortization
|
|
|
36,690
|
|
|
35,300
|
|
Marketable
securities
|
|
|
29,195
|
|
|
30,092
|
|
Deferred
interest rate hedge contracts
|
|
|
25,624
|
|
|
28,435
|
|
Investment
in debt security
|
|
|
21,611
|
|
|
21,013
|
|
Intangible
assets subject to amortization
|
|
|
|
|
|
|
|
Customer
base, less accumulated amortization of $5,349 and $3,756
|
|
|
19,745
|
|
|
18,944
|
|
Contract
rights, less accumulated amortization of $1,861 and $465
|
|
|
2,326
|
|
|
3,722
|
|
Other
|
|
|
105,625
|
|
|
121,394
|
|
|
|
$
|
4,035,205
|
|
|
4,035,705
|
|
As
of
September 30, 2005, we completed the required annual impairment test
under SFAS
142 and determined our goodwill was not impaired.
We
recently implemented a new integrated billing and customer care system.
We
accounted for the costs to develop such 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 $207.0 million and is being amortized over a twenty-year
period.
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 2005, 2004 and 2003 was $3.0 million, $2.0 million
and
$1.5 million, respectively, and is expected to be $3.1 million in 2006,
$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, 2005 and 2004 was composed
of the
following:
December
31,
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Cable
and wire
|
|
$
|
4,123,805
|
|
|
3,948,784
|
|
Central
office
|
|
|
2,532,034
|
|
|
2,385,406
|
|
General
support
|
|
|
768,972
|
|
|
785,025
|
|
Fiber
transport
|
|
|
188,451
|
|
|
150,098
|
|
Information
origination/termination
|
|
|
59,838
|
|
|
56,428
|
|
Construction
in progress
|
|
|
81,532
|
|
|
66,485
|
|
Other
|
|
|
46,745
|
|
|
38,791
|
|
|
|
|
7,801,377
|
|
|
7,431,017
|
|
Accumulated
depreciation
|
|
|
(4,496,891
|
)
|
|
(4,089,616
|
)
|
Net
property, plant and equipment
|
|
$
|
3,304,486
|
|
|
3,341,401
|
|
Depreciation
expense was $528.9 million, $498.9 million and $502.1 million in 2005,
2004 and
2003, respectively. The year 2004 included a reduction in depreciation
expense
of $13.2 million to adjust the balances of certain over-depreciated property,
plant and equipment accounts.
Our
long-term debt as of December 31, 2005 and 2004 was as follows:
December
31,
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
CenturyTel
|
|
|
|
|
|
Senior
notes and debentures:
|
|
|
|
|
|
6.55%
Series C
|
|
$
|
-
|
|
|
50,000
|
|
7.20%
Series D, due 2025
|
|
|
100,000
|
|
|
100,000
|
|
6.15%
Series E
|
|
|
-
|
|
|
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
|
|
|
500,000
|
|
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
|
|
|
-
|
|
Unamortized
net discount
|
|
|
(6,578
|
)
|
|
(3,919
|
)
|
Net
fair value of derivative instruments related to
|
|
|
|
|
|
|
|
Series H and L senior notes
|
|
|
(3,929
|
)
|
|
10,865
|
|
Other
|
|
|
39
|
|
|
79
|
|
Total
CenturyTel
|
|
|
2,370,440
|
|
|
2,587,025
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
|
|
First
mortgage debt
|
|
|
|
|
|
|
|
5.32%*
notes, payable to agencies of the U. S. government and cooperative
lending
associations, due in installments through 2028
|
|
|
146,905
|
|
|
210,403
|
|
7.98%
notes, due through 2016
|
|
|
4,700
|
|
|
4,964
|
|
Other
debt
|
|
|
|
|
|
|
|
6.87%*
unsecured medium-term notes, due through 2008
|
|
|
122,499
|
|
|
197,999
|
|
9.40%*
notes, due in installments through 2028
|
|
|
4,931
|
|
|
6,187
|
|
5.53%*
capital lease obligations, due through 2008
|
|
|
3,331
|
|
|
5,058
|
|
Total
subsidiaries
|
|
|
282,366
|
|
|
424,611
|
|
Total
long-term debt
|
|
|
2,652,806
|
|
|
3,011,636
|
|
Less
current maturities
|
|
|
276,736
|
|
|
249,617
|
|
Long-term
debt, excluding current maturities
|
|
$
|
2,376,070
|
|
|
2,762,019
|
|
*
Weighted average interest rate at December 31, 2005
The
approximate annual debt maturities for the five years subsequent to December
31,
2005 are as follows: 2006 - $276.7 million (including $165 million aggregate
principal amount of our convertible debentures, Series K, due 2032, which
can be
put to us at various dates beginning in 2006); 2007 - $121.1 million;
2008 -
$280.6 million; 2009 - $15.6 million; and 2010 - $514.3 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, 2005, restricted net
assets of
subsidiaries were $160.6 million and subsidiaries’ retained earnings in excess
of amounts restricted by debt covenants totaled $1.9 billion. At December
31,
2005, approximately $2.6 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 tied to our credit
ratings, or that restrict the issuance of new securities in the event
of a
material adverse change to us.
Approximately
16% of our property, plant and equipment is pledged to secure the long-term
debt
of subsidiaries.
In
May
2004, we prepaid all $100 million aggregate principal amount of our 8.25%,
Series B notes, due 2024. We incurred a $4.6 million pre-tax expense
(a $3.6
million prepayment premium and a $1.0 million write-off of unamortized
deferred
debt costs) in the second quarter of 2004 associated with this
prepayment.
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 8
for
information on our accelerated share repurchase program which mitigated
the
dilutive impact of issuing these 12.9 million shares.
As
of
December 31, 2005, we had available a $750 million five-year revolving
credit
facility. We had no outstanding borrowings under our facility at December
31,
2005. At December 31, 2005, our telephone subsidiaries had available
for use
$115.9 million of commitments for long-term financing from the Rural
Utilities
Service.
In
the
third quarter of 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, 2006, August 1, 2010 and August 1, 2017. In each
case,
the purchase price payable will be equal to 100% of the principal amount
of the
debentures to be purchased plus any accrued and unpaid interest to the
purchase
date. We will pay cash for all debentures so purchased on August 1, 2006.
For
any such 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.
As of December 31, 2005, we realized a weighted average interest rate
of 8.25%
related to these hedges. Interest expense was reduced by $386,000 during
2005 as
a result of these hedges. The aggregate fair value of such hedges at
December
31, 2005 was $17.6 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, 2005 and 2004 were composed
of the
following:
December
31,
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Deferred
federal and state income taxes
|
|
$
|
670,420
|
|
|
601,757
|
|
Accrued
postretirement benefit costs
|
|
|
241,153
|
|
|
232,546
|
|
Fair
value of interest rate swap
|
|
|
17,645
|
|
|
6,283
|
|
Additional
minimum pension liability
|
|
|
11,662
|
|
|
18,450
|
|
Minority
interest
|
|
|
8,372
|
|
|
7,508
|
|
Other
|
|
|
73,882
|
|
|
67,007
|
|
|
|
$
|
1,023,134
|
|
|
933,551
|
|
Common
stock
-
Unissued shares of CenturyTel common stock were reserved as
follows:
December
31,
|
|
2005
|
|
|
|
(In
thousands)
|
|
Incentive
compensation programs
|
|
|
11,037
|
|
Acquisitions
|
|
|
4,064
|
|
Employee
stock purchase plan
|
|
|
4,637
|
|
Dividend
reinvestment plan
|
|
|
334
|
|
Conversion
of convertible preferred stock
|
|
|
428
|
|
Other
employee benefit plans
|
|
|
2,224
|
|
|
|
|
22,724
|
|
In
accordance with previously announced stock repurchase programs, we repurchased
16.4 million shares (for $551.8 million) and 13.4 million shares (for
$401.0
million) in 2005 and 2004, respectively. The 2005 repurchases included
12.9
million shares repurchased (for an initial price of $416.5 million) under
accelerated share repurchase agreements (see below for additional
information).
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 since the investment banks’ weighted average purchase price
during the repurchase period was higher than the initial average price.
We
reflected such settlement amount as an adjustment to equity.
See
Note
18 for information concerning a $1.0 billion share repurchase program
approved
by our board of directors in February 2006.
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, 2005, the holders of 7.7 million
shares of
common stock were entitled to ten votes per share.
Preferred
stock
- As of
December 31, 2005, we had 2.0 million shares of authorized preferred
stock, $25
par value per share. At December 31, 2005 and 2004, there were 314,000
and
319,000 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
- In
1996 the Board of Directors declared a dividend of one preference share
purchase
right for each common share outstanding. Such rights become exercisable
if and
when a potential acquiror takes certain steps to acquire 15% or more
of
CenturyTel’s common stock. Upon the occurrence of such an acquisition, each
right held by shareholders other than the acquiror may be exercised to
receive
that number of shares of common stock or other securities of CenturyTel
(or, in
certain situations, the acquiring company) which at the time of such
transaction
will have a market value of two times the exercise price of the right.
Such plan
expires in November 2006 and will be reconsidered for renewal by our
Board of
Directors.
(9)
|
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. We
first
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.
In 2003,
we announced changes, effective January 1, 2004, that (i) decreased our
subsidization of benefits provided under our postretirement benefit plan
for
existing participants and (ii) eliminated our subsidization of benefits
for
employees hired after January 1, 2003.
The
following is a reconciliation of the beginning and ending balances for
the
benefit obligation and the plan assets.
December
31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
305,720
|
|
|
311,421
|
|
|
253,762
|
|
Service
cost
|
|
|
6,289
|
|
|
6,404
|
|
|
6,176
|
|
Interest
cost
|
|
|
16,718
|
|
|
17,585
|
|
|
18,216
|
|
Participant
contributions
|
|
|
1,637
|
|
|
1,362
|
|
|
1,199
|
|
Plan
amendments
|
|
|
23,289
|
|
|
2,529
|
|
|
(34,597
|
)
|
Actuarial
(gain) loss
|
|
|
16,391
|
|
|
(18,185
|
)
|
|
79,163
|
|
Benefits
paid
|
|
|
(16,102
|
)
|
|
(15,396
|
)
|
|
(12,498
|
)
|
Benefit
obligation at end of year
|
|
$
|
353,942
|
|
|
305,720
|
|
|
311,421
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
29,570
|
|
|
29,877
|
|
|
28,697
|
|
Return
on assets
|
|
|
1,440
|
|
|
2,377
|
|
|
4,479
|
|
Employer
contributions
|
|
|
13,000
|
|
|
11,350
|
|
|
8,000
|
|
Participant
contributions
|
|
|
1,637
|
|
|
1,362
|
|
|
1,199
|
|
Benefits
paid
|
|
|
(16,102
|
)
|
|
(15,396
|
)
|
|
(12,498
|
)
|
Fair
value of plan assets at end of year
|
|
$
|
29,545
|
|
|
29,570
|
|
|
29,877
|
|
Net
periodic postretirement benefit cost for 2005, 2004 and 2003 included
the
following components:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
6,289
|
|
|
6,404
|
|
|
6,176
|
|
Interest
cost
|
|
|
16,718
|
|
|
17,585
|
|
|
18,216
|
|
Expected
return on plan assets
|
|
|
(2,440
|
)
|
|
(2,465
|
)
|
|
(2,367
|
)
|
Amortization
of unrecognized actuarial loss
|
|
|
2,916
|
|
|
3,611
|
|
|
1,731
|
|
Amortization
of unrecognized prior service cost
|
|
|
(1,876
|
)
|
|
(3,648
|
)
|
|
(2,447
|
)
|
Net
periodic postretirement benefit cost
|
|
$
|
21,607
|
|
|
21,487
|
|
|
21,309
|
|
The
following table sets forth the amounts recognized as liabilities for
postretirement benefits at December 31, 2005, 2004 and 2003.
December
31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Benefit
obligation
|
|
$
|
(353,942
|
)
|
|
(305,720
|
)
|
|
(311,421
|
)
|
Fair
value of plan assets
|
|
|
29,545
|
|
|
29,570
|
|
|
29,877
|
|
Unamortized
prior service cost
|
|
|
(1,726
|
)
|
|
(26,891
|
)
|
|
(33,068
|
)
|
Unrecognized
net actuarial loss
|
|
|
82,660
|
|
|
68,185
|
|
|
89,893
|
|
Accrued
benefit cost
|
|
$
|
(243,463
|
)
|
|
(234,856
|
)
|
|
(224,719
|
)
|
Assumptions
used in accounting for postretirement benefits as of December 31, 2005
and 2004
were:
|
|
2005
|
|
2004
|
|
Determination
of benefit obligation
|
|
|
|
|
|
Discount rate
|
|
|
5.5
|
%
|
|
5.75
|
|
Healthcare cost increase trend rates (Medical/Prescription
Drug)
|
|
|
|
|
|
|
|
Following year
|
|
|
9.0%/14.0
|
%
|
|
10.0/15.0
|
|
Rate to which the cost trend rate is assumed to decline (the
ultimate cost
trend rate)
|
|
|
5.0%/5.0
|
%
|
|
5.0/5.0
|
|
Year that the rate reaches the ultimate cost trend rate
|
|
|
2010/2015
|
|
|
2010/2015
|
|
|
|
|
|
|
|
|
|
Determination
of benefit cost
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
6.0
|
|
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,
2005 and 2004 by asset category are as follows:
|
|
2005
|
|
2004
|
|
Equity
securities
|
|
|
60.2
|
%
|
|
63.0
|
|
Debt
securities
|
|
|
31.4
|
|
|
34.1
|
|
Other
|
|
|
8.4
|
|
|
2.9
|
|
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
|
|
$
|
1,498
|
|
|
(1,428
|
)
|
Effect
on postretirement benefit obligation
|
|
$
|
23,159
|
|
|
(21,736
|
)
|
We
expect
to contribute approximately $18 million to our postretirement benefit
plan in
2006.
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)
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
18,500
|
|
|
(800
|
)
|
|
17,700
|
|
2007
|
|
$
|
20,700
|
|
|
(900
|
)
|
|
19,800
|
|
2008
|
|
$
|
22,900
|
|
|
(1,000
|
)
|
|
21,900
|
|
2009
|
|
$
|
24,400
|
|
|
(1,100
|
)
|
|
23,300
|
|
2010
|
|
$
|
26,000
|
|
|
(1,100
|
)
|
|
24,900
|
|
2011-2015
|
|
$
|
140,600
|
|
|
(6,100
|
)
|
|
134,500
|
|
(10)
|
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 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,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
418,630
|
|
|
390,833
|
|
|
346,256
|
|
Service
cost
|
|
|
15,332
|
|
|
14,175
|
|
|
12,840
|
|
Interest
cost
|
|
|
23,992
|
|
|
23,156
|
|
|
23,617
|
|
Plan
amendments
|
|
|
31
|
|
|
428
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
-
|
|
|
(9,962
|
)
|
Actuarial
loss
|
|
|
28,016
|
|
|
16,304
|
|
|
46,221
|
|
Benefits
paid
|
|
|
(25,402
|
)
|
|
(26,266
|
)
|
|
(28,139
|
)
|
Benefit
obligation at end of year
|
|
$
|
460,599
|
|
|
418,630
|
|
|
390,833
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
363,981
|
|
|
348,308
|
|
|
266,420
|
|
Return
on plan assets
|
|
|
25,453
|
|
|
35,892
|
|
|
52,783
|
|
Employer
contributions
|
|
|
43,335
|
|
|
6,047
|
|
|
50,437
|
|
Acquisitions
|
|
|
-
|
|
|
-
|
|
|
6,807
|
|
Benefits
paid
|
|
|
(25,402
|
)
|
|
(26,266
|
)
|
|
(28,139
|
)
|
Fair
value of plan assets at end of year
|
|
$
|
407,367
|
|
|
363,981
|
|
|
348,308
|
|
At
December 31, 2005 and 2004, our underfunded pension plans (meaning those
with
projected benefit obligations in excess of plan assets) had aggregate
benefit
obligations of $437.8 million and $172.0 million, respectively, and aggregate
plan assets of $382.2 million and $109.0 million, respectively.
Net
periodic pension expense for 2005, 2004 and 2003 included the following
components:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
15,332
|
|
|
14,175
|
|
|
12,840
|
|
Interest
cost
|
|
|
23,992
|
|
|
23,156
|
|
|
23,617
|
|
Expected
return on plan assets
|
|
|
(29,225
|
)
|
|
(28,195
|
)
|
|
(22,065
|
)
|
Settlements
|
|
|
-
|
|
|
1,093
|
|
|
2,233
|
|
Recognized
net losses
|
|
|
6,328
|
|
|
5,525
|
|
|
7,214
|
|
Net
amortization and deferral
|
|
|
289
|
|
|
279
|
|
|
397
|
|
Net
periodic pension expense
|
|
$
|
16,716
|
|
|
16,033
|
|
|
24,236
|
|
The
following table sets forth the combined plans’ funded status and amounts
recognized in our consolidated balance sheet at December 31, 2005, 2004
and
2003.
December
31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Benefit
obligation
|
|
$
|
(460,599
|
)
|
|
(418,630
|
)
|
|
(390,833
|
)
|
Fair
value of plan assets
|
|
|
407,367
|
|
|
363,981
|
|
|
348,308
|
|
Unrecognized
transition asset
|
|
|
(396
|
)
|
|
(648
|
)
|
|
(900
|
)
|
Unamortized
prior service cost
|
|
|
3,109
|
|
|
3,618
|
|
|
3,721
|
|
Unrecognized
net actuarial loss
|
|
|
123,879
|
|
|
98,479
|
|
|
98,759
|
|
Prepaid
pension cost
|
|
$
|
73,360
|
|
|
46,800
|
|
|
59,055
|
|
Our
accumulated benefit obligation as of December 31, 2005 and 2004 was $392.3
million and $353.1 million, respectively.
Amounts
recognized on the balance sheet consist of:
December
31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Prepaid
pension cost (reflected in Other Assets)
|
|
$
|
73,360
|
|
|
46,800
|
|
|
59,055
|
|
Additional
minimum pension liability (reflected in Deferred
|
|
|
|
|
|
|
|
|
|
|
Credits and Other Liabilities)
|
|
|
(11,662
|
)
|
|
(18,450
|
)
|
|
-
|
|
Intangible
asset (reflected in Other Assets)
|
|
|
-
|
|
|
3,043
|
|
|
-
|
|
Accumulated
Other Comprehensive Loss
|
|
|
11,662
|
|
|
15,407
|
|
|
-
|
|
|
|
$
|
73,360
|
|
|
46,800
|
|
|
59,055
|
|
Assumptions
used in accounting for the pension plans as of December 2005 and 2004
were:
|
|
2005
|
|
2004
|
|
Determination
of benefit obligation
|
|
|
|
|
|
Discount rate
|
|
|
5.5
|
%
|
|
5.75
|
|
Weighted average rate of compensation increase
|
|
|
4.0
|
%
|
|
4.0
|
|
|
|
|
|
|
|
|
|
Determination
of benefit cost
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
6.0
|
|
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, 2005
and 2004
by asset category are as follows:
|
|
2005
|
|
2004
|
|
Equity
securities
|
|
|
69.5
|
%
|
|
71.7
|
|
Debt
securities
|
|
|
28.0
|
|
|
25.5
|
|
Other
|
|
|
2.5
|
|
|
2.8
|
|
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 2006 contribution will be determined based on a number
of factors,
including the results of the 2006 actuarial valuation report. At this
time, the
amount of the 2006 contribution is not known.
Our
estimated future projected benefit payments under our defined benefit
pension
plans are as follows: 2006 - $22.8 million; 2007 - $24.1 million; 2008
- $26.9
million; 2009 - $29.0 million; 2010 - $31.2 million; and 2011-2015 -
$190.8
million.
We
also
sponsor 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 2005,
2004 and
2003 was $7.3 million, $8.1 million, and $8.9 million, respectively.
At December
31, 2005, the ESOP owned an aggregate of 6.0 million shares of CenturyTel
common
stock.
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 $9.5
million
in 2005, $9.1 million in 2004 and $8.2 million in 2003.
Income
tax expense included in the Consolidated Statements of Income for the
years
ended December 31, 2005, 2004 and 2003 was as follows:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
Federal
|
|
|
|
|
|
|
|
Current
|
|
$
|
139,836
|
|
|
121,374
|
|
|
58,659
|
|
Deferred
|
|
|
35,499
|
|
|
59,973
|
|
|
118,600
|
|
State
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(6,075
|
)
|
|
14,380
|
|
|
(113
|
)
|
Deferred
|
|
|
34,031
|
|
|
14,401
|
|
|
10,106
|
|
|
|
$
|
203,291
|
|
|
210,128
|
|
|
187,252
|
|
Income
tax expense was allocated as follows:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Income
tax expense in the consolidated statements of income
|
|
$
|
203,291
|
|
|
210,128
|
|
|
187,252
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense for tax purposes in excess of amounts recognized for
financial
reporting purposes
|
|
|
(6,261
|
)
|
|
(3,244
|
)
|
|
(4,385
|
)
|
Tax
effect of the change in accumulated other comprehensive
income (loss)
|
|
|
(801
|
)
|
|
(5,195
|
)
|
|
19,763
|
|
The
following is a reconciliation from the statutory federal income tax rate
to our
effective income tax rate:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Percentage
of pre-tax income)
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
|
35.0
|
%
|
|
35.0
|
|
|
35.0
|
|
State
income taxes, net of federal income tax benefit
|
|
|
3.4
|
|
|
3.4
|
|
|
1.2
|
|
Other,
net
|
|
|
(.6
|
)
|
|
-
|
|
|
(1.0
|
)
|
Effective
income tax rate
|
|
|
37.8
|
%
|
|
38.4
|
|
|
35.2
|
|
The
tax
effects of temporary differences that gave rise to significant portions
of the
deferred tax assets and deferred tax liabilities at December 31, 2005
and 2004
were as follows:
December
31,
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
Deferred
tax assets
|
|
|
|
|
|
Postretirement
and pension benefit costs
|
|
$
|
65,318
|
|
|
72,353
|
|
Regulatory
support
|
|
|
383
|
|
|
12,509
|
|
Net
state operating loss carryforwards
|
|
|
56,506
|
|
|
48,735
|
|
Other
employee benefits
|
|
|
21,176
|
|
|
19,096
|
|
Other
|
|
|
42,274
|
|
|
31,593
|
|
Gross
deferred tax assets
|
|
|
185,657
|
|
|
184,286
|
|
Less
valuation allowance
|
|
|
(54,412
|
)
|
|
(27,112
|
)
|
Net
deferred tax assets
|
|
|
131,245
|
|
|
157,174
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
Property,
plant and equipment, primarily due to depreciation
differences
|
|
|
(334,011
|
)
|
|
(340,175
|
)
|
Goodwill
|
|
|
(447,850
|
)
|
|
(394,832
|
)
|
Deferred
debt costs
|
|
|
(1,869
|
)
|
|
(2,275
|
)
|
Intercompany
profits
|
|
|
(2,411
|
)
|
|
(3,301
|
)
|
Other
|
|
|
(15,524
|
)
|
|
(18,348
|
)
|
Gross
deferred tax liabilities
|
|
|
(801,665
|
)
|
|
(758,931
|
)
|
Net
deferred tax liability
|
|
$
|
(670,420
|
)
|
|
(601,757
|
)
|
We
establish valuation allowances when necessary to reduce the deferred
tax assets
to amounts we expect to realize. As of December 31, 2005, we had available
tax
benefits associated with net state operating loss carryforwards, which
expire
through 2025, of $56.5 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 $54.4 million through the valuation allowance
as of
December 31, 2005 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 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.
In
the
fourth quarter of 2004, we adopted Emerging Issues Task Force No. 04-8,
“The
Effect of Contingently Convertible Instruments on Diluted Earnings Per
Share”
(“EITF 04-8”). EITF 04-8 requires contingently convertible instruments be
included in the diluted earnings per share calculation. Our $165 million
Series
K senior notes (issued in the third quarter of 2002) are convertible
into
approximately 4.1 million shares of common stock under various contingent
circumstances, including the common stock attaining a specified trading
price in
excess of the notes’ fixed conversion price. Beginning in the fourth quarter of
2004, our diluted earnings per share and diluted shares outstanding reflect
the
application of EITF 04-8. Prior periods have been restated to reflect
this
change in accounting.
In
connection with calculating our diluted earnings per share for our accelerated
share repurchase program discussed in Note 8, 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
following is a reconciliation of the numerators and denominators of
the basic
and diluted earnings per share computations:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars,
except per share amounts, and shares in
thousands)
|
|
Income
(Numerator):
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
334,479
|
|
|
337,244
|
|
|
344,707
|
|
Dividends
applicable to preferred stock
|
|
|
(396
|
)
|
|
(399
|
)
|
|
(399
|
)
|
Net
income applicable to common stock for computing basic earnings
per
share
|
|
|
334,083
|
|
|
336,845
|
|
|
344,308
|
|
Interest
on convertible debentures, net of tax
|
|
|
4,875
|
|
|
4,829
|
|
|
5,079
|
|
Dividends
applicable to preferred stock
|
|
|
396
|
|
|
399
|
|
|
399
|
|
Net
income as adjusted for purposes of computing diluted
earnings per share
|
|
$
|
339,354
|
|
|
342,073
|
|
|
349,786
|
|
Shares
(Denominator):
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares:
|
|
|
|
|
|
|
|
|
|
|
Outstanding during period
|
|
|
131,044
|
|
|
137,225
|
|
|
143,673
|
|
Nonvested restricted stock
|
|
|
(203
|
)
|
|
-
|
|
|
-
|
|
Employee Stock Ownership Plan shares not committed
to be released
|
|
|
-
|
|
|
(10
|
)
|
|
(90
|
)
|
Weighted
average number of shares outstanding during period for computing
basic
earnings per share
|
|
|
130,841
|
|
|
137,215
|
|
|
143,583
|
|
Incremental
common shares attributable to dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable under convertible securities
|
|
|
4,511
|
|
|
4,514
|
|
|
4,514
|
|
Shares
issuable upon settlement of accelerated share repurchase
agreements
|
|
|
378
|
|
|
-
|
|
|
-
|
|
Shares
issuable under incentive compensation plans
|
|
|
357
|
|
|
415
|
|
|
682
|
|
Number
of shares as adjusted for purposes of computing
diluted earnings per share
|
|
|
136,087
|
|
|
142,144
|
|
|
148,779
|
|
Basic
earnings per share
|
|
$
|
2.55
|
|
|
2.45
|
|
|
2.40
|
|
Diluted
earnings per share
|
|
$
|
2.49
|
|
|
2.41
|
|
|
2.35
|
|
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 1.8 million for 2005, 2.4 million
for 2004
and 2.6 million for 2003.
(13)
|
STOCK
OPTION PROGRAMS
|
We
currently maintain programs which allow the Board of Directors, through
the
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, 2005, we had reserved 11.0 million
shares of common stock which may be issued in connection with incentive
awards
made in the future under our current incentive compensation
programs.
Under
our
programs, options have been granted to employees and directors at a price
either
equal to or exceeding the then-current market price. All of the options
expire
ten years after the date of grant and the original vesting period ranged
from
immediate to three years. In December 2005, the Company approved accelerating
the vesting of all unvested stock options outstanding, effective as of
December
31, 2005. See Note 1 - Stock-Based Compensation, for additional information.
Stock
option transactions during 2005, 2004 and 2003 were as follows:
|
|
|
|
|
|
Outstanding
December 31, 2002
|
|
|
6,895,802
|
|
$
|
27.95
|
|
Exercised
|
|
|
(1,059,414
|
)
|
|
22.30
|
|
Granted
|
|
|
1,720,317
|
|
|
27.36
|
|
Forfeited
|
|
|
(822,133
|
)
|
|
33.34
|
|
Outstanding
December 31, 2003
|
|
|
6,734,572
|
|
|
28.14
|
|
Exercised
|
|
|
(827,486
|
)
|
|
22.96
|
|
Granted
|
|
|
952,975
|
|
|
28.22
|
|
Forfeited
|
|
|
(146,503
|
)
|
|
27.90
|
|
Outstanding
December 31, 2004
|
|
|
6,713,558
|
|
|
28.79
|
|
Exercised
|
|
|
(1,664,625
|
)
|
|
25.04
|
|
Granted
|
|
|
1,015,025
|
|
|
33.69
|
|
Forfeited
|
|
|
(68,500
|
)
|
|
31.40
|
|
Outstanding
December 31, 2005
|
|
|
5,995,458
|
|
|
30.63
|
|
|
|
|
|
|
|
|
|
Exercisable
December 31, 2005
|
|
|
5,995,458
|
|
|
30.63
|
|
|
|
|
|
|
|
|
|
Exercisable
December 31, 2004
|
|
|
4,686,177
|
|
|
28.71
|
|
The
following table summarizes certain information about our stock options
at
December 31, 2005.
Options
outstanding (all of which are exercisable)
|
|
|
|
Number
of options
|
|
Weighted
average remaining contractual life outstanding
|
|
Weighted
average exercise price
|
|
|
|
|
|
|
|
|
|
$13.33-13.50
|
|
|
173,166
|
|
|
1.1
|
|
$
|
13.47
|
|
24.36-29.88
|
|
|
2,549,095
|
|
|
6.6
|
|
|
27.76
|
|
30.00-39.00
|
|
|
3,251,232
|
|
|
6.4
|
|
|
33.70
|
|
45.54-46.19
|
|
|
21,965
|
|
|
3.2
|
|
|
45.62
|
|
13.33-46.19
|
|
|
5,995,458
|
|
|
|
|
|
|
|
(14)
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES
|
The
amount of interest actually paid, net of amounts capitalized of $2.8
million,
$762,000 and $488,000 during 2005, 2004 and 2003, respectively, was $194.8
million, $207.2 million and $221.1 million during 2005, 2004 and 2003,
respectively. Income taxes paid were $88.8 million in 2005, $129.9 million
in
2004 and $91.6 million in 2003. Income tax refunds totaled $4.9 million
in 2005,
$8.9 million in 2004 and $85.7 million in 2003.
We
have
consummated the acquisitions of various operations, along with certain
other
assets, during the three years ended December 31, 2005. In connection
with these
acquisitions, the following assets were acquired and liabilities assumed:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
Property,
plant and equipment, net
|
|
$
|
66,450
|
|
|
-
|
|
|
46,390
|
|
Goodwill
|
|
|
-
|
|
|
5,274
|
|
|
21,743
|
|
Deferred
credits and other liabilities
|
|
|
-
|
|
|
(3,381
|
)
|
|
21,754
|
|
Other
assets and liabilities, excluding cash
and cash equivalents
|
|
|
9,003
|
|
|
107
|
|
|
(3,644
|
)
|
Decrease
in cash due to acquisitions
|
|
$
|
75,453
|
|
|
2,000
|
|
|
86,243
|
|
(15)
|
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, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets
|
|
$
|
96,808
|
|
|
96,808
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
(including current maturities)
|
|
$
|
3,011,636
|
|
|
3,132,041
|
|
|
(1)
|
|
Interest
rate
swaps
|
|
$
|
6,283
|
|
|
6,283
|
|
|
(2)
|
|
Other
|
|
$
|
50,860
|
|
|
50,860
|
|
|
(2)
|
|
(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 is our investment in stock of the Rural Telephone
Bank
(“RTB”). The RTB is currently in the process of dissolving and is expected
to
reimburse the holders of RTB stock in cash at par value (including accumulated
earned stock dividends). The carrying value of our investment in RTB
stock ($5.1
million) is reflected on the balance sheet on the cost basis and does
not
include the cumulative stock dividends earned. Upon dissolution of the
RTB, we
expect to receive approximately $120 million in cash in the first half
of 2006.
Such amount is included in the fair value disclosure in the above
table.
We
believe the carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates the fair value due
to the
short maturity of these instruments and have not been reflected in the
above
table.
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. Effective in the first quarter of 2004, as a result of our
increased
focus on integrated bundle offerings and the varied discount structures
associated with such offerings, we determined that our results of operations
would be more appropriately reported as a single reportable segment under
the
provisions of Statement of Financial Accounting Standards No. 131, “Disclosures
about Segments of an Enterprise and Related Information.” Therefore, the results
of operations for 2005 and 2004 reflect the presentation of a single
reportable
segment. Results of operations for 2003 have been conformed to this presentation
of a single reportable segment.
Our
operating revenues for our products and services include the following
components:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Local
service
|
|
$
|
702,400
|
|
|
716,028
|
|
|
712,565
|
|
Network
access
|
|
|
959,838
|
|
|
966,011
|
|
|
1,001,462
|
|
Long
distance
|
|
|
189,872
|
|
|
186,997
|
|
|
173,884
|
|
Data
|
|
|
318,770
|
|
|
275,777
|
|
|
244,998
|
|
Fiber
transport and CLEC
|
|
|
115,454
|
|
|
74,409
|
|
|
43,041
|
|
Other
|
|
|
192,918
|
|
|
188,150
|
|
|
191,660
|
|
Total
operating revenues
|
|
$
|
2,479,252
|
|
|
2,407,372
|
|
|
2,367,610
|
|
For
a
description of each of the sources of revenues, see Management’s Discussion and
Analysis and Results of Operations - Operating Revenues.
Interexchange
carriers and other accounts receivable on the balance sheets are primarily
amounts due from various long distance carriers, principally AT&T, and
several large local exchange operating companies.
(17)
|
COMMITMENTS
AND CONTINGENCIES
|
Construction
expenditures and investments in vehicles, buildings and equipment during
2006
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 money 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 the class action
status of the
suit and issued a ruling that the billing descriptions we used for these
services during an approximately 18-month period between October
29, 2000 and
May 2002 were legally insufficient. We plan to appeal this decision.
The Court’s
order does not specify the award of damages, the scope of which remains
subject
to significant fact finding. At this time, we cannot reasonably estimate
the
amount or range of possible loss; however, we believe it to be significantly
below the level of revenues billed for such services during the above
period. We
do not believe that the ultimate outcome of this litigation will
have a material
adverse effect on our financial position or 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 directly with the FCC using this streamlined filing approach.
For those
tariffs that have not yet been “deemed lawful,” we initially record as a
liability our earnings in excess of the authorized rate of return, and
may
thereafter recognize as revenues some or all of these amounts at the
end of the
applicable settlement period as our legal entitlement thereto becomes
more
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. We do not expect to recognize any revenue
in 2006
associated with the expiration of a monitoring period as described herein.
As of
December 31, 2005, 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 $31.5 million. The settlement
period
related to 2003/2004 monitoring period lapses on September 30, 2007.
We will
continue to monitor the legal status of any proceedings that could impact
our
entitlement to these funds.
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.
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. 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 these agreements principally through borrowings
under our $750 million credit facility and cash on hand. We expect to
use cash
generated from operations during 2006 to repay these borrowings. The
investment
banks are expected to repurchase an equivalent number of shares in the
open
market in the coming months. Once these repurchases are complete, we
will
receive or be required to pay a price adjustment (payable at our discretion
in
either shares or cash) based principally on the actual cost of the shares
repurchased by the investment banks.
On
March
1, 2006, we reduced our workforce by approximately 275 jobs, or 4% of
our
workforce, due to increased competitive pressures and the lost of access
lines
over the last several years. We expect to incur a one-time pre-tax charge
of
approximately $7.6 million in the first quarter of 2006 in connection
with the
severance and related costs.
*
* * * *
* * * *
CENTURYTEL,
INC.
Consolidated
Quarterly Income Statement Information
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands, except per share amounts)
|
|
2005
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
578,014
|
|
|
586,729
|
|
|
600,264
|
|
|
602,603
|
|
Operating
income
|
|
$
|
184,773
|
|
|
188,381
|
|
|
190,781
|
|
|
186,461
|
|
Net
income
|
|
$
|
83,919
|
|
|
87,367
|
|
|
90,979
|
|
|
82,442
|
|
Basic
earnings per share
|
|
$
|
.59
|
|
|
.61
|
|
|
.63
|
|
|
.57
|
|
Diluted
earnings per share
|
|
$
|
.58
|
|
|
.60
|
|
|
.62
|
|
|
.56
|
|
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 (see Note 17 for additional information);
(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.
The
fourth quarter of 2005 included a $6.3 million pre-tax charge related
to the
impairment of a non-operating investment.
Diluted
earnings per share for the fourth quarter of 2003 included a $.06 per
share
charge related to operating taxes, net of related revenue effect, and
interest
associated with various operating tax audits.
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
None.
Item
9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures.
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, 2005. 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”.
Item
9B.
|
Other
Information
|
None.
PART
III
Item
10.
|
Directors
and Executive Officers of the
Registrant
|
The
name,
age and office(s) held by each of 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
|
53
|
Chairman
of the Board of Directors and
Chief Executive Officer
|
|
|
|
Karen
A. Puckett
|
45
|
President
and Chief Operating Officer
|
|
|
|
R.
Stewart Ewing, Jr.
|
54
|
Executive
Vice President and Chief
Financial Officer
|
|
|
|
David
D. Cole
|
48
|
Senior
Vice President - Operations
Support
|
|
|
|
Stacey
W. Goff
|
40
|
Senior
Vice President, General Counsel and
Secretary
|
|
|
|
Michael
Maslowski
|
58
|
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 2006 annual meeting of
stockholders (the "Proxy Statement"), which Proxy Statement will be filed
pursuant to Regulation 14A within the first 120 days of 2006.
Item
11.
|
Executive
Compensation
|
The
information required by Item 11 is incorporated by reference to the Proxy
Statement.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
The
following table provides information about shares of CenturyTel common
stock
authorized for issuance under our existing equity compensation plans
as of
December 31, 2005.
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
|
|
|
5,995,458
|
|
$
|
30.63
|
|
|
5,044,794
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan approved by shareholders
|
|
|
-
|
|
|
-
|
|
|
4,636,945
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security
holders
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Totals
|
|
|
5,995,458
|
|
$
|
30.63
|
|
|
9,681,739
|
|
The
balance of the information required by Item 12 is incorporated by reference
to
the Proxy Statement.
Item
13.
|
Certain
Relationships and Related
Transactions
|
The
information required by Item 13 is incorporated by reference to the Proxy
Statement.
Item
14.
|
Principal
Accountant Fees and
Services
|
The
information required by Item 14 is incorporated by reference to the Proxy
Statement.
PART
IV
Item
15.
|
Exhibits,
Financial Statement Schedules, and Reports on Form
8-K
|
|
(a).
|
Documents
filed as a part of this report
|
|
(1)
|
The
following Consolidated Financial Statements are included
in Part II, Item
8:
|
Report
of
Management, including its assessment of the effectiveness of its internal
controls over financial reporting
Report
of
Independent Registered Public Accounting Firm on Consolidated Financial
Statements and Financial Statement Schedule
Report
of
Independent Registered Public Accounting Firm on management’s assessment of, and
the effective operation of, internal controls over financial
reporting
Consolidated
Statements of Income for the years ended December 31, 2005, 2004 and
2003
Consolidated
Statements of Comprehensive Income for the years ended December 31,
2005, 2004
and 2003
Consolidated
Balance Sheets - December 31, 2005 and 2004
Consolidated
Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
Consolidated
Statements of Stockholders' Equity for the years ended December 31,
2005, 2004
and 2003
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,
included
elsewhere herein.
|
|
3.4
|
Charters
of Committees of Board of Directors
|
|
(a)
|
Charter
of the Audit Committee of the Board of Directors, as amended
through
November 18, 2004 (incorporated by reference to Exhibit 3.4(a)
of our
Annual Report on Form 10-K for the year ended December 31,
2004).
|
|
(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
|
Rights
Agreement, dated as of August 27, 1996, between CenturyTel
and Society
National Bank, as Rights Agent, including the form of Rights
Certificate
(incorporated by reference to Exhibit 1 of our Current Report
on Form 8-K
filed August 30, 1996) and Amendment No.1 thereto, dated
May 25, 1999
(incorporated by reference to Exhibit 4.2(ii) to our Current
Report on
Form 8-K dated May 25, 1999) and Amendment No. 2 thereto,
dated and
effective as of June 30, 2000, by and between CenturyTel
and Computershare
Investor Services, LLC, as rights agent (incorporated by
reference to
Exhibit 4.1 of our Quarterly Report on 10-Q for the quarter
ended
September 30, 2000).
|
|
4.2
|
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).
|
|
4.3
|
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)).
|
|
4.4
|
$750
Million Five-Year Revolving Credit Facility, dated March
7, 2005, between
CenturyTel and the lenders named therein (incorporated by
reference to
Exhibit 4.4 to our Annual Report on Form 10-K for the year
ended December
31, 2004).
|
|
4.5
|
First
Supplemental Indenture, dated as of November 2, 1998, to
Indenture between
CenturyTel of the Northwest, Inc. and The First National
Bank of Chicago
(incorporated by reference to Exhibit 10.2 to 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)
|
|
(a)
|
Employee
Stock Ownership Plan and Trust, as amended and restated February
28, 2002
and amendment thereto dated December 31, 2002 (incorporated
by reference
to Exhibit 10.1(a) of our Annual Report on Form 10-K for
the year ended
December 31, 2002).
|
|
(b)
|
Dollars
& Sense Plan and Trust, as amended and restated, effective
September
1, 2000 and amendment thereto dated December 31, 2002 (incorporated
by
reference to Exhibit 10.1(b) of our Annual Report on Form
10-K for the
year ended December 31, 2002) and amendment thereto, effective
November
17, 2005, included elsewhere
herein.
|
|
(c)
|
Amended
and Restated Retirement Plan, effective as of February 28,
2002, and
amendment thereto dated December 31, 2002 (incorporated by
reference to
Exhibit 10.1(c) of our Annual Report on Form 10-K for the
year ended
December 31, 2002) and amendment thereto, effective November
17, 2005,
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, included elsewhere
herein.
|
|
(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).
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(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).
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(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).
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|
(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).
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(f) |
2005
Directors Stock Option Plan (incorporated by reference
to our 2005 Proxy Statement filed April 15,
2005).
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(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).
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(g)
|
2005
Management Incentive Compensation Plan (incorporated by reference
to our
2005 Proxy Statement filed April 15,
2005).
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|
(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).
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(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).
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(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, included elsewhere
herein.
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|
(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, included elsewhere
herein.
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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).
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|
(b)
|
Restated
Supplemental Executive Retirement Plan, dated April 3, 2000
(incorporated
by reference to Exhibit 10.1(d) to our Quarterly Report on
Form 10-Q for
the quarter ended March 31, 2000) and amendment thereto effective
November
17, 2005, included elsewhere
herein.
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|
(c)
|
Amended
and Restated Supplemental Dollars & Sense Plan, effective as of
January 1, 1999 (incorporated by reference to Exhibit 10.1
(q) to our
Annual Report on Form 10-K for the year ended December 31,
1998) and
amendments thereto effective November 17, 2005, both included
elsewhere
herein.
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|
(d) |
Supplemental
Defined Benefit Plan, effective as of January
1, 1999 (incorporated by reference to Exhibit 10.1(y) to
our Annual Report
on Form 10-K for the year ended December 31, 1998), and amendment
thereto
dated February 28, 2002 (incorporated by reference to Exhibit
10.3(e) to
our Annual Report on Form 10-K for the year ended December
31, 2001) and
amendment thereto effective November 17, 2005, included elsewhere
herein.
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|
(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).
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|
(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).
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|
(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).
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|
(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).
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|
(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).
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|
(e) |
Form
of Indemnification Agreement for Officers and Directors,
included
elsewhere herein.
|
|
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).
|
|
21
|
Subsidiaries
of CenturyTel, included elsewhere
herein.
|
|
23
|
Independent
Registered Public Accounting Firm Consent, included elsewhere
herein.
|
|
31.1
|
Chief
Executive Officer certification pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002, included elsewhere
herein.
|
|
31.2
|
Chief
Financial Officer certification pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002, included elsewhere
herein.
|
|
32
|
Chief
Executive Officer and Chief Financial Officer certification
pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, included elsewhere
herein.
|
The
following items were reported in Form 8-Ks during the fourth quarter
of 2005,
each of which was filed on the date indicated.
October
27, 2005
Items
2.02 and 9.01. Results of Operations and Financial Condition - News release
announcing third quarter 2005 operating results.
November
29, 2005
Item
8.01. Other Events - Extension of Registrant’s $200 million share repurchase
program to February 28, 2006.
December
20, 2005
Item
1.01. Entry Into a Material Definitive Agreement - Acceleration of the
vesting
period of all outstanding unvested stock options effective as of December
31,
2005.
December
22, 2005
Items
8.01 and 9.01. Other Events and Financial Statements and Exhibits - Press
release announcing the completion of the previously-announced accelerated
share
repurchase program.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by
the undersigned, thereunto duly authorized.
|
CenturyTel,
Inc.,
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|
|
|
|
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|
Date:
March 15, 2006
|
By:
/s/ Glen F. Post, III
|
|
|
Glen
F. Post, III
|
|
|
Chairman
of the Board and
|
|
|
Chief
Executive Officer
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of the Registrant and
in the
capacities and on the date indicated.
|
|
Chairman
of the Board and
|
|
|
/s/
Glen F. Post, III
|
|
Chief
Executive Officer
|
|
|
Glen
F. Post, III
|
|
|
|
March
15, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Vice President and
|
|
|
/s/
R. Stewart Ewing, Jr.
|
|
Chief
Financial Officer
|
|
|
R.
Stewart Ewing, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Neil A. Sweasy
|
|
Vice
President and Controller
|
|
|
Neil
A. Sweasy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
William R. Boles, Jr.
|
|
Director
|
|
|
William
R. Boles, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Virginia Boulet
|
|
Director
|
|
|
Virginia
Boulet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Calvin Czeschin
|
|
Director
|
|
|
Calvin
Czeschin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
James B. Gardner
|
|
Director
|
|
|
James
B. Gardner
|
|
|
|
|
/s/
W. Bruce Hanks
|
|
Director
|
|
|
W.
Bruce Hanks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Gregory J. McCray
|
|
Director
|
|
|
Gregory
J. McCray
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
C. G. Melville, Jr.
|
|
Director
|
|
|
C.
G. Melville, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Fred R. Nichols
|
|
Director
|
|
|
Fred
R. Nichols
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Harvey P. Perry
|
|
Vice-Chairman
of
|
|
|
Harvey
P. Perry
|
|
the
Board and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jim D. Reppond
|
|
Director
|
|
|
Jim
D. Reppond
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Joseph R. Zimmel
|
|
Director
|
|
|
Joseph
R. Zimmel
|
|
|
|
|
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
CENTURYTEL,
INC.
For
the
years ended December 31, 2005, 2004 and 2003
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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
33,962
|
|
|
43,527
|
|
|
(53,810)
|
(1)
|
|
-
|
|
|
23,679
|
|
Valuation
allowance for deferred tax assets
|
|
$
|
28,380
|
|
|
12,978
|
|
|
(21,623)
|
(2)
|
|
-
|
|
|
19,735
|
|
(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.
|