form10-k.htm
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, 2008
or
[ ]
Transition Report Pursuant to
Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Commission
file number 1-7784
CENTURYTEL,
INC.
(Exact
name of Registrant as specified in its charter)
|
Louisiana
|
|
72-0651161
|
|
|
(State or other jurisdiction
of
|
|
(IRS
Employer
|
|
|
incorporation
or organization)
|
|
Identification
No.)
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|
100
CenturyTel Drive, Monroe, Louisiana
|
|
71203
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code - (318) 388-9000
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class
|
Name of each exchange
on which registered
|
|
|
Common
Stock, par value $1.00
|
New
York Stock Exchange
Berlin
Stock Exchange
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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 [ ]
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
[ ] 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
[ ]
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. [ ]
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
[ ] Non-accelerated
filer
[ ]
Smaller reporting company [ ]
Indicate
by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes [ ]
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 $3.2
billion
as of June 30, 2008. As of February 20, 2009, there
were 100,319,319 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Registrant’s Proxy Statement to be furnished in connection with the 2009
annual meeting of shareholders are incorporated by reference in Part III of this
Report.
Table
of Contents
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|
Page
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Part
I.
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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26
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Item
1B.
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Unresolved
Staff Comments
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44
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Item
2.
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Properties
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44
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Item
3.
|
Legal
Proceedings
|
45
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Item
4.
|
Submission
of Matters to a Vote of Security Holders and Executive Officers
of the Registrant
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46
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Part
II.
|
|
|
|
|
|
Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
47
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Item
6.
|
Selected
Financial Data
|
48
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and
Results of Operations
|
50
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Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
76
|
Item
8.
|
Financial
Statements and Supplementary Data
|
77
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
119
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Item
9A.
|
Controls
and Procedures
|
119
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Item
9B.
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Other
Information
|
119
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Part
III.
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|
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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120
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Item
11.
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Executive
Compensation
|
121
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Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management
|
121
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Item
13.
|
Certain
Relationships and Related Transactions
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121
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Item
14.
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Principal
Accountant Fees and Services
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121
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Part
IV.
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|
|
|
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Item
15.
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Exhibits,
Financial Statement Schedules and Reports on Form 8-K
|
122
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Signatures
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135
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PART
I
On
October 26, 2008, we agreed to acquire Embarq Corporation (“EMBARQ”) in a
stock-for-stock transaction that we expect to complete in the second quarter of
2009, subject to the satisfaction of various closing conditions. The information
contained in this annual report does not reflect the impact of us acquiring
EMBARQ. For additional information, see “Pending Acquisition”
below.
General. CenturyTel,
Inc., together with its subsidiaries, is an integrated communications company
engaged primarily in providing an array of communications services, including
local and long distance voice, Internet access and broadband
services. We strive to maintain our customer relationships by, among
other things, bundling our service offerings to provide a complete offering of
integrated communications services. We conduct all of our operations
in 25 states located within the continental United States.
At
December 31, 2008, our incumbent local exchange telephone subsidiaries operated
approximately 2.0 million telephone access lines, primarily in rural areas and
small to mid-size cities in 23 states, with over 68% of these lines located in
Missouri, Wisconsin, Alabama, Arkansas and Washington. According to
published sources, we are currently the seventh largest local exchange telephone
company in the United States based on the number of access lines
served.
We also
provide fiber transport, competitive local exchange carrier, security
monitoring, and other communications and business information services in
certain local and regional markets.
In recent
years, we have expanded our product offerings to include satellite television
services and wireless broadband services. For additional
information, see “Operations - Recent Product Developments” below.
For
information on the amount of revenue derived by our various lines of services,
see “Operations - Services” below and Item 7 of this annual report.
Pending
acquisition. On October 26, 2008, we entered into a definitive
merger agreement to acquire Embarq Corporation (“EMBARQ”) in a stock-for-stock
transaction. Under the terms of the agreement, EMBARQ shareholders
will receive 1.37 CenturyTel shares for each share of EMBARQ common stock they
own at closing. On December 31, 2008, EMBARQ had outstanding
approximately 142.4 million shares of common stock and $5.7 billion of long-term
debt. The two companies have a combined operating presence in 33
states with approximately 7.7 million access lines and two million broadband
customers.
Completion
of the transaction is subject to the receipt of regulatory approvals, including
approvals from the Federal Communications Commission and certain state public
service commissions, as well as other customary closing
conditions. Subject to these conditions, we anticipate closing this
transaction in the second quarter of 2009.
See Item
1A, Risk Factors, for additional information concerning the pending acquisition
of EMBARQ. Additional information about EMBARQ is included in
documents that it has filed with the U.S. Securities and Exchange Commission
(the “SEC”). See “Where to find additional information”
below.
The
foregoing description of the pending EMBARQ merger is not complete, and is
qualified in its entirety by reference to our Current Reports on Form 8-K filed
with the SEC on October 27 and October 30, 2008, including the exhibits
thereto.
Recently completed
acquisitions. On April 30, 2007, we acquired all
of the outstanding stock of Madison River Communications Corp. (“Madison River”)
for approximately $322 million cash (including the effect of post-closing
adjustments). In connection with the acquisition, we also paid all of
Madison River’s existing indebtedness (including accrued interest), which
approximated $522 million. At the time of this acquisition, Madison
River operated approximately 164,000 predominantly rural access lines in four
states with more than 30% high-speed Internet penetration and its network
included ownership in a 2,100 route mile fiber network.
In June
2005, we acquired fiber assets in 16 metropolitan markets from KMC Telecom
Holdings, Inc. (“KMC”) for approximately $75.5 million cash, which has enabled
us to offer broadband and competitive local exchange services to customers in
these markets. During 2008, we sold the assets in six of these
markets in two separate transactions.
In June
2003, we purchased for $39.4 million cash 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.”
We also
acquired approximately 660,000, 490,000 and 650,000 telephone access lines in
transactions completed in 1997, 2000 and 2002, respectively, each of which
substantially expanded our operations. The 2002 acquisition of
telephone access lines was funded primarily from proceeds received from the sale
of substantially all of our wireless operations in August 2002.
We
continually evaluate the possibility of acquiring additional communications
assets in exchange for cash, securities or other properties, and at any given
time may be engaged in discussions or negotiations regarding additional
acquisitions. We generally do not announce our acquisitions or
dispositions until we have entered into a preliminary or definitive
agreement. Although our primary focus will continue to be on
acquiring interests that are proximate to our properties or that serve a
customer base large enough for us to operate efficiently, we may also acquire
other communications interests and these acquisitions could have a material
impact upon us.
Where to find additional
information. We make available all of our filings with
the SEC (including 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. These documents may also be obtained from the SEC’s website at
www.sec.gov. You
may obtain copies of EMBARQ’s filings with the SEC at the same website, or at
EMBARQ’s website (www.EMBARQ.com).
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. If a provision of our Corporate Compliance Program is
amended, other than by a technical, administrative or other non-substantive
amendment, or a waiver under this program is granted to a director or executive
officer, notice of such amendment or waiver will be posted on our
website. Also, we may elect to disclose the amendment or waiver in a
report on Form 8-K filed with the SEC. Only our board of directors
may consider a waiver of our Corporate Compliance Program for a director or
executive officer.
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 2008 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
communications industry are based on estimates made by us using data from
industry sources, and on assumptions made by us based on our management’s
knowledge and experience in the markets in which we operate and the
communications 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, 2008, we had approximately 6,500 employees, of which approximately
1,600 were members of 15 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. During 2006, 2007 and 2008, we
announced reductions of our workforce which aggregated approximately 700 jobs,
primarily due to (i) increased competitive pressures and the loss of access
lines over the last several years, (ii) completion of our Madison River
integration and (iii) the elimination of certain customer service personnel due
to reduced call volumes.
We were
incorporated under Louisiana law in 1968 to serve as a holding company for
several telephone companies acquired over the previous 15 to 20 years. Our
principal executive offices are located at 100 CenturyTel Drive, Monroe,
Louisiana 71203 and our telephone number is (318) 388-9000.
OPERATIONS
According
to published sources, we are the seventh largest local exchange telephone
company in the United States, based on the approximately 2.0 million access
lines we served at December 31, 2008. 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-size cities in 23
states.
The
following table lists additional information regarding our access lines as of
December 31, 2008 and 2007 (rounded to the nearest thousand
lines).
December 31,
2008
|
|
|
|
|
December 31, 2007
|
|
|
|
Number
of
|
|
|
Percent
of
|
|
|
Number
of
|
|
|
Percent
of
|
|
State
|
|
access lines
|
|
|
access lines
|
|
|
access lines
|
|
|
access lines
|
|
Missouri
|
|
|
387,000 |
|
|
|
19 |
% |
|
|
408,000 |
|
|
|
19 |
%
|
Wisconsin
(1)
|
|
|
362,000 |
|
|
|
18 |
|
|
|
387,000 |
|
|
|
18 |
|
Alabama
(2)
|
|
|
268,000 |
|
|
|
13 |
|
|
|
290,000 |
|
|
|
14 |
|
Arkansas
|
|
|
197,000 |
|
|
|
10 |
|
|
|
211,000 |
|
|
|
10 |
|
Washington
|
|
|
147,000 |
|
|
|
7 |
|
|
|
157,000 |
|
|
|
7 |
|
Michigan
|
|
|
86,000 |
|
|
|
4 |
|
|
|
91,000 |
|
|
|
4 |
|
Colorado
|
|
|
82,000 |
|
|
|
4 |
|
|
|
86,000 |
|
|
|
4 |
|
Louisiana
|
|
|
80,000 |
|
|
|
4 |
|
|
|
84,000 |
|
|
|
4 |
|
Oregon
|
|
|
62,000 |
|
|
|
3 |
|
|
|
66,000 |
|
|
|
3 |
|
Ohio
|
|
|
57,000 |
|
|
|
3 |
|
|
|
64,000 |
|
|
|
3 |
|
Illinois
(2)
|
|
|
53,000 |
|
|
|
3 |
|
|
|
57,000 |
|
|
|
3 |
|
Montana
|
|
|
53,000 |
|
|
|
3 |
|
|
|
57,000 |
|
|
|
3 |
|
Texas
|
|
|
31,000 |
|
|
|
2 |
|
|
|
33,000 |
|
|
|
2 |
|
Georgia
(2)
|
|
|
30,000 |
|
|
|
2 |
|
|
|
34,000 |
|
|
|
2 |
|
Minnesota
|
|
|
25,000 |
|
|
|
1 |
|
|
|
27,000 |
|
|
|
1 |
|
Tennessee
|
|
|
22,000 |
|
|
|
1 |
|
|
|
23,000 |
|
|
|
1 |
|
Mississippi
|
|
|
21,000 |
|
|
|
1 |
|
|
|
22,000 |
|
|
|
1 |
|
North
Carolina (2)
|
|
|
13,000 |
|
|
|
* |
|
|
|
14,000 |
|
|
|
* |
|
Wyoming
|
|
|
6,000 |
|
|
|
* |
|
|
|
6,000 |
|
|
|
* |
|
New
Mexico
|
|
|
5,000 |
|
|
|
* |
|
|
|
6,000 |
|
|
|
* |
|
Idaho
|
|
|
5,000 |
|
|
|
* |
|
|
|
5,000 |
|
|
|
* |
|
Indiana
|
|
|
4,000 |
|
|
|
* |
|
|
|
5,000 |
|
|
|
* |
|
Iowa
|
|
|
2,000 |
|
|
|
* |
|
|
|
2,000 |
|
|
|
* |
|
|
|
|
1,998,000 |
|
|
|
100 |
% |
|
|
2,135,000 |
|
|
|
100 |
%
|
*
|
Represents
less than 1% of access lines.
|
(1)
|
As
of December 31, 2008 and 2007, approximately 48,000 and 51,000,
respectively, of these lines were owned and operated by our 89%-owned
affiliate.
|
(2) |
In
connection with our acquisition of Madison River in April 2007, we
acquired an aggregate of approximately 164,000 access lines in Illinois,
Alabama, Georgia and North
Carolina. |
The
following table summarizes certain information related to our customer base,
operating revenues and capital expenditures for the past five
years. The 2008 and 2007 information includes the Madison River
properties we acquired on April 30, 2007.
|
|
Year
ended or as of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access
lines
|
|
|
1,998,000 |
|
|
|
2,135,000 |
|
|
|
2,094,000 |
|
|
|
2,214,000 |
|
|
|
2,314,000 |
|
%
Residential
|
|
|
73 |
% |
|
|
73 |
|
|
|
74 |
|
|
|
75 |
|
|
|
75 |
|
%
Business
|
|
|
27 |
% |
|
|
27 |
|
|
|
26 |
|
|
|
25 |
|
|
|
25 |
|
Internet
customers
|
|
|
683,000 |
|
|
|
623,000 |
|
|
|
459,000 |
|
|
|
357,000 |
|
|
|
271,000 |
|
%
High-speed Internet service
|
|
|
94 |
% |
|
|
89 |
|
|
|
80 |
|
|
|
70 |
|
|
|
53 |
|
%
Dial-up service
|
|
|
6 |
% |
|
|
11 |
|
|
|
20 |
|
|
|
30 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
2,599,747 |
|
|
|
2,656,241 |
|
|
|
2,447,730 |
|
|
|
2,479,252 |
|
|
|
2,407,372 |
|
Capital
expenditures
|
|
$ |
286,817 |
|
|
|
326,045 |
|
|
|
314,071 |
|
|
|
414,872 |
|
|
|
385,316 |
|
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 broadband, and other additional
services that may become available in the future due to advances in technology,
wireless spectrum sales by the Federal Communications Commission or improvements
in our infrastructure, (iii) provide our broadband and premium services to a
higher percentage of our customers, (iv) pursue acquisitions of additional
communications properties if available at attractive prices, (v) increase usage
of our networks and (vi) market our products to new customers. See
“Services” and “Regulation and Competition.”
Services
We derive
revenue from providing (i) local exchange and long distance voice telephone
services, (ii) network access services, (iii) data services, which includes both
high-speed and dial-up Internet services, as well as special access and private
line services, (iv) fiber transport, competitive local exchange and security
monitoring services and (v) other related services. The following table reflects
the percentage of operating revenues derived from these respective
services:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
|
33.6 |
% |
|
|
33.5 |
|
|
|
35.6 |
|
Network
access
|
|
|
31.6 |
|
|
|
35.4 |
|
|
|
35.9 |
|
Data
|
|
|
20.2 |
|
|
|
17.4 |
|
|
|
14.4 |
|
Fiber
transport and CLEC
|
|
|
6.2 |
|
|
|
6.0 |
|
|
|
6.1 |
|
Other
|
|
|
8.4 |
|
|
|
7.7 |
|
|
|
8.0 |
|
|
|
|
100.0 |
% |
|
|
100.0 |
|
|
|
100.0 |
|
Voice. We offer
local calling service to residential and business customers within our local
service areas, generally for a fixed monthly charge. We also offer a
number of enhanced voice services (such as call forwarding, caller
identification, conference calling, voicemail, selective call ringing and call
waiting) to our local exchange customers for an additional monthly
fee. At December 31, 2008, nearly 60% of both our business and
residential customers subscribed to one or more enhanced services. We
also offer long distance services to our customers based on either usage or
pursuant to flat-rate calling plans. We anticipate that most of our
long distance service will be provided as part of an integrated bundle with our
other service offerings, including our local exchange telephone service
offering.
Normalized
for acquisitions, dispositions and other adjustments, access lines declined 6.4%
in 2008, 5.7% in 2007 and 4.8% in 2006. 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 and recent economic
conditions. Based on our current retention initiatives, we estimate
that our access line loss will be between 5.7% and 6.7% in 2009.
Network access. We
derive our network access revenues primarily from (i) providing services to
various carriers and customers in connection with the use of our facilities to
originate and terminate their interstate and intrastate voice transmissions and
(ii) receiving universal support funds which allows us to recover a portion of
our costs under federal and state cost recovery mechanisms (see “Regulation and
Competition Relating to Incumbent Local Exchange Operations”
below). Our revenues for switched access services depend primarily on
the level of call volume.
Certain
of our interstate network access revenues are based on tariffed access charges
prescribed by the Federal Communications Commission (“FCC”); the remainder of
such revenues are derived under revenue sharing arrangements with other local
exchange carriers (“LECs”) administered by the National Exchange Carrier
Association (“NECA”), a quasi-governmental non-profit organization formed by the
FCC in 1983 for such purposes.
Certain
of our intrastate network access revenues are derived through access charges
that we bill to intrastate long distance carriers and other LEC customers. Such
intrastate network access charges are based on tariffed access charges, which
are subject to state regulatory commission approval. Additionally, certain of
our intrastate network access revenues, along with intrastate and intra-LATA
(Local Access and Transport Areas) long distance revenues, are derived through
revenue sharing arrangements with other LECs.
Data. We
derive our data
revenues primarily from monthly recurring charges for providing Internet access
services (both high-speed and dial-up services) and data transmission services
over special circuits and private lines. We began offering
traditional dial-up Internet access services to our telephone customers in
1995. In late 1999, we began offering high-speed Internet access
services, a premium-priced broadband data service. As of December 31,
2008, approximately 88% of our access lines were
broadband-enabled. At December 31, 2008, we provided high-speed
Internet access services to over 641,000 customers and dial-up services to over
42,000 customers. During 2008, we added over 85,000 high-speed
Internet customers.
Our data
revenue also includes amounts billed to our business customers for dedicated
circuits used for various purposes, including connecting the customer’s offices
or networks to our networks.
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. In February 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 part of our plan
to focus our efforts on the CLEC markets with the most promise, in mid-2008 we
sold the assets in six of our CLEC markets to other communications companies in
two separate transactions. As of December 31, 2008, our competitive
local exchange markets provided service over 800 miles of fiber.
Under the
name “LightCore”, we sell fiber capacity to other carriers and businesses over a
network that encompassed, at December 31, 2008, over 9,900 miles of fiber in the
central United States. We began our fiber transport business during
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.
In
addition to the above-described fiber network, in connection with our 2007
acquisition of Madison River, we acquired ownership in a 2,100 route mile fiber
network located in six states which has enabled us to expand our fiber network
business and further reduce our reliance on third-party transport
providers.
We offer
24-hour burglary and fire monitoring services to over 10,700 customers in select
markets in Louisiana, Arkansas, Mississippi, Texas and Ohio.
Other. We derive
our “other revenues” principally by (i) leasing, selling, installing and
maintaining customer premise telecommunications equipment and wiring, (ii)
providing billing and collection services to third parties, (iii) participating
in the publication of local telephone directories, which allows us to share in
revenues generated by the sale of yellow page and related advertising to
businesses, and (iv) offering our new services described below under the heading
“-Recent Product Developments”. We also provide printing, database
management and direct mail services and cable television services.
During
2008, we paid an aggregate of approximately $149 million for 69 licenses in the
FCC’s auction of 700 megahertz (“MHz”) wireless spectrum. The 700 MHz
spectrum is not expected to be cleared for usage until mid-2009. We
are still in the planning stages regarding the use of this
spectrum. However, based on our preliminary analysis, we are
considering developing wireless voice and data service capabilities based on
equipment using LTE (Long-Term Evolution) technology. Given that this
equipment is not expected to be commercially available until 2010, we do not
expect our deployment to result in any material impact on our capital and
operating budgets in 2009.
From time
to time, we also make investments in other communications
companies.
For
further information on regulatory, technological and competitive changes that
could impact our revenues, see “Regulation and Competition” under this Item 1
below and “Risk Factors and Cautionary Statements” under Item 1A
below. For more information on the financial contributions of our
various services, see Item 7 of this annual report.
Recent
Product Developments
Since
2005, we, in conjunction with DISH Network Corporation (“DISH”), have offered
satellite television service to households in substantially all of our local
exchange service areas. Effective January 1, 2007, we changed our
relationship with DISH from a revenue sharing arrangement to an agency
relationship. In late 2005, we initiated our switched digital
television service to the LaCrosse, Wisconsin market and, in October 2007, we
commenced a second switched digital video service offering to our Columbia,
Missouri market.
We also
offer wireless broadband Internet services in select locations in certain
markets in 13 states.
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 13% of our plant is pledged to secure
obligations of our telephone subsidiaries to the RUS. For additional
information regarding our financing, see our consolidated financial statements
included in Item 8 herein.
Sales
and Marketing
We
maintain local offices in most of the larger population centers within our
service territories. These offices provide sales and customer support
services in the community. We also rely on our call center personnel
to promote sales of services that meet the needs of our customers. 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.
Most of
our services are currently offered under our “CenturyTel” brand
name. However, we currently sell fiber capacity on our networks under
the brand name “LightCore.” In addition, our satellite television
service is offered on a co-branded basis under the “DISH Network”
name. We have agreed to determine, in consultation with EMBARQ,
whether it is in the best interests of our shareholders to change our corporate
or brand names in connection with our pending EMBARQ merger.
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, 2008, we maintained over 253,000 miles
of copper plant and approximately 21,000 miles of fiber optic plant in our local
exchange networks. Our fiber optic cable is the primary transport
technology between our host and remote central offices and interconnection
points with other incumbent carriers. Most of our long distance
service is provided directly through our own switches and network equipment,
with the balance being provided through reselling arrangements with other long
distance carriers. We also maintain networks in connection with
providing fiber transport and CLEC services. For additional
information on these networks, 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 in their franchised service
territories. (These LECs are sometimes referred to below as
“incumbent LECs” or “ILECs”). Consequently, most of our intrastate
telephone operations have traditionally been regulated extensively by various
state regulatory agencies (generally called public service commissions or public
utility commissions) and our interstate operations have been regulated by the
FCC under the Communications Act of 1934. As we discuss in greater
detail below, passage of the 1996 Act, coupled with state legislative and
regulatory initiatives and technological changes, fundamentally altered the
telephone industry by generally 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 our traditional telephone operations, but numerous other regulations not
discussed below could also impact us. Some legislation and
regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proposals which could substantially change the
manner in which the communications industry operates. Neither the
outcome of any of these developments, nor their potential impact on us, can be
predicted at this time. The impact of regulatory changes in the
communications industry could have a substantial impact on our
operations. 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
certifications 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 including interconnection obligations
and (v) regulated service standards, operating procedures and various other
matters.
In recent
years, state legislatures and regulatory commissions in most of the 23 states in
which our telephone subsidiaries operate have either reduced the regulation of
LECs or have announced their intention to do so, and we expect this trend will
continue. Essentially, such relief comes in two forms: (i) full or
partial deregulation through legislation or (ii) the ability of LECs to elect
into or renew existing state alternative regulation through a regulatory
proceeding. Several states have implemented laws or rulings which
require or permit LECs to opt out of pricing or “rate of return” regulation in
exchange for agreeing to alternative forms of regulation. Such
alternatives 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 72% 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.”
The
following summary describes the alternative regulation plans applicable to us in
Missouri, Wisconsin, Alabama and Arkansas, our four largest telephone
markets.
· 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 and
non-basic services may be increased without restriction up to 5%
annually. If the inflation-based factor were to decline as it
has done in recent years, our revenues would be negatively
impacted.
· 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 developed jointly between the Wisconsin
Public Service Commission and us. Each of these alternative
regulation plans permits us to adjust local rates within specified parameters if
we meet certain quality-of-service and infrastructure-development commitments.
These plans also include initiatives designed to promote
competition.
·
In 2005, the state of Alabama passed legislation that essentially
allowed telephone companies the option to phase in deregulation of certain LEC
services. In February 2007, our Alabama LECs opted to provide all
local services (including bundled services but excluding certain basic telephone
and optional calling services) on a deregulated and detariffed
basis. Certain basic telephone and optional calling services continue
to be regulated and subject to a price cap. Our Alabama properties
acquired from Madison River operate under a separate alternative regulation plan
under which local rates are still governed by the Alabama Public Service
Commission.
· Our
Arkansas LECs acquired from Verizon Communications, Inc. are regulated under an
alternative regulation plan under which rates can be adjusted based on an
inflation-based factor. Other local rates can be adjusted without
commission approval; however, such rates are subject to commission review under
certain conditions. Our remaining Arkansas LECs have the option
to increase rates up to certain specified amounts.
Notwithstanding
the movement toward alternative regulation, LECs operating approximately 28% of
our total access lines continue to be subject to “rate of return” regulation for
intrastate purposes. These LECs remain subject to the powers of state
regulatory commissions to conduct earnings reviews and adjust service rates,
either of which could lead to revenue reductions.
Federal regulation. Our telephone subsidiaries are required to comply
with the Communications Act of 1934, which requires us to offer services at just
and reasonable rates and on non-discriminatory terms, as well as the 1996 Act,
which amended the Communications Act to promote competition and reform the
Universal Service Program.
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. In addition, the FCC has responsibility
for maintaining and administering the Universal Service Fund. 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. Our properties acquired from Verizon
in 2002 have continued to operate under price-cap regulation, as permitted under
FCC rules for acquired properties, while the remainder of our properties operate
under traditional rate-of-return regulation (which permits us to set rates based
on forecasted investment and expenses plus a return on investment, which is
currently 11.25%). In September 2008, we filed a petition with the
FCC to convert our remaining rate-of-return study areas to price cap regulation
effective January 1, 2009 and, to the extent necessary, requested limited
waivers of certain pricing and universal service high-cost support rules related
to our election. Such petition was not addressed by the FCC in
2008 and remains pending.
In 2003,
the FCC opened a broad intercarrier compensation proceeding with the ultimate
goal of creating a uniform mechanism to be used by the entire telecommunications
industry for payments between carriers originating, terminating, or carrying
telecommunications traffic. The FCC has received intercarrier
compensation proposals from several industry groups, and in early 2005 solicited
comments on all proposals previously submitted to it. Broad industry
negotiations have taken place with the goal of developing a consensus plan that
addresses the concerns of carriers from all industry segments. On
November 5, 2008 the FCC issued a document that, among other things, requested
public comment on (i) the chairman’s draft proposal which would require carriers
to reduce access charges in three phases to as low as $.0007 per minute of use
(which is substantially lower than our current intrastate and interstate access
rates and local reciprocal compensation rates), (ii) an alternative proposal,
and (iii) some universal service reforms. Such document also included
an order that declined to implement a universal service reform proposal issued
in November 2007 by the Federal-State Joint Board. It is currently
unclear what action the FCC may take with respect to the new set of draft
proposals. Adoption of the chairman’s original proposal, which is
included in the latest draft order, could result in a material adverse impact on
our results of operations. The ultimate outcome of this proceeding
could change the way we receive compensation from, and remit compensation to,
other carriers, our end user customers and the federal Universal Service Fund
(the “USF”). Until the FCC’s proceeding concludes and the changes, if
any, to the existing rules are established, we cannot estimate the impact it
will have on our results of operations.
In
December 2005, a group of six mid-size carriers, including us, filed proposed
rules with the FCC regarding “phantom traffic”. “Phantom traffic”
generally refers to telecommunications calls that cannot be billed properly to
responsible carriers by other carriers in the call path because the traffic is
mislabeled, unlabeled or improperly routed. The proposal requests
that the FCC implement and enforce updated rules that require carriers to
accurately identify, label and route network traffic so that appropriate bills
can be created. In late 2006, the FCC opened a separate phantom
traffic proceeding with the intent of formalizing potential phantom traffic
rules for the industry. Overall, the comments received to date on the
phantom traffic issue have been favorable to us; however, until the FCC
concludes its phantom traffic proceeding and adopts changes, if any, to existing
rules, we cannot estimate the impact any changes 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. Additionally, certain deregulated providers seek and
receive high cost universal support funding based on the incumbent’s costs
rather than their own.
Our
operations and those of all communications carriers also may be impacted by
legislation and regulation imposing new or greater obligations related to
assisting law enforcement, bolstering homeland security, minimizing
environmental impacts, or addressing other issues that impact our business,
including the Communications Assistance for Law Enforcement Act, and laws
governing local number portability and customer proprietary network information
requirements. These laws and regulations may cause us to incur
additional costs.
Universal service support funds,
revenue sharing arrangements and related matters. A significant number of
our telephone subsidiaries recover a portion of their costs from the federal USF
and from similar state “universal support” mechanisms, which receive their
funding from fees charged to interexchange carriers and
LECs. Disbursements from these programs traditionally have focused
principally on allowing LECs serving small communities and rural areas to
provide communications services on terms and at prices reasonably comparable to
those available in urban areas. Other USF programs address other
social goals, such as supporting schools and libraries through the USF’s E-rate
program.
The table
below sets forth the amounts received by our telephone subsidiaries in 2008 and
2007 from federal and state universal support programs.
|
|
Year
ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
%
of Total
|
|
|
|
|
|
%
of Total
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
Amount
|
|
|
Operating
|
|
|
Amount
|
|
|
Operating
|
|
Support
Program
|
|
Received
|
|
|
Revenues
|
|
|
Received
|
|
|
Revenues
|
|
|
|
(amounts
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USF
High Cost Loop Support
|
|
$ |
151.7 |
|
|
|
5.8 |
% |
|
$ |
166.5 |
|
|
|
6.3 |
% |
Other Federal Support
Programs
|
|
|
128.5 |
|
|
|
5.0 |
% |
|
|
133.9 |
|
|
|
5.0 |
% |
Total Federal Support
Receipts
|
|
|
280.2 |
|
|
|
10.8 |
% |
|
|
300.4 |
|
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Support Programs
|
|
|
39.7 |
|
|
|
1.5 |
% |
|
|
35.6 |
|
|
|
1.3 |
% |
TOTAL
|
|
$ |
319.9 |
|
|
|
12.3 |
% |
|
$ |
336.0 |
|
|
|
12.6 |
% |
Federal
USF programs have undergone substantial changes since 1997, and are expected to
experience more changes in the coming years. As mandated by the 1996
Act, in May 2001 the FCC modified its existing universal service support
mechanism for rural telephone companies by adopting an interim mechanism for a
five-year period based on embedded, or historical, costs that provide relatively
predictable levels of support to many LECs, including substantially all of our
LECs. In May 2006, the FCC extended this interim mechanism
until such time that new high-cost support rules are adopted for rural telephone
companies.
Universal
support funds available to ILECs are currently available to local competitors
that (i) certify they will serve all customers in a study area, (ii) offer nine
core services, and (iii) qualify as an “eligible telecommunications
carrier.” Wireless and other competitive service providers continue
to seek to qualify to receive USF support. This trend, coupled with
changes in usage of telecommunications services, have placed stress on the
funding mechanism of the USF, which is subject to annual caps on
disbursements. These developments have placed additional financial
pressure on the amount of money that is necessary and available to provide
support to all eligible service providers, including support payments we receive
from the USF High Cost Loop support program.
Over the
past few years, each of the FCC, Universal Service Administrative Company and
certain Congressional committees has initiated wide-ranging reviews of the
administration of the federal USF. As part of this process, we, along
with a number of other USF recipients, have undergone a number of USF audits and
have also received requests for information from the FCC’s Office of Inspector
General (“OIG”) and Congressional committees. In addition, in July
2008 we received a subpoena from the OIG requesting a broad range of information
regarding our depreciation rates and methodologies since 2000. The
OIG has not identified to us any specific issues with respect to our
participation in the USF program and none of the audits completed to date has
identified any material issues regarding our participation in the USF
program. While we believe our participation is in compliance with FCC
rules and in accordance with accepted industry practices, we cannot predict with
certainty the timing or outcome of these various reviews. We have
complied with and are continuing to respond to all requests for
information.
A
significant portion of our support payments have varied over time based on our
average cost to serve customers compared to national cost
averages. Under the USF High Cost Loop support program, which is the
USF’s principal support program, our payments from the USF will decrease if
national average costs per loop increase at a rate greater than our average cost
per loop. Increases in the nationwide average cost per loop factor
used to allocate funds among all USF recipients caused our revenues from the USF
High Cost Loop support program to decrease in 2008 when compared to
2007. Similarly, we anticipate that our 2009 revenues from the USF
High Cost Loop support program will be lower than 2008. See Item 7 of
Part II of this annual report for more information.
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. Since then, the FSJB recommended a
comprehensive general review of the high-cost support mechanisms for rural and
non-rural carriers and requested comments on the FCC’s current rules for the
provision of high-cost support for rural companies, including comments on
whether eligibility requirements should be amended in a manner that would
adversely affect larger rural LECs such as us. The FCC Chairman’s
November 2008 proposal regarding USF reform would (i) require that all high-cost
USF recipients have broadband service capabilities deployed in 100% of their
markets within five years; (ii) freeze ILEC support at December 2008 levels; and
(iii) expand the current Lifeline and Link-up programs.
Over the
past few years, the FSJB has proposed that the FCC consider several changes to
USF programs, including an interim cap on the amount of high cost support that
competitive eligible telecommunications carriers (“CETCs”) may
receive. The FSJB also recommended elimination of the identical
support rule which now enables wireless CETCs to draw identical support based on
the ILEC’s cost. In addition, the FSJB is recommending certain
other reforms, including (i) caps on the present high cost funding mechanism,
(ii) certification of only one wireline, one wireless and one broadband carrier
in each market and (iii) further consideration of competitive bidding as a
distribution mechanism. Until the FCC acts on these recommendations,
we cannot estimate the impact that such proposals would have on our
operations. In addition, there are a number of judicial appeals
challenging several aspects of the FCC’s universal service rules and various
Congressional proposals seeking to substantially modify USF programs, none of
which have been resolved at this time. We will continue to be active
in monitoring and participating in these developments.
In 2004,
the FCC mandated changes in the administration of the universal service support
programs that temporarily suspended the disbursement of funds under the USF’s
E-rate program (for service to Schools and Libraries), and, more significantly,
created questions that these administrative changes could similarly delay the
disbursement of funds to LECs from the Universal Service High Cost Loop support
program. Congress has passed bills in recent years granting
successive one-year exemptions from the federal law that impacted the E-rate
program, including a bill extending the exemption through December 31, 2008. An
additional exemption is currently pending before Congress. Although
we expect funding from this program to continue, we cannot assure you that the
lack of a definitive resolution of this issue will not delay or impede the
disbursement of funds in the future.
A
substantial portion of our state support payments are payable by Louisiana under
a state universal service fund program. An order was approved by the
Louisiana Public Service Commission (“LPSC”) in December 2008 which restructures
the program to determine our state support based on embedded cost. We
expect the payments to be received under this fund to approximate those received
by us under the predecessor program. The costs are subject to an
annual adjustment by the LPSC. As such, there can be no assurance
that the 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, and all of which are subject to
change. 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. In light of pending intercarrier compensation reform
that is expected to address intrastate access charges, most states are deferring
action until they receive direction from the FCC. However, some
carriers are continuing to pursue lower intrastate access rates in some
states.
Developments affecting
competition. Over the past decade, fundamental technological,
regulatory and legislative changes have significantly impacted the
communications industry, and we expect these changes will
continue. Primarily as a result of regulatory and technological
changes, competition has been introduced and encouraged in each sector of the
communications industry in recent years. As a result, we increasingly
face competition from other communication service providers, as further
described below.
Wireless
telephone services increasingly constitute a significant source of competition
with LEC services, especially since wireless carriers have begun to compete
effectively on the basis of price with more traditional telephone
services. As a result, some customers have chosen to completely
forego use of traditional wireline phone service and instead rely solely on
wireless service for voice services. This trend is more pronounced
among residential customers, which comprise 73% 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. Substantially all of our access line customers are
currently capable of receiving wireless services from at least one competitive
service provider. Technological and regulatory developments in
wireless services, 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.
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. In
response to successful judicial challenges to these rules, in 2005 the FCC
released rules 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 LECs’ 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 half 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.
As a
result of these regulatory, consumer and technological developments, ILECs
increasingly face competition from CLECs, particularly in densely populated
areas. CLECs provide competing services through reselling the ILECs’
local services, through use of the ILECs’ unbundled network elements or through
their own facilities. The number of companies which have requested
authorization to provide local exchange service in our service areas has
increased in recent years, especially in our markets acquired from Verizon in
2002 and 2000. We anticipate that similar action may be taken by
other competitors in the future, especially if all forms of federal support
available to ILECs continue to remain available to these
competitors.
As noted
above, wireless and other competitive services providers have been increasingly
aggressive in seeking and obtaining USF support funds. This support
is likely to encourage additional competitors to enter our high-cost service
areas.
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. As of December 31, 2008, we
believe that approximately 43-48% of our access lines faced competition
from cable voice offerings. Additionally, several large electric
utilities have announced plans to offer communications services that compete
with some LECs.
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 frequently use existing broadband networks to
deliver flat-rate, all distance calling plans that may offer features that
cannot readily be provided by traditional LECs. These plans may also
be priced competitively or below those currently charged for traditional local
and long distance telephone services for several reasons, including lower
operating costs. In December 2003, the FCC initiated rulemaking
that is expected to address the effect of VoIP on intercarrier compensation,
universal service and emergency services. 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. 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, technology or other communications companies that previously
offered a limited range of services are now offering diversified bundles of
services, either through their own networks, reselling arrangements or joint
ventures. As such, a growing number of companies are competing to
serve the communications needs of the same customer
base. Several of these companies started offering full service
bundles before us, which could give them an advantage in building customer
loyalty. Such activities will continue to place downward pressure on
the demand for our access lines.
In
addition to facing direct competition from those providers described above,
ILECs increasingly face competition from alternate communication systems
constructed by long distance carriers, large customers or alternative access
vendors. These systems, which have become more prevalent as a result
of the 1996 Act, are capable of originating or terminating calls without use of
the ILECs’ networks or switching services. Other potential sources of
competition include non-carrier systems that are capable of bypassing ILECs’
local networks, either partially or completely, through various means, including
the provision of special access or independent switching services and the
concentration of telecommunications traffic on a few of the ILECs’ access
lines. We anticipate that all these trends will continue and lead to
decreased use of our networks.
Significant
competitive factors in the local telephone industry include pricing, packaging
of services and features, quality and convenience of service and meeting
customer needs such as simplified billing and timely response to service
calls.
As the
telephone industry increasingly experiences competition, the size and resources
of each respective competitor may increasingly influence its prospects. Many
companies currently providing or planning to provide competitive communication
services have substantially greater financial and marketing resources than we do
or own larger or more diverse networks than ours. In addition, many
of them are not subject to the same regulatory constraints we are.
Competition
can harm us by causing us to lose customers, or by causing us to lower prices or
increase our capital or operating expenses to retain
customers. Competing communications services, such as wireless, VoIP,
electronic mail and optional calling services, can also reduce usage of our
network and thereby decrease our network access revenues. Competition
can also cause customers to reduce either usage of our services or switch to
less profitable services, and could impede our ability to diversify into new
lines of business dominated by incumbent providers.
We
anticipate that the traditional operations of LECs will continue to be impacted
by changes in regulation, technology, and consumer preferences affecting the
ability of LECs to attract and retain customers and the capability of wireless
companies, CLECs, cable television companies, VoIP providers, electric utilities
and others to provide competitive LEC services. Competition relating to
traditional LEC services has thus far affected large urban areas to a greater
extent than the less dense areas in which we operate.
Exclusive
of acquisitions, we expect our operating revenues in 2009 to decline as we
continue to experience downward pressure primarily due to continued access line
losses, reduced universal service funding and lower network access
revenues. We expect such declines to be partially offset
primarily due to increased demand for our high-speed Internet service
offering.
Regulation
and Competition Relating to Other Operations
Long Distance
Operations. We offer intra-LATA, intrastate and interstate
long distance services. State public service commissions generally
regulate intra-LATA toll calls within the same LATA and inter-LATA toll calls
between different LATAs located in the same state. Federal regulators
have jurisdiction over interstate toll calls. Recent state regulatory
changes have increased competition to provide intra-LATA toll services in our
local exchange markets. Competition for intrastate and interstate
long distance services has been intense for several years, and focuses primarily
on price and pricing plans, and secondarily on customer service, reliability and
communications quality. Traditionally, our principal competitors for
providing long distance services were large national carriers, regional phone
companies and dial-around resellers. Increasingly, however, we have
experienced competition from newer sources, including wireless companies
offering attractively-priced calling plans. Technological
substitutions, including VoIP and electronic mail, have further reduced demand
for traditional long distance services. To counter such competition,
we now offer unlimited long distance calling plans.
Data
Operations. In connection with our data business, we face
competition from Internet service providers, satellite companies and cable
companies which use wired or wireless technologies to offer dial-up Internet
access services or high-speed broadband services. As of December 31,
2008, we believe approximately 60% of our local exchange markets are overlapped
by cable systems offering data services competitive with ours. Many
of these competitors offer content or other features that we cannot
match. Moreover, many of these providers have traditionally
been subject to less rigorous regulatory scrutiny than our subsidiaries,
although recent FCC rule changes classifying our high-speed offering as an
“information service” has helped reduce regulatory disparities. These
recent rule changes further provided companies the option to deregulate (for
price cap companies) or detariff (for rate of return companies) high-speed
Internet services. During 2006, all of our operating companies
elected to either deregulate or detariff their high-speed Internet services,
which decreased regulatory oversight and increased our retail pricing
flexibility.
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. Over the
last few years, several large communications companies have merged and have
implemented strategies to transfer a significant portion of their voice and data
traffic from our fiber network to their networks. We expect this
trend to continue as companies seek opportunities to reduce their
transport-related costs. In addition, new IP-based services may
enable new entrants to transport data at prices lower than we currently
offer.
CLEC
Operations. Competitive local exchange carriers are subject to
certain reporting and other regulatory requirements by the FCC and state public
service commissions, although the degree of regulation is much less substantial
than that imposed on ILECs operating in the same markets. Local
governments also frequently require competitive local exchange carriers to
obtain licenses or franchises regulating the use of rights-of-way necessary to
install and operate their networks. In each of our CLEC markets, we
face competition from the ILEC, which traditionally has long-standing
relationships with its customers. Over time, we may also face
competition from one or more other CLECs, or from other communications providers
who can provide comparable services.
Other
Operations. Similar to our CLEC business, we may be required
to obtain licenses or franchises to enter new markets for our switched digital
television and wireless broadband services, which could delay our rollout of
these offerings. The television and wireless communications markets
we have recently entered are highly competitive, which could limit our ability
to compete effectively.
OTHER
DEVELOPMENTS OR MATTERS
In August
2007, our board of directors approved a $750 million stock repurchase program
which expires in September 2009, unless extended by the
board. Through December 31, 2008, we had repurchased approximately
13.2 million shares for $503.9 million under this program. We have
suspended our current share repurchase program pending completion of our
acquisition of EMBARQ. We previously repurchased approximately $401.0
million, $186.7 million, $437.5 million and $1.028 billion of our shares under
separate repurchase programs approved in February 2004, February 2005, May 2005
and February 2006, respectively. For additional information, see
Liquidity and Capital Resources included in Item 7 of this annual
report.
In
June 2008, our board of directors increased our quarterly cash dividend
rate from $.0675 to $.70 per share, and declared a one-time dividend of $.6325
per share, which was paid in July 2008, which, when coupled with the
previously-paid second quarter 2008 dividend, equaled the newly-established $.70
per share quarterly rate. See “Risk Factors” below for additional
information regarding our current dividend practice.
In
February 2009, the American Recovery and Reinvestment Act of 2009 was signed
into law. Such Act includes programs for loans and grants for
broadband investment that total $7.2 billion. Our utilization of
these programs will depend in part on how the agencies charged with maintaining
the programs interpret the new law. If these programs are implemented
in a fashion that affords us opportunities to expand or enhance our broadband
offerings, we will likely apply for grant funding to deploy broadband in some of
our higher cost rural areas.
We have
certain obligations based on federal, state and local laws relating to the
protection of the environment. Costs of compliance through 2008 have
not been material and we currently have no reason to believe that such costs
will become material.
For
additional information concerning our business and properties, see
Items 2 and 7 elsewhere herein, and the Consolidated Financial
Statements and notes 2, 4, 5, and 16 thereto set forth in Item 8 elsewhere
herein.
Item
1A. Risk Factors
RISK
FACTORS AND CAUTIONARY STATEMENTS
Risk
Factors
Any of
the following risks could materially and adversely affect our business,
financial condition, results of operations, liquidity or
prospects. The risks described below are not the only risks facing
us. Please be aware that additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial could also
materially and adversely affect our business operations.
Risks
Related to Our Business
If
we continue to experience access line losses similar to the past several years,
our revenues, earnings and cash flows may be adversely impacted.
Our
business generates a substantial portion of its revenues by delivering voice and
data services over access lines. We have experienced access line
losses over the past several years, including a 6.4% decline during the year
ended December 31, 2008, due to a number of factors, including increased
competition and wireless and broadband substitution. We expect to
continue to experience access line losses in our markets for an unforeseen
period of time. Our inability to retain access lines could adversely
impact our revenues, earnings and cash flow from operations.
Recent deterioration in the economy
and credit markets may adversely affect our future results of
operations.
To date,
our operations and liquidity has not been materially impacted by the current
credit environment; however, the recent tightening of the credit markets may
negatively impact our operations in the future if overall borrowing rates
increase. In addition, if the economy and credit markets continue to
deteriorate, it may impact our ability to collect receivables from our customers
and other communications companies. This deterioration may also cause
our customers to reduce or terminate their receipt of service offerings from us
due to their inability to pay for such services or to completely forego our
service offerings for other competitive services. Such events would
negatively impact our results of operations. We cannot predict with
certainty the impact to us of any further deterioration in the overall economy
and credit markets.
We are
also exposed to market risk from changes in the fair value of our pension plan
assets. Should our actual return on plan assets continue to be
significantly lower than our 8.25% expected return assumption, our net periodic
pension expense and our required cash contribution to our pension plan will
increase in future periods. Such events would negatively impact our
results of operations and cash flow.
We
face competition, which we expect to intensify and which may reduce market share
and lower profits.
As a
result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive. We face
competition from (i) wireless telephone services, which we expect to increase if
wireless providers continue to expand and improve their network coverage, offer
fixed-rate calling plans, lower their prices and offer enhanced services and
(ii) cable television operators, competitive local exchange carriers and
voice-over-Internet protocol, or VoIP, providers. Over time, we
expect to face additional local exchange competition from electric utility and
satellite communications providers and alternative networks or non-carrier
systems designed to reduce demand for our switching or access
services. The recent proliferation of companies offering integrated
service offerings has intensified competition in Internet, long distance and
data services markets, and we expect that competition will further intensify in
these markets.
Our
competitive position could be weakened in the future by strategic alliances or
consolidation within the communications industry or the development of new
technologies. 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 (i) have market presence, engineering,
technical and marketing capabilities and financial, personnel and other
resources substantially greater than ours, (ii) own larger and more diverse
networks, (iii) conduct operations or raise capital at a lower cost than us,
(iv) are subject to less regulation, (v) offer greater online content services
or (vi) have substantially stronger brand names. Consequently, these competitors
may be better equipped to charge lower prices for their products and services,
to provide more attractive offerings, 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.
Competition
could adversely impact us in several ways, including (i) the loss of customers
and market share, (ii) the possibility of customers reducing their usage of our
services or shifting to less profitable services, (iii) reduced traffic on our
networks, (iv) our need to expend substantial time or money on new capital
improvement projects, (v) our need to lower prices or increase marketing
expenses to remain competitive and (vi) our inability to diversify by
successfully offering new products or services.
We
could be harmed by rapid changes in technology.
The
communications industry is experiencing significant technological changes,
particularly in the areas of VoIP, data transmission and wireless
communications. Several large electric utilities have announced plans
to offer communications services that will compete with LECs. Some of
our competitors may enjoy network advantages that will enable them to provide
services more efficiently or at lower cost. Rapid changes in
technology could result in the development of additional products or services
that compete with or displace those offered by traditional LECs, or that enable
current customers to reduce or bypass use of our networks. We cannot
predict with certainty which technological changes will provide the greatest
threat to our competitive position. We may not be able to obtain
timely access to new technology on satisfactory terms or incorporate new
technology into our systems in a cost effective manner, or at all. If
we cannot develop new products to keep pace with technological advances, or if
such products are not widely embraced by our customers, we could be adversely
impacted.
We
cannot assure you that our diversification efforts will be
successful.
The
telephone industry has recently experienced a decline in access lines and
intrastate minutes of use, which, coupled with the other changes resulting from
competitive, technological and regulatory developments, could materially
adversely affect our core business and future prospects. As explained
in greater detail elsewhere in this annual report, our access lines (excluding
the effect of acquisitions) have decreased over the last several years, and we
expect this trend to continue. We also earned less intrastate
revenues in 2008 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 that our intrastate minutes of
use will continue to decline, although the magnitude of such decrease is
uncertain.
We have
traditionally sought growth largely through acquisitions of properties similar
to those currently operated by us. However, we cannot assure you that
properties will be available for purchase on terms attractive to us,
particularly if they are burdened by regulations, pricing plans or competitive
pressures that are new or different from those historically applicable to our
incumbent properties. Moreover, we cannot assure you that we will be
able to arrange additional financing on terms acceptable to us or to obtain
timely federal and state governmental approvals on terms acceptable to us, or at
all.
Recently,
we broadened our services and products by offering 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. We provide facilities-based
digital video services to select markets and may initiate other new service or
product offerings in the future, including new offerings exploiting the 700 MHz
spectrum that we purchased in 2008. We anticipate that these new
offerings will generate lower profit margins than many of our traditional
services. We cannot assure you that our recent or future
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 adjust to changes in our
industry.
The
above-described changes in our industry have placed a higher premium on
marketing, technological, engineering and provisioning skills. Our
future success depends, in part, on our ability to retrain our staff to acquire
or strengthen these skills, and, where necessary, to attract and retain new
personnel that possess these skills.
Our
future results will suffer if we do not effectively manage our expanded
operations.
Following
the EMBARQ merger, we may continue to expand our operations through additional
acquisitions and new product and service offerings, some of which involve
complex technical, engineering, and operational challenges. Our future success
depends, in part, upon our ability to manage our expansion opportunities, which
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 our expansion or acquisition opportunities will be successful,
or that we will realize our expected operating efficiencies, cost savings,
revenue enhancements, synergies or other benefits.
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
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·
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software and hardware defects or
malfunctions
|
·
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breaches of security, including sabotage, tampering, computer viruses and
break-ins, and
|
·
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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 is
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. Our local exchange carrier networks
consist of central office and remote sites, all with advanced digital
switches. Some of the digital switches were manufactured by Nortel,
which recently declared bankruptcy. If any of these suppliers
experience interruptions or other problems delivering or servicing these network
components on a timely basis, our operations could suffer
significantly. To the extent that proprietary technology of a
supplier is an integral component of our network, we may have limited
flexibility to purchase key network components from alternative
suppliers. We also rely on a limited number of other communications
companies in connection with reselling long distance, wireless and satellite
entertainment services to our customers. In addition, we rely on a
limited number of software vendors to support our business management
systems. In the event it becomes necessary to seek alternative
suppliers and vendors, we may be unable to obtain satisfactory replacement
supplies or services on economically attractive terms, on a timely basis, or at
all, which could increase costs or cause disruptions in our
services.
Portions
of our property, plant and equipment are located on property owned by third
parties.
Over the past few years, certain utilities, cooperatives and municipalities in
certain of the states in which we operate have requested significant rate
increases for attaching our plant to their facilities. To the
extent that these entities are successful in increasing the amount we pay for
these attachments, our future operating costs will increase.
In
addition, we rely on rights-of-way, co-location agreements and other
authorizations granted by governmental bodies and other third parties to locate
our cable, conduit and other network equipment on their respective
properties. If any of these authorizations terminate or lapse, our
operations could be adversely affected.
Our
relationships with other communications companies are material to our operations
and their financial difficulties may adversely affect us.
We
originate and terminate calls for long distance carriers and other interexchange
carriers over our network in exchange for access charges that represent a
significant portion of our revenues. Should these carriers go
bankrupt or experience substantial financial difficulties, our inability to
timely collect access charges from them could have a negative effect on our
business and results of operations.
In
addition, certain of our operations carry a significant amount of voice and data
traffic for larger communications companies. As these larger
communications companies consolidate or expand their networks, it is possible
that they could transfer a significant portion of this traffic from our network
to their networks, which could negatively impact 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. For
a discussion of similar concerns relating to the EMBARQ merger, see “Risks
Related to the Pending Acquisition of EMBARQ – We and EMBARQ may be unable to
retain key employees” below.
We
could be affected by certain changes in labor matters.
At
December 31, 2008, approximately 25% of our employees were members of 15
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 the Pending Acquisition of EMBARQ
Our
ability to complete the EMBARQ merger is subject to the receipt of consents and
approvals from government entities which may impose conditions that could
adversely effect us or cause us to abandon the merger.
We are
unable to complete the merger until after we receive approvals from the FCC and
various state governmental entities. In deciding whether to grant
some of these approvals, the relevant governmental entity will make a
determination of whether, among other things, the merger is in the public
interest. Regulatory entities may impose certain requirements or
obligations as conditions for their approval.
The
merger agreement may require us to accept conditions from these regulators that
could adversely impact the combined company without us having the right to
refuse to close the merger on the basis of those regulatory
conditions. We can provide no assurance that we will obtain the
necessary approvals or that any required conditions will not materially
adversely effect us following the merger. In addition, we can provide
no assurance that these conditions will not result in the abandonment of the
merger.
Failure
to complete the merger could negatively impact us.
If the
merger is not completed, our ongoing businesses may be adversely affected and we
will be subject to several risks, including the following:
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•
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being
required, under certain circumstances, to pay a termination fee of $140
million;
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•
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having
to pay certain costs relating to the proposed merger, such as legal,
accounting, financial advisor, filing, printing and mailing fees;
and
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•
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diverting
the focus of management from pursuing other opportunities that could be
beneficial to us,
|
in each
case, without realizing any of the benefits of having the merger
completed.
The
pendency of the merger could adversely affect us.
In
connection with the pending merger, some of our customers may delay or defer
decisions, which could negatively impact our revenues, earnings and cash flows
regardless of whether the merger is completed. Similarly, our current
and prospective employees may experience uncertainty about their future roles
with the combined company following the merger, which may materially adversely
affect our ability to attract and retain key personnel during the pendency of
the merger. For a discussion of similar concerns following the
merger, see “ – We and EMBARQ may be unable to retain key
employees.”
We
expect to incur substantial expenses related to the integration of
EMBARQ.
We expect
to incur substantial expenses in connection with integrating the business,
policies, procedures, operations, technologies and systems of EMBARQ with
ours. There are a large number of systems that must be integrated,
including management information, purchasing, accounting and finance, sales,
billing, payroll and benefits, fixed asset and lease administration systems and
regulatory compliance. While we have assumed that a certain level of
expenses would be incurred, there are a number of factors beyond our control
that could affect the total amount or the timing of all of the expected
integration expenses. Moreover, many of the expenses that will be
incurred, by their nature, are difficult to estimate accurately at the present
time. These expenses could, particularly in the near term, exceed the
savings that we expect to achieve from the elimination of duplicative expenses
and the realization of economies of scale and cost savings and revenue
enhancements related to the integration of the businesses following the
completion of the merger. These integration expenses likely will
result in our taking significant charges against earnings following the
completion of the merger, but the amount and timing of such charges are
uncertain at present.
Following
the merger, the combined company may be unable to successfully integrate our
business and EMBARQ’s business and realize the anticipated benefits of the
merger.
The
merger involves the combination of two companies which currently operate as
independent public companies. The combined company will be required
to devote significant management attention and resources to integrating its
business practices and operations. Potential difficulties the
combined company may encounter in the integration process include the
following:
·
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the
inability to successfully combine our business and EMBARQ’s business in a
manner that permits the combined company to achieve the cost savings and
operating synergies anticipated to result from the merger, which would
result in the anticipated benefits of the merger not being realized partly
or wholly in the time frame currently anticipated or at
all;
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·
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lost
sales and customers as a result of certain customers of either of the two
companies deciding not to do business with the combined
company;
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·
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complexities
associated with managing the combined
businesses;
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·
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integrating
personnel from the two companies while maintaining focus on providing
consistent, high quality products and customer
service;
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·
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potential
unknown liabilities and unforeseen increased expenses, delays or
regulatory conditions associated with the merger;
and
|
·
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performance
shortfalls at one or both of the two companies as a result of the
diversion of management’s attention caused by completing the merger and
integrating the companies’
operations.
|
In
addition, we and EMBARQ have operated and, until the completion of the merger,
will continue to operate, independently. It is possible that the
integration process could result in the diversion of each company’s management’s
attention, the disruption or interruption of, or the loss of momentum in, each
company’s ongoing businesses or inconsistencies in standards, controls,
procedures and policies, any of which could adversely affect our ability to
maintain relationships with customers and employees or our ability to achieve
the anticipated benefits of the merger, or could reduce the earnings or
otherwise adversely affect the business and financial results of the combined
company.
We
and EMBARQ may be unable to retain key employees.
Our
success after the merger will depend in part upon our ability to retain key
EMBARQ and CenturyTel employees. Key employees may depart either
before or after the merger because of issues relating to the uncertainty and
difficulty of integration or a desire not to remain with us following the
merger. Accordingly, no assurance can be given that we will be able
to retain key employees to the same extent that we or EMBARQ have been able to
in the past.
Following
the merger, we may need to launch branding or rebranding initiatives that are
likely to involve substantial costs and may not be favorably received by
customers.
We plan
to consult with EMBARQ about whether to change our name and primary brand in
connection with the merger. Prior to the merger, we and EMBARQ will
each continue to market our respective products and services using the
“CenturyTel” and “EMBARQ” brand names and logos. Following the
merger, we plan to market our products and services under “CenturyTel,” “EMBARQ”
or some other name. As a result, we will discontinue use of either or
both of the “CenturyTel” or “EMBARQ” brand names and logos in some or all of the
markets of the combined company. If we retain either our name or
EMBARQ’s, we will nonetheless incur substantial capital and other costs in
rebranding our products and services in those markets that previously used a
different name. If we choose an entirely new brand, these costs will
be even greater, and we may not be able to achieve or maintain name recognition
or status under our new brand that is comparable to the recognition and status
previously enjoyed. The failure of any of these initiatives could
adversely affect our ability to attract and retain customers after the merger,
resulting in reduced revenues.
Risks
Related to Our Regulatory Environment
Our
revenues could be materially reduced or our expenses materially increased by
changes in regulations, including those recently proposed by the chairman of the
FCC.
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 have been and are likely to
continue to be subject to ongoing changes and court challenges, which could also
affect our revenues.
Risk of loss or reduction of network
access charge revenues or support fund payments. A significant
portion of our revenues are derived from access charge revenues that are paid to
us by long distance carriers based largely on rates set by federal and state
regulatory bodies. In particular, the FCC regulates tariffs for
interstate access and subscriber line charges, both of which are components of
our revenues. The FCC has been considering comprehensive reform of
its intercarrier compensation rules for several years. Any reform
eventually adopted by the FCC will likely involve significant changes in the
access charge system and could potentially result in a significant decrease or
elimination of access charges altogether. 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.
We
receive a substantial portion of our revenues from the federal Universal Service
Fund (“USF”), 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. For several years, the FCC and a federal-state
joint board established by Congress have considered comprehensive reforms of the
federal USF contribution and distribution rules. During this period,
various parties have objected to the size of the USF or questioned the continued
need to maintain the program in its current form. Over the past few
years, our high cost support fund revenues have decreased due to increases in
the nationwide average cost per loop factor used to determine payments to
program participants, as well as declines in the overall size of the high cost
support fund. Pending judicial appeals and congressional proposals
create additional uncertainty regarding our future receipt of support
payments. In addition, the number of eligible telecommunications
carriers receiving support payments from this program has increased
substantially in recent years, which, coupled with other factors, has placed
additional financial pressure on the amount of money that is available to
provide support payments to all eligible recipients, including us.
On
November 5, 2008, the FCC issued a document that, among other things,
requested public comment on the reform proposal, including a draft proposal of
the FCC chairman designed to comprehensively redefine and reform the FCC’s
intercarrier compensation rules and the federal USF rules. The draft
proposes to reduce intrastate and interstate access rates and local reciprocal
compensation rates to levels substantially below those currently charged by
us. The draft also proposes changes to USF rules that would mandate
broadband deployment, freeze the level of certain USF support payments, and
expand various USF programs, the combined effect of which would adversely impact
local exchange carriers by limiting the amount of USF revenues available to them
and increasing their operating costs. It is currently unclear what
action the FCC may take with respect to the draft proposals. Adoption
of the chairman’s original proposal could result in a material adverse impact on
the results of our operations.
Risks posed by state regulations.
We are also subject to the authority of state regulatory commissions
which have the power to regulate intrastate rates and services, including local,
in-state long-distance and network access services. Notwithstanding
the movement toward alternative state regulation, LECs operating approximately
28% of our total access lines continue to be subject to “rate of return”
regulation for intrastate purposes. These LECs remain subject to the
powers of state regulatory commissions to conduct earnings reviews and adjust
service rates, which could lead to revenue reductions. LECs governed
by alternative regulatory plans could also under certain circumstances be
ordered to reduce rates or could experience rate reductions following the lapse
of plans currently in effect. Our business could also be materially adversely
affected by the adoption of new laws, policies and regulations or changes to
existing state regulations. In particular, we cannot assure you that we will
succeed in obtaining or maintaining all requisite state regulatory approvals for
our operations without the imposition of restrictions on our business, which
could have the effect of imposing material additional costs on us or limiting
our revenues.
Risks posed by costs of regulatory
compliance. Regulations continue to create significant
compliance costs for us. Challenges to our tariffs by regulators or
third parties or delays in obtaining certifications and regulatory approvals
could cause us to incur substantial legal and administrative expenses, and, if
successful, such challenges could adversely affect the rates that we are able to
charge our customers. Our business also may be impacted by
legislation and regulation imposing new or greater obligations related to
assisting law enforcement, bolstering homeland security, minimizing
environmental impacts, or addressing other issues that impact our business
(including local number portability and customer proprietary network information
requirements). For example, existing provisions of the Communications
Assistance for Law Enforcement Act require communications carriers to ensure
that their equipment, facilities, and services are able to facilitate authorized
electronic surveillance. We expect our compliance costs to increase
if future laws or regulations continue to increase our obligations to assist
other governmental agencies.
Risk of loss of statutory exemption
from burdensome interconnection rules imposed on incumbent local exchange
carriers. Affiliates of ours operating approximately half 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, these affiliates 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.
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 ultimately have on us and our
competitors. Several regulatory and judicial proceedings have
recently concluded, are underway or may soon be commenced, which address issues
affecting our operations and those of our competitors. Moreover,
certain communities nationwide have expressed an interest in establishing
municipal telephone utilities 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 change rates, to compete and to respond
rapidly to changing industry conditions. Although newer alternative
forms of regulation permit us greater freedoms in several states in which we
operate, they nonetheless typically impose caps on the rates that we can charge
our customers. As our business becomes increasingly competitive,
regulatory disparities between us and our competitors could impede our ability
to compete. Litigation and different objectives among federal and
state regulators could create uncertainty and impede our ability to respond to
new regulations. Moreover, changes in tax laws, regulations or
policies could increase our tax rate, particularly if state regulators continue
to search for additional revenue sources to address budget
shortfalls. We are unable to predict the future actions of the
various regulatory bodies that govern us, but such actions could materially
affect our business.
We
are subject to franchising requirements that could impede our expansion
opportunities.
We may be
required to obtain from municipal authorities operating franchises to install or
expand facilities. Some of these franchises may require us to pay
franchise fees. These franchising requirements generally apply to our
fiber transport and CLEC operations, and to our emerging switched digital
television and wireless broadband businesses. These requirements
could delay us in expanding our operations or increase the costs of providing
these services.
We
will be exposed to risks relating to evaluations of controls required by Section
404 of the Sarbanes-Oxley Act.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act and related regulations implemented
by the SEC, the New York Stock Exchange and the Public Company Accounting
Oversight Board, are increasing legal and financial compliance costs and making
some activities more time consuming. The annual evaluation of our
internal controls required by Section 404 of the Sarbanes-Oxley Act may result
in identifying material weaknesses in our internal
controls. Any future failure to successfully or timely complete
these annual assessments could subject us to sanctions or investigation by
regulatory authorities. Any such action could adversely affect our
financial results or investors’ confidence in us, and could cause our stock
price to fall. If we fail to maintain effective controls and
procedures, we may be unable to provide financial information in a timely and
reliable manner, which could in certain instances limit our ability to borrow or
raise capital.
For a
more thorough discussion of the regulatory issues that may affect our business,
see “Operations” above.
Other
Risks
We
have a substantial amount of indebtedness and may need to incur more in the
future.
We have a
substantial amount of indebtedness, which could have material adverse
consequences for us, including (i) hindering our ability to adjust to changing
market, industry or economic conditions, (ii) limiting our ability to access the
capital markets to refinance maturing debt or to fund acquisitions or emerging
businesses, (iii) limiting the amount of free cash flow available for future
operations, acquisitions, dividends, stock repurchases or other uses, (iv)
making us more vulnerable to economic or industry downturns, including interest
rate increases, and (v) placing us at a competitive disadvantage to those of our
competitors that have less indebtedness.
In
connection with executing our business strategies, following the EMBARQ merger
we expect to continue to evaluate the possibility of acquiring additional
communications assets, and we may elect to finance future acquisitions by
incurring additional indebtedness. Moreover, to respond to
competitive challenges, we may be required to raise substantial additional
capital to finance new product or service offerings, including capital necessary
to finance any new offerings exploiting the 700MHz spectrum that we purchased in
2008. 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
indebtedness could be adversely affected.
We
cannot assure you that we will be able to continue paying dividends at the
current rate.
As noted
elsewhere in this annual report, we plan to continue our current dividend
practices. However, you should be aware that our shareholders may not
receive the same dividends for reasons that may include any of the following
factors:
·
|
we
may not have enough cash to pay such dividends due to changes in our cash
requirements, capital spending plans, cash flow or financial
position;
|
·
|
while
our dividend practices involve the distribution of a substantial portion
of our cash available to pay dividends, our board of directors could
change its practices at any time;
|
·
|
the
actual amounts of dividends distributed and the decision to make any
distribution will remain at all times entirely at the discretion of our
board of directors;
|
·
|
the
effects of regulatory reform, including any changes to intercarrier
compensation and the Universal Service Fund
rules;
|
·
|
our
ability to maintain investment grade credit ratings on our senior
debt;
|
·
|
the
amount of dividends that we may distribute is limited by restricted
payment and leverage covenants in our credit facilities and, potentially,
the terms of any future indebtedness that we may incur;
and
|
·
|
the
amount of dividends that we may distribute is subject to restrictions
under Louisiana law.
|
Our board
is free to change or suspend our dividend practices at any time. Our
common shareholders should be aware that they have no contractual or other legal
right to dividends.
Our
current dividend practices could limit our ability to pursue growth
opportunities.
The
current practice of our board of directors to pay an annual $2.80 per common
share dividend reflects an intention to distribute to our shareholders a
substantial portion of our free cash flow. As a result, we may not
retain a sufficient amount of cash to finance a material expansion of our
business in the future. In addition, our ability to pursue any
material expansion of our business, through acquisitions or increased capital
spending, will depend more than it otherwise would on our ability to obtain
third party financing. We cannot assure you that such financing will
be available to us at all, or at an acceptable cost.
As
a holding company, we rely on payments from our operating companies to meet our
obligations.
As a
holding company, substantially all of our income and operating cash flow is
dependent upon the earnings of our subsidiaries and the distribution of those
earnings to, or upon loans or other payments of funds by those subsidiaries to,
us. As a result, we rely upon our subsidiaries to generate the funds
necessary to meet our obligations, including the payment of amounts owed under
our long-term debt. Our subsidiaries are separate and distinct legal
entities and have no obligation to pay any amounts owed by us or, subject to
limited exceptions for tax-sharing purposes, to make any funds available to us
to repay our obligations, whether by dividends, loans or other
payments. Certain of our subsidiaries may be restricted under loan
agreements or regulatory orders from transferring funds to us, including certain
loan provisions that restrict the amount of dividends that may be paid to
us. Moreover, our rights to receive assets of any subsidiary upon its
liquidation or reorganization will be effectively subordinated to the claims of
creditors of that subsidiary, including trade creditors. The
footnotes to our consolidated financial statements included elsewhere herein
describe these matters in additional detail.
Our
agreements and organizational documents and applicable law could limit another
party’s ability to acquire us.
Our
articles of incorporation provide for a classified board of directors, which
limits the ability of an insurgent to rapidly replace the board. In
addition, a number of other provisions in our agreements and organizational
documents and various provisions of applicable law may delay, defer or prevent a
future takeover of CenturyTel unless the takeover is approved by our board of
directors. This could deprive our shareholders of any related
takeover premium.
We
face other risks.
The list
of risks above is not exhaustive, and you should be aware that we face various
other risks. For a description of additional risks, please see
“Operations” above, “Forward-Looking Statements” below, and the other items of
this annual report, particularly Items 3, 7 and 8.
Cautionary
Statements Regarding 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 relating to
CenturyTel or EMBARQ, the operations of either such company or our pending
merger with EMBARQ, including without limitation statements with respect to
CenturyTel’s or EMBARQ’s 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. Actual results or performance by CenturyTel or EMBARQ,
and issues relating to our pending merger with EMBARQ, 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 impact actual results of CenturyTel or
EMBARQ, the combined company or the pending merger include but are not limited
to:
·
|
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 regulatory changes, (ii) the final outcome of various federal, state
and local regulatory initiatives and proceedings that could impact our
competitive position, revenues, compliance costs, capital expenditures or
prospects, including regulatory changes recently proposed by the chairman
of the FCC, 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 adjust to changes in the communications
industry
|
·
|
our
ability to successfully complete our pending merger with EMBARQ, including
timely receiving all regulatory
approvals
|
·
|
the
possibility that the anticipated benefits from the merger cannot be fully
realized in a timely manner or at all, or that integrating EMBARQ’s
operations into our will be more difficult, disruptive
or costly than anticipated
|
·
|
our
ability to effectively manage our expansion opportunities, including
without limitation our ability to (i) effectively integrate newly-acquired
or newly-developed businesses into our operations, (ii) attract and retain
technological, managerial and other key personnel, (iii) achieve projected
growth, revenue and cost savings targets from the EMBARQ merger within the
anticipated timeframe, 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 our traditional telephone
or access services caused by greater use of wireless, electronic mail or
Internet communications or other
factors
|
·
|
our
ability to successfully introduce new product or service offerings on a
timely and cost-effective basis, including without limitation our ability
to (i) successfully roll out our new video, voice and broadband services,
(ii) successfully exploiting the 700 MHz spectrum that we purchased in
2008, (iii) expand successfully our full array of service offerings to new
or acquired markets and (iv) offer bundled service packages on terms
attractive to our customers
|
·
|
our
continued access to credit markets on favorable terms, including our
continued access to financing in amounts, and on terms and conditions,
necessary to support our operations and refinance existing indebtedness
when it becomes due
|
·
|
our
ability to collect receivables from financially troubled communications
companies
|
·
|
our
ability to pay a $2.80 per common share dividend annually, which may be
affected by changes in our cash requirements, capital spending plans, cash
flows or financial position;
|
·
|
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 potential network disruptions on our
business
|
·
|
general
worldwide economic conditions and related uncertainties, including
continued access to credit markets on favorable
terms
|
·
|
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 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 debt ratings
v unfavorable
outcomes of regulatory or legal proceedings and investigations, including rate
proceedings and tax audits
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
discontinuance 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 annual report. Due to these uncertainties,
there can be no assurance that our anticipated results will occur, that our
judgments or assumptions will prove correct, or that unforeseen developments
will not occur. Accordingly, you are cautioned not to place undue
reliance upon any of our forward-looking statements, which speak only as of the
date made. Additional risks that we currently deem immaterial or that
are not presently known to us could also cause our actual results to differ
materially from those expected in our forward-looking statements. We
undertake no obligation to update or revise any of our forward-looking
statements for any reason, whether as a result of new information, future events
or developments, changed circumstances, or otherwise.
Investors
should also be aware that while we do, at various times, communicate with
securities analysts, it is against our policy to disclose to them selectively
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.
Our properties consist principally of telephone lines, central office equipment,
and land and buildings related to telephone operations. As of December 31, 2008
and 2007, our gross property, plant and equipment of approximately $8.9 billion
and $8.7 billion, respectively, consisted of the following:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cable
and wire
|
|
|
52.5 |
% |
|
|
52.8 |
|
Central
office
|
|
|
32.3 |
|
|
|
32.0 |
|
General
support
|
|
|
9.2 |
|
|
|
9.4 |
|
Fiber
transport
|
|
|
3.7 |
|
|
|
3.3 |
|
Construction
in progress
|
|
|
.8 |
|
|
|
1.1 |
|
Other
|
|
|
1.5 |
|
|
|
1.4 |
|
|
|
|
100.0 |
% |
|
|
100.0 |
|
“Cable
and wire” facilities consist primarily of buried cable and aerial cable, poles,
wire, conduit and drops used in providing local and long distance
services. “Central office” consists primarily of switching equipment,
circuit equipment and related facilities. “General support” consists
primarily of land, buildings, tools, furnishings, fixtures, motor vehicles and
work equipment. “Fiber transport” consists of network assets and
equipment to provide fiber transport services. “Construction in
progress” includes property of the foregoing categories that has not been placed
in service because it is still under construction.
The
properties of certain of our telephone subsidiaries are subject to mortgages
securing the debt of such companies. We own substantially all of the
central office buildings, local administrative buildings, warehouses, and
storage facilities used in our telephone operations.
For
further information on the location and type of our properties, see the
descriptions of our operations in Item 1.
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 monetary damages and injunctive relief under
various legal theories on behalf of a purported class of over two million
customers in our telephone markets. On March 10, 2006, the Court
certified a class of plaintiffs and issued a ruling that the billing
descriptions we used for these services during an approximately 18-month period
between October 2000 and May 2002 were legally insufficient. Our
appeal of this class certification decision was denied. Our
preliminary analysis indicates that we billed less than $10 million for inside
wire maintenance services under the billing descriptions and time periods
specified in the District Court ruling described above. Should other
billing descriptions be determined to be inadequate or if claims are allowed for
additional time periods, the amount of our potential exposure could increase
significantly above amounts previously accrued. The Court’s order
does not specify the award of damages, the scope and amounts of which, if any,
remain subject to additional fact-finding and resolution of what we believe are
valid defenses to plaintiff’s claims. Accordingly, we currently
cannot reasonably estimate the maximum amount of possible loss if this matter
proceeds to litigation. However, we do not believe that the ultimate
outcome of this matter will have a material adverse effect on our financial
position or on-going results of operations.
We
received an aggregate of approximately $128 million during 2006 and 2007 from
the redemption of our Rural Telephone Bank stock. Some portion of
those proceeds, while not estimable at this time, may under certain
circumstances be subject to review, reduction or refund by regulatory
authorities or judicial process, which in each case could have an adverse effect
on our financial results.
From time to time, we are involved in
other proceedings or investigations 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 expect 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
Purchases 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
|
2008:
|
|
|
|
|
|
First
quarter
|
$
42.00
|
32.00
|
.0675
|
|
Second
quarter
|
$
37.25
|
30.55
|
.0675
|
|
Third
quarter
|
$
40.35
|
34.13
|
1.3325
|
|
Fourth
quarter
|
$
40.00
|
20.45
|
.70
|
|
|
|
|
|
2007:
|
|
|
|
|
|
First
quarter
|
$
46.80
|
42.66
|
.065
|
|
Second
quarter
|
$
49.94
|
45.14
|
.065
|
|
Third
quarter
|
$
49.91
|
41.10
|
.065
|
|
Fourth
quarter
|
$
46.90
|
39.91
|
.065
|
Common
stock dividends during 2008 and 2007 were paid each quarter.
In
June 2008, our board of directors increased our quarterly cash dividend
rate from $.0675 to $.70 per share, and declared a one-time dividend of $.6325
per share, payable in July 2008, which, when coupled with the previously-paid
second quarter 2008 dividend, equaled the newly-established $.70 per share
quarterly rate.
As of
February 20, 2009, there were approximately 3,900 stockholders of record of our
common stock. As of February 20, 2009, the closing stock price of our
common stock was $26.17.
In
February 2006, our Board of Directors authorized a $1.0 billion share repurchase
program under which, in February 2006, we repurchased $500 million (or
approximately 14.36 million shares) of our common stock under accelerated share
repurchase agreements with certain investment banks at an initial average price
of $34.83. The investment banks completed their repurchases in
mid-July 2006 and in connection therewith we paid an aggregate of approximately
$28.4 million cash to the investment banks to compensate them for the difference
between their weighted average purchase price during the repurchase period and
the initial average price. We repurchased the remaining $500 million
of common stock of this program in open-market transactions through June
2007.
In August
2007, our board of directors authorized a $750 million share repurchase program
which expires on September 30, 2009, unless extended by the
board. Through December 31, 2008, we had repurchased approximately
13.2 million shares for $503.9 million under this program. We
suspended repurchases in September 2008 pending completion of our acquisition of
EMBARQ.
During
the fourth quarter of 2008, we withheld 128 shares of stock at an average price
of $26.54 per share to pay taxes due upon the vesting of restricted stock for
certain of our employees in October 2008.
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 as of and
for each of the years ended in the five-year period ended December 31,
2008:
Selected
Income Statement Data
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars,
except per share amounts, and shares expressed in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
2,599,747 |
|
|
|
2,656,241 |
|
|
|
2,447,730 |
|
|
|
2,479,252 |
|
|
|
2,407,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
721,352 |
|
|
|
793,078 |
|
|
|
665,538 |
|
|
|
736,403 |
|
|
|
753,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
365,732 |
|
|
|
418,370 |
|
|
|
370,027 |
|
|
|
334,479 |
|
|
|
337,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
3.57 |
|
|
|
3.82 |
|
|
|
3.17 |
|
|
|
2.55 |
|
|
|
2.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
3.56 |
|
|
|
3.72 |
|
|
|
3.07 |
|
|
|
2.49 |
|
|
|
2.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$ |
2.1675 |
|
|
|
.26 |
|
|
|
.25 |
|
|
|
.24 |
|
|
|
.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
102,268 |
|
|
|
109,360 |
|
|
|
116,671 |
|
|
|
130,841 |
|
|
|
137,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
102,871 |
|
|
|
113,094 |
|
|
|
122,229 |
|
|
|
136,087 |
|
|
|
142,144 |
|
Selected
Balance Sheet Data
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
property, plant and equipment
|
|
$ |
2,895,892 |
|
|
|
3,108,376 |
|
|
|
3,109,277 |
|
|
|
3,304,486 |
|
|
|
3,341,401 |
|
Goodwill
|
|
$ |
4,015,674 |
|
|
|
4,010,916 |
|
|
|
3,431,136 |
|
|
|
3,432,649 |
|
|
|
3,433,864 |
|
Total
assets
|
|
$ |
8,254,195 |
|
|
|
8,184,553 |
|
|
|
7,441,007 |
|
|
|
7,762,707 |
|
|
|
7,796,953 |
|
Long-term
debt
|
|
$ |
3,294,119 |
|
|
|
2,734,357 |
|
|
|
2,412,852 |
|
|
|
2,376,070 |
|
|
|
2,762,019 |
|
Stockholders'
equity
|
|
$ |
3,163,240 |
|
|
|
3,409,205 |
|
|
|
3,190,951 |
|
|
|
3,617,273 |
|
|
|
3,409,765 |
|
The
following table presents certain selected consolidated operating data as of the
following dates:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone
access lines (1) (2)
|
|
|
1,998,000 |
|
|
|
2,135,000 |
|
|
|
2,094,000 |
|
|
|
2,214,000 |
|
|
|
2,314,000 |
|
High-speed
Internet customers (1)
|
|
|
641,000 |
|
|
|
555,000 |
|
|
|
369,000 |
|
|
|
249,000 |
|
|
|
143,000 |
|
(1) In
connection with our Madison River acquisition in April 2007, we acquired
approximately 164,000 telephone
access lines and 57,000 high-speed Internet customers.
(2) Excluding
adjustments during 2006 to reflect (i) the removal of test lines, (ii) database
conversion and clean-up and (iii) the sale of our Arizona properties, access
line losses for 2006 were approximately 107,000.
See Items
1 and 2 in Part I and Items 7 and 8 elsewhere herein for additional
information.
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 an array of communications services to customers
in 25 states. We currently derive our revenues from providing (i)
local exchange and long distance voice services, (ii) network access services,
(iii) data services, which include both high-speed (“DSL”) and dial-up Internet
services, as well as special access and private line services, (iv) fiber
transport, competitive local exchange and security monitoring services and (v)
other related services.
On
October 26, 2008, we entered into a definitive merger agreement to acquire
Embarq Corporation (“EMBARQ”) in a stock-for-stock transaction. Under
the terms of the agreement, EMBARQ shareholders will receive 1.37 CenturyTel
shares for each share of EMBARQ common stock they own at closing. On
December 31, 2008, EMBARQ had outstanding approximately 142.4 million shares of
common stock and $5.7 billion of long-term debt. The two companies
have a combined operating presence in 33 states with approximately 7.7 million
access lines and two million broadband customers. Completion of the
transaction is subject to the receipt of regulatory approvals, including
approvals from the Federal Communications Commission and certain state public
service commissions, as well as other customary closing
conditions. Subject to these conditions, we anticipate closing this
transaction in the second quarter of 2009. For additional
information, see Item 1 of Part I of this annual report and Note 1.
As
further discussed in Note 11, during the second quarter of 2008, we recognized
an $8.2 million curtailment loss (reflected in selling, general and
administrative expense) in connection with amending our Supplemental Executive
Retirement Plan (“SERP”). We also recognized a $4.5 million pre-tax
gain (reflected in other income (expense)) upon liquidation of our investments
in marketable securities in the SERP trust in the second quarter of
2008. We will record a one-time settlement charge in the first
quarter of 2009 of approximately $7.7 million in connection with the lump sum
distributions made in early 2009.
In 2008
and 2007, we recognized net after tax benefits of approximately $12.8 million
and $32.7 million, respectively, related to the recognition of previously
unrecognized tax benefits. See Note 12 for additional
information.
On April
30, 2007, we acquired all of the outstanding stock of Madison River
Communications Corp. (“Madison River”). See Note 2 for additional
information. We have reflected the results of operations of the
Madison River properties in our consolidated results of operations beginning May
1, 2007.
In the
fourth quarter of 2007, we recorded a $16.6 million pre-tax impairment charge in
order to write-down the value of certain long-lived assets in six of our
northern competitive local exchange carrier markets to their estimated
realizable value. We determined the estimated realizable value based
on proposals received during our sales process of such properties commenced in
2007. We sold such properties in separate transactions in May and
July 2008. Results of operations for these markets are included in
our consolidated results of operations up to the respective sales
dates.
During
2007, we recognized approximately $49.0 million of network access revenues in
connection with the settlement of a dispute with a carrier and approximately
$42.2 million of revenues in connection with the lapse of a regulatory
monitoring period (of which approximately $25.4 million is reflected in network
access revenues and $16.8 million is reflected in data revenues). We
do not expect this level of favorable revenue settlements to reoccur in the
future.
Effective
January 1, 2007, we changed our relationship with our provider of satellite
television service from a revenue sharing arrangement to an agency relationship
and, in connection therewith, we received in the second quarter of 2007 a
non-recurring reimbursement of $5.9 million, of which $4.1 million was reflected
as a reduction of cost of services (which we previously incurred as subscriber
acquisition costs) and the remainder was reflected as revenues. This
change has also resulted in us recognizing higher levels of operating income
compared to our prior arrangement.
Over each
of the past few years, we announced reductions of our workforce of an aggregate
of approximately 700 jobs and, in connection therewith, incurred net pre-tax
charges of approximately $1.7 million in 2008, $2.2 million in 2007 and $7.5
million in 2006 for severance and related costs. See Note
8 for additional information.
In the
second quarter of 2006, we recorded a one-time pre-tax gain of approximately
$117.8 million upon redemption of our investment in the stock of the Rural
Telephone Bank (“RTB”). Subsequently, in the fourth quarter of
2007, upon final distribution of the remaining proceeds from the RTB
dissolution, we recorded a pre-tax gain of approximately $5.2
million. See Note 15 for additional information.
During
the last several years (exclusive of acquisitions and certain non-recurring
favorable adjustments), we have experienced revenue declines in our voice and
network access revenues primarily due to the loss of access lines and minutes of
use. 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
broadband, and other additional services that may become available in the future
due to advances in technology, wireless spectrum sales by the Federal
Communications Commission or improvements in our infrastructure, (iii) provide
our broadband and 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.
Our net
income for 2008 was $365.7 million, compared to $418.4 million during 2007 and
$370.0 million during 2006. Diluted earnings per share for 2008 was
$3.56 compared to $3.72 in 2007 and $3.07 in 2006. The number of
average diluted shares outstanding declined 9.0% in 2008 and 7.5% in 2007
primarily due to our share repurchases during the past three
years.
Year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
721,352 |
|
|
|
793,078 |
|
|
|
665,538 |
|
Interest
expense
|
|
|
(202,217 |
) |
|
|
(212,906 |
) |
|
|
(195,957 |
) |
Other
income (expense)
|
|
|
40,954 |
|
|
|
38,770 |
|
|
|
121,568 |
|
Income tax expense
|
|
|
(194,357 |
) |
|
|
(200,572 |
) |
|
|
(221,122 |
) |
Net income
|
|
$ |
365,732 |
|
|
|
418,370 |
|
|
|
370,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
3.57 |
|
|
|
3.82 |
|
|
|
3.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
3.56 |
|
|
|
3.72 |
|
|
|
3.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic shares
outstanding
|
|
|
102,268 |
|
|
|
109,360 |
|
|
|
116,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted shares
outstanding
|
|
|
102,871 |
|
|
|
113,094 |
|
|
|
122,229 |
|
Operating
income decreased $71.7 million in 2008 due to a $56.5 million decrease in
operating revenues and a $15.2 million increase in operating expenses. Operating
income increased $127.5 million in 2007 as a $208.5 million increase in
operating revenues was partially offset by an $81.0 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 (including the FCC’s proposed rules
regarding intercarrier compensation and the Universal Service Fund described
elsewhere herein); our ability to effectively adjust to changes in the
communications industry; our ability to successfully complete our pending
merger with EMBARQ, including timely receiving all regulatory approvals and
realizing the anticipated benefits of the transaction; our ability to
effectively manage our expansion opportunities, including
successfully integrating
newly-acquired businesses into our operations and retaining
and hiring key personnel; possible changes in the demand for, or
pricing of, our products and services; our ability to successfully introduce new
product or service offerings on a timely and cost-effective basis; our continued
access to credit markets on favorable terms; our ability to collect our
receivables from financially troubled communications companies; our ability to
pay a $2.80 per common share dividend annually, which may be affected by changes
in our cash requirements, capital spending plans, cash flows or financial
position; 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 and our
pending acquisition of EMBARQ 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 annual report. We undertake no obligation to update
any of our forward-looking statements for any reason.
All
references to “Notes” in this Item 7 refer to the Notes to Consolidated
Financial Statements included in Item 8 of this annual report.
OPERATING
REVENUES
Year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$ |
874,041 |
|
|
|
889,960 |
|
|
|
871,767 |
|
Network
access
|
|
|
820,383 |
|
|
|
941,506 |
|
|
|
878,702 |
|
Data
|
|
|
524,194 |
|
|
|
460,755 |
|
|
|
351,495 |
|
Fiber
transport and CLEC
|
|
|
162,050 |
|
|
|
159,317 |
|
|
|
149,088 |
|
Other
|
|
|
219,079 |
|
|
|
204,703 |
|
|
|
196,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$ |
2,599,747 |
|
|
|
2,656,241 |
|
|
|
2,447,730 |
|
During
2007, we recognized revenues of approximately $42.2 million related to the
expiration of a regulatory monitoring period, of which approximately $25.4
million is reflected in network access revenues and $16.8 million is reflected
in data revenues. In addition, in 2007 we recognized approximately
$49.0 million of network access revenues related to the settlement of a dispute
with a carrier. We do not expect this level of favorable revenue
settlements to reoccur in the future.
Voice revenues.
We derive voice revenues by providing local exchange
telephone services and retail long distance services to customers in our service
areas. The $15.9 million (1.8%) decrease in voice revenues in 2008 is
primarily due to (i) a $22.5 million decrease due to a 5.9% decline in the
average number of access lines (exclusive of our acquisition of Madison River
properties); (ii) a $10.8 million decrease in custom calling feature revenues
primarily due to the continued migration to bundled service offerings at a lower
effective rate; and (iii) a $7.7 million decline as a result of a decrease in
revenues associated with extended area calling plans. These decreases
were partially offset by $17.0 million of additional revenues attributable to
the Madison River properties acquired April 30, 2007 and a $9.9 million increase
in long distance revenues attributable to an increase in the percentage of our
customer base on fixed rate unlimited calling plans and the implementation of
rate increases applicable to several rate plans in late 2007 and early
2008.
The $18.2
million (2.1%) increase in voice revenues in 2007 is primarily due to $43.3
million of revenues attributable to the Madison River properties acquired April
30, 2007. Such increase was partially offset by (i) a $20.7 million
decrease due to a 5.2% decline in the average number of access lines (normalized
for acquisitions, dispositions and previously-disclosed adjustments made during
2006) and (ii) a $6.0 million decline as a result of a decrease in revenues
associated with extended area calling plans.
Total
access lines declined 136,800 (6.4%) during 2008 compared to a normalized
decline of 119,700 (5.7%) during 2007. We believe the decline in the
number of access lines during 2008 and 2007 is primarily due to the displacement
of traditional wireline telephone services by other competitive services and
recent economic conditions. Based on our current retention
initiatives, we estimate that our access line loss will be between 5.7% and 6.7%
in 2009.
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 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 $121.1 million (12.9%) in 2008 and increased $62.8
million (7.1%) in 2007 due to the following factors:
|
|
2008
|
|
|
2007
|
|
|
|
increase
|
|
|
increase
|
|
|
|
(decrease)
|
|
|
(decrease)
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Favorable
settlement of a dispute with a carrier in 2007
|
|
$ |
(48,987 |
) |
|
|
48,987 |
|
Intrastate revenues
due to decreased minutes of use, decreased access rates in
certain states and recovery from state support funds
|
|
|
(29,022 |
) |
|
|
(20,912 |
) |
Revenue
recognition upon expiration of regulatory monitoring periods
in 2007
|
|
|
(25,402 |
) |
|
|
25,402 |
|
Partial
recovery of operating costs through revenue
sharing arrangements with
other telephone companies, interstate
access
revenues and return on rate base
|
|
|
(15,857 |
) |
|
|
(21,311 |
) |
Recovery
from the federal Universal Service High Cost Loop
support program
|
|
|
(14,596 |
) |
|
|
2,231 |
|
Acquisition
of Madison River
|
|
|
12,345 |
|
|
|
33,923 |
|
Prior
year revenue settlement agreements
|
|
|
1,922 |
|
|
|
(2,346 |
) |
Other, net
|
|
|
(1,526 |
) |
|
|
(3,170 |
) |
|
|
$ |
(121,123 |
) |
|
|
62,804 |
|
In March
2006, we filed a complaint against a carrier for recovery of unpaid and
underpaid access charges for calls made using the carrier’s prepaid calling
cards and calls that used Internet Protocol for a portion of their
transmission. The carrier filed a counterclaim against us, asserting
that we improperly billed them terminating intrastate access charges on certain
wireless roaming traffic. In April 2007, we entered into a settlement
agreement with the carrier and received approximately $49 million cash from them
related to the issues described above.
In 2008
and 2007, we experienced reductions in our intrastate revenues of approximately
$29.0 million and $20.9 million, respectively, primarily due to a reduction in
intrastate minutes (partially due to the displacement of minutes by wireless,
electronic mail and other optional calling services). We
believe that intrastate minutes will continue to decline in 2009, although we
cannot estimate the magnitude of such decrease.
In third
quarter 2007, upon the lapse of the applicable 2003/2004 monitoring period for
certain of our tariffed billings, we recognized approximately $42.2 million of
revenues (of which approximately $25.4 million is reflected in network access
revenues and $16.8 million is reflected in data revenues). Such
amount represented billings from tariffs prior to July 2004 in excess of the
authorized rate of return that we initially recorded as a deferred credit
pending completion of such 2003/2004 monitoring period.
Our revenues from the Universal Service High Cost Loop Fund decreased
approximately $14.6 million in 2008 and increased $2.2 million in
2007. Such decrease in 2008 was primarily due to an increase in the
nationwide average cost per loop factor used by the FCC to allocate funds among
all recipients. We anticipate our 2009 revenues from the federal
Universal Service High Cost Loop support program will decrease between $12 and
$14 million compared to 2008.
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 $63.4 million
(13.8%) in 2008 substantially due to (i) a $57.8 million increase in DSL-related
revenues primarily due to growth in the number of DSL customers and (ii) $16.3
million of additional revenues contributed by Madison River. Such
increases were partially offset by $16.8 million of one-time revenues recorded
in third quarter 2007 upon expiration of the previously described regulatory
monitoring period. While we expect our data revenues to increase in
2009 as compared to 2008, we do not expect to recognize the same level of
increase as we experienced in 2008 primarily due to the fact that our customer
base is more highly penetrated with DSL services.
Data
revenues increased $109.3 million (31.1%) in 2007 substantially due to (i) a
$66.4 million increase in DSL-related revenues due primarily to growth in the
number of DSL customers; (ii) $34.5 million of revenues contributed by Madison
River and (iii) $16.8 million of one-time revenues recorded in third quarter
2007 upon expiration of the previously described regulatory monitoring
period. Such increases were partially offset by a $5.4 million
decrease in special access revenues primarily due to certain customers
disconnecting circuits and a $5.1 million decrease in dial-up Internet revenues
due to a decline in the number of dial-up customers.
Fiber transport and
CLEC. Our fiber transport and CLEC revenues include
revenues from our fiber transport, competitive local exchange carrier (“CLEC”)
and security monitoring businesses. Fiber transport and CLEC revenues
increased $2.7 million (1.7%) in 2008, of which $6.4 million was due to growth
in our incumbent fiber transport business and $2.5 million was due to additional
revenue contributed by Madison River. Such increases were partially
offset by a $2.6 million decrease due to the sales of six CLEC markets that were
consummated in the second and third quarters of 2008 and a $3.5 million decrease
in CLEC revenues primarily due to customer disconnects.
Fiber
transport and CLEC revenues increased $10.2 million (6.9%) in 2007, of which
$8.7 million was due to growth in our incumbent fiber transport business and
$4.8 million was contributed by Madison River. Such increases were
partially offset by a $3.5 million decrease in CLEC revenues primarily due to
customer disconnects.
Other revenues. We derive other revenues primarily by (i)
leasing, selling, installing and maintaining customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for third
parties, (iii) participating in the publication of local directories and (iv)
providing new service offerings, principally consisting of our new video and
wireless reseller services. Other revenues increased $14.4 million
(7.0%) in 2008 primarily due to (i) $7.7 million of additional revenues
contributed by Madison River and (ii) a $2.8 million increase in directory
revenues.
Other
revenues increased $8.0 million (4.1%) in 2007 primarily due to $13.9 million of
revenues contributed by Madison River. In connection with
receiving a one-time reimbursement as a result of our above-described change in
our contractual relationship with our satellite television service provider, we
recorded a $1.9 million one-time increase to revenues in 2007. The impact of the
change in the arrangement from a gross to a net revenue presentation resulted in
an $8.2 million decrease in recurring revenues for the twelve months ended
December 31, 2007 compared to 2006.
OPERATING
EXPENSES
Year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$ |
955,473 |
|
|
|
937,375 |
|
|
|
888,414 |
|
Selling,
general and administrative
|
|
|
399,136 |
|
|
|
389,533 |
|
|
|
370,272 |
|
Depreciation and
amortization
|
|
|
523,786 |
|
|
|
536,255 |
|
|
|
523,506 |
|
Operating expenses
|
|
$ |
1,878,395 |
|
|
|
1,863,163 |
|
|
|
1,782,192 |
|
Cost of services and
products. Cost of services and products increased $18.1
million (1.9%) in 2008 primarily due to (i) $22.7 million of additional costs
incurred by the Madison River properties; (ii) a $12.3 million increase in
DSL-related expenses due to growth in the number of DSL customers; (iii) a $4.9
million increase in costs associated with our recently launched switched digital
video offering; and (iv) a $4.1 million increase due to a one-time reimbursement
of costs received from our satellite television service provider in the second
quarter of 2007 in connection with the change in our arrangement, as mentioned
above. Such increases were partially offset by (i) a $16.6 million
impairment charge recorded in 2007 related to certain of our CLEC assets that
were subsequently sold in 2008; (ii) a $4.4 million reduction in costs due to
the six CLEC markets sold and (iii) a $1.6 million decrease in salaries and
benefits.
Cost of services and products increased $49.0 million (5.5%) in 2007 primarily
due to (i) $52.5 million of costs incurred by our Madison River properties; (ii)
a $20.9 million increase in DSL-related expenses due to growth in the number of
DSL customers; (iii) a $16.6 million impairment charge related to certain of our
CLEC assets that were subsequently sold in 2008; and (iv) a $7.8 million
increase in expenses associated with pole attachments primarily due to rate
increases. Such increases were partially offset by (i) a $33.1
million decrease in salaries and benefits due to one-time costs associated with
workforce reductions in 2006 and the impact of having fewer incumbent employees
resulting from workforce reductions in 2007 and 2006 and (ii) a $19.7 million
decrease in expenses associated with our satellite television service offering
due to a change in our arrangement as mentioned above (such reduction includes a
$4.1 million one-time reimbursement of costs received from the service provider
in 2007 in connection with the change in the arrangement, as described
above).
Selling, general and
administrative. Selling, general and administrative expenses
increased $9.6 million (2.5%) in 2008 primarily due to (i) an $11.4 million
increase in marketing expenses; (ii) an $8.2 million increase due to expenses
related to the curtailment loss associated with our SERP; (iii) $5.0 million of
costs associated with our pending acquisition of EMBARQ (see Accounting
Pronouncements below for additional information) and (iv) $4.8 million of
additional costs incurred by Madison River. Such increases were
partially offset by (i) an $8.8 million decrease in operating taxes; (ii) a $5.4
million decrease in bad debt expense (most of which is attributable to a
favorable settlement with a carrier in first quarter 2008); (iii) a $4.3 million
decrease in salaries and benefits; and (iv) a $2.7 million decrease in
information technology expenses.
Selling,
general and administrative expenses increased $19.3 million (5.2%) in 2007
primarily due to (i) $16.4 million of costs incurred by Madison River; (ii) an
$8.2 million increase in salaries and benefits; and (iii) a $5.6 million
increase in sales and marketing expenses. Such increases were
partially offset by (i) a $5.7 million reduction in bad debt expense and (ii) a
$4.3 million decrease in information technology expenses.
Depreciation and
amortization. Depreciation and amortization decreased $12.5
million (2.3%) primarily due to a $36.7 million reduction in depreciation
expense due to certain assets becoming fully depreciated. Such
decrease was partially offset by $13.7 million of additional depreciation and
amortization incurred by Madison River and a $12.8 million increase due to
higher levels of plant in service.
Depreciation
and amortization increased $12.7 million (2.4%) in 2007 primarily due to $32.5
million of depreciation and amortization incurred by Madison River and a $14.8
million increase due to higher levels of plant in service. Such
increases were substantially offset by a $31.7 million reduction in depreciation
expense due to certain assets becoming fully depreciated.
Other. For
additional information regarding certain matters that have impacted or may
impact our operations, see “Regulation and Competition”.
INTEREST
EXPENSE
Interest
expense decreased $10.7 million (5.0%) in 2008 compared to 2007. An
$18.0 million decrease due to lower average interest rates was partially offset
by a $9.3 million increase due to increased average debt
outstanding.
Interest
expense increased $16.9 million (8.6%) in 2007 compared to 2006. A
$22.7 million increase due to increased average debt outstanding (primarily due
to the $750 million of senior notes issued in March 2007 to fund the Madison
River acquisition) was partially offset by a $5.9 million decrease due to lower
average interest rates.
OTHER
INCOME (EXPENSE)
Other
income (expense) includes the effects of certain items not directly related to
our core operations, including gains or losses from nonoperating asset
dispositions and impairments, our share of the income from our 49% interest in a
cellular partnership, interest income and allowance for funds used during
construction. Other income (expense) was $41.0 million in 2008, $38.8
million in 2007 and $121.6 million in 2006. The years 2008, 2007 and
2006 were impacted by certain charges and credits that are not expected to occur
in the future. Included in 2008 income are (i) approximately $10
million related to the recognition of previously accrued transaction related and
other contingencies, (ii) aggregate pre-tax gains of approximately $7.3 million
from the sales of certain non-operating investments and (iii) a $4.5 million
gain realized upon liquidation of our investments in marketable securities in
our SERP trust. Also included in 2008 is a $3.4 million pre-tax
charge related to terminating certain derivative instruments that did not
qualify for hedge accounting. The year 2007 includes a non-recurring
pre-tax gain of $10.4 million related to the sale of our interest in a real
estate partnership and a $5.2 million pre-tax gain resulting from the final
distribution of funds from the RTB redemption mentioned
below. Included in 2006 were pre-tax gains of approximately $118.6
million (substantially all of which related to the redemption of our RTB stock
upon dissolution of the RTB), which was partially offset by pre-tax charges of
approximately $11.7 million due to the impairment of certain non-operating
investments.
Our share
of income from our 49% interest in a cellular partnership decreased $2.5 million
in 2008 compared to 2007. We record our share of the partnership
income based on unaudited results of operations until the time we receive
audited financial statements for the partnership from the unaffiliated general
partner. Upon receipt of the respective audited financial statements,
we recorded unfavorable adjustments in 2008 (upon completion of the 2007 audit)
and favorable adjustments in 2007 (upon completion of the 2006 and 2005
audits).
INCOME
TAX EXPENSE
The
effective income tax rate was 34.7%, 32.4%, and 37.4% for 2008, 2007 and 2006,
respectively. Income tax expense was reduced by approximately $12.8
million in 2008 and $32.7 million in 2007 due to the recognition of previously
unrecognized tax benefits (see Critical Accounting Policies below and Note
12). Income tax expense was reduced by approximately $1.7 million in
2008 and $6.4 million in 2006 due to the resolution of various income tax audit
issues.
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (revised), “Business Combinations” (“SFAS
141(R)”). Under SFAS 141(R), an acquiring entity will be required to
recognize all of the assets acquired and liabilities assumed in a transaction at
the acquisition date fair value with limited exceptions. SFAS 141(R)
will change the accounting treatment for certain specific items, including
acquisition costs, acquired contingent liabilities, restructuring costs,
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date. SFAS 141(R) is effective for us for all business
combinations for which the acquisition date is on or after January 1,
2009. We will account for our pending acquisition of EMBARQ using the
guidance of SFAS 141(R). Because it was probable that the acquisition
date of the pending EMBARQ business combination would be subsequent to the
January 1, 2009 effective date of SFAS 141(R), we elected to expense our EMBARQ
acquisition related costs that had been incurred through December 31, 2008 in
the fourth quarter of 2008 (which aggregated approximately $5.0
million). Such charge is reflected in selling, general and
administrative expense in our 2008 consolidated statement of
income. We will expense additional acquisition related costs as
incurred after December 31, 2008.
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS
157”). SFAS 157, effective for us beginning January 1, 2008, defines
fair value, establishes a framework for measuring fair value and expands the
disclosures about fair value measurements required or permitted under other
accounting pronouncements. SFAS 157 establishes a three-tier fair
value hierarchy, which prioritizes the inputs used to measure fair
value. These tiers include: Level 1 (defined as observable inputs
such as quoted market prices in active markets); Level 2 (defined as inputs
other than quoted prices in active markets that are either directly or
indirectly observable); and Level 3 (defined as unobservable inputs in which
little or no market data exists). See Note 17 for additional
disclosures regarding SFAS 157.
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires noncontrolling interests to be recognized as
equity in the consolidated financial statements. In addition, net
income attributable to the noncontrolling interest will be included in
consolidated net income. SFAS 160 is effective for fiscal years, and
the interim periods within those fiscal years, beginning on or after December
15, 2008. We do not expect SFAS 160 to have a material impact to our
consolidated financial statements.
In June
2008, the Financial Accounting Standards Board issued FSP EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities”. Based on this pronouncement, we have
concluded that our outstanding non-vested restricted stock is a participating
security and therefore should be included in the earnings allocation in
computing earnings per share using the two-class method. The
pronouncement is effective for us beginning in first quarter 2009 and, upon
adoption, will require us to recast our previously reported earnings per
share. If our diluted earnings per share would have been calculated
using the provisions of FSP EITF 03-6-1 for 2008, our diluted earnings per share
would have been $3.52 per share as compared to $3.56 per share.
In June
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the
accounting for uncertainty in income taxes recognized in financial
statements. FIN 48 required us, effective January 1, 2007, to
recognize and measure tax benefits taken or expected to be taken in a tax return
and disclose uncertainties in income tax positions. See Note 12 for
additional information related to our income tax uncertainties.
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 these reasons,
the adoption of SFAS 143 did not have a material effect on our financial
statements. For our telephone operations acquired from Verizon in
2002 (which are not subject to SFAS 71) and our other non-regulated operations,
we have not accrued a liability for anticipated removal costs related to
tangible long-lived assets.
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) intangible and
long-lived assets, (v) business combinations and (vi) income
taxes. Actual results may differ from these estimates and
assumptions. We believe these critical accounting policies discussed
below involve a higher degree of judgment or complexity.
Revenue
recognition. Certain of our interstate network access and data
revenues are based on tariffed access charges filed directly with the FCC; the
remainder of such revenues is derived from revenue sharing arrangements with
other LECs administered by the National Exchange Carrier Association, with the
exception of DSL-related revenues which were removed from our pooled interstate
tariff filing effective July 1, 2006 and are now recognized as revenues when
billed. We currently recognize such interstate network access
revenues at the authorized rate of return, unless the actual achieved or
projected rate of return is lower than authorized.
The
Telecommunications Act of 1996 allows local exchange carriers to file access
tariffs on a streamlined basis and, if certain criteria are met, deems those
tariffs lawful. Tariffs that have been “deemed lawful” in effect
nullify an interexchange carrier’s ability to seek refunds should the earnings
from the tariffs ultimately result in earnings above the authorized rate of
return prescribed by the FCC. Certain of our telephone subsidiaries
file interstate tariffs with the FCC using this streamlined filing
approach. Since July 2004, we have recognized billings from our
tariffs as revenue since we believe such tariffs are “deemed
lawful”. There is no assurance that our future tariff filings will be
“deemed lawful”. For those billings from tariffs prior to July 2004,
we initially recorded as a deferred credit our earnings in excess of the
authorized rate of return.
Allowance for doubtful
accounts. In evaluating the collectibility of our accounts
receivable, we assess a number of factors, including a specific customer’s or
carrier’s ability to meet its financial obligations to us, the length of time
the receivable has been past due and historical collection
experience. Based on these assessments, we record both specific and
general reserves for uncollectible accounts receivable to reduce the related
accounts receivable to the amount we ultimately expect to collect from customers
and carriers. If circumstances change or economic conditions worsen
such that our past collection experience is no longer relevant, we may need to
increase our reserves from the levels reflected in our accompanying consolidated
balance sheet.
Pension and postretirement
benefits. Accounting for pensions and postretirement benefits
involves estimating the cost of benefits to be provided well into the future and
attributing that cost over the time period each employee provides service to
us. To accomplish this, extensive use is made of various assumptions,
such as discount rates, investment returns, mortality, turnover, medical costs
and inflation through a collaborative effort by management and independent
actuaries. The results of this effort provide management with the
necessary information on which to base its judgment and develop the estimates
used to prepare the financial statements. Changes in assumptions used
could result in a material impact to our financial results in any given
period.
A
significant assumption used in determining our pension and postretirement
expense is the expected long-term rate of return on plan assets. For
2008 and 2007, 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 based on our current plan asset allocation. We
also reviewed the historical rates of return on those plan assets over long-term
periods that ranged from 10 to 20 years. A 25 basis point decrease in
the return on plan asset assumption would increase annual combined pension and
postretirement expense approximately $870,000. During
2008, the loss on our pension plan assets was approximately 28%, which was
significantly lower than our 8.25% expected return
assumption. The effect of this large difference between actual
and expected asset returns for 2008 has negatively impacted us in several ways,
including (i) contributing largely to the $80.8 million
after-tax increase in our accumulated other comprehensive loss (which reduced
our consolidated stockholders’ equity balance as of December 31, 2008); (ii) an
expected increase in our pension expense for 2009 compared to 2008 estimated to
be approximately $20 million; and (iii) anticipated higher contributions to our
pension plans in the near future than previously expected. We
contributed $50 million to our primary pension plan in late
2008. Since our previous contributions to our primary pension plan
have exceeded the minimum amount of contributions required by law, we have
accumulated a positive “credit balance” under the plan. We currently
estimate that our existing accumulated credit balance will be sufficient to
fully satisfy our required minimum contribution under the plan for 2009 and
partially satisfy our 2010 required minimum contribution. Based on
actuarial estimates as of December 31, 2008 that assume the utilization of our
existing credit balance to satisfy future cash contributions and assuming no
discretionary contributions are made, our required minimum contribution to our
primary pension plan is estimated to be $4 million in 2010 and $30 million in
2011. Our minimum required contributions to our other pension plans
are immaterial.
Another
assumption used in the determination of our pension and postretirement benefit
plan obligations is the appropriate discount rate. The discount rate
is an assumed rate of return derived from high-quality debt securities that, if
applicable at the measurement date to a specified amount of principal, would
provide the necessary future cash flows to pay our pension benefit obligations
when they become due. For our pension plans, the discount rate used
for the December 31, 2008 measurement date was derived by matching projected
benefit payments to bond yields obtained from the CitiGroup Pension Discount
Curve (Above Median) which are ultimately derived from the AA-rated corporate
bond sector. For the year ended December 31, 2007, we utilized the
CitiGroup Pension Discount Curve to derive our discount
rate. Our discount rate for determining benefit obligations
under our primary pension plan at December 31, 2008 was 6.6% compared to 6.3% at
December 31, 2007. The utilization of a different methodology to
derive the discount rate is considered a change in estimate for accounting
purposes. Such change (i) had no impact to the amount of pension
expense recognized in 2008, (ii) will have an immaterial impact to the amount of
pension expense recognized in 2009 and (iii) reduced our projected benefit
obligation by approximately $26 million as of December 31, 2008. The
discount rate can change from year to year based on market conditions that
impact corporate bond yields. We use a similar
methodology to determine the discount rate for our postretirement plan by
utilizing as a reference the Hewitt Top Quartile Yield Curve as of the end of
the year. Our discount rate for determining benefit obligations under
our postretirement plan at December 31, 2008 was 6.9% compared to 6.5% at
December 31, 2007. A 25 basis point decrease in the assumed discount
rate would increase annual combined pension and postretirement expense
approximately $1.4 million.
Intangible and long-lived
assets. We are subject to testing for impairment of long-lived
assets under two accounting standards, Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and
Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).
SFAS 142
requires goodwill recorded in business combinations to be reviewed for
impairment at least annually and requires write-downs only in periods in which
the recorded amount of goodwill exceeds the fair value. The vast
majority of our goodwill is attributable to our telephone operations, which we
internally operate and manage based on three geographic regions. We
test for goodwill impairment for our telephone operations at the region level
due to the similar economic characteristics of the individual reporting units
that comprise each region. 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 of our telephone operations are based on valuation models using techniques
such as multiples of earnings (before interest, taxes and depreciation and
amortization). We also evaluate goodwill impairment of our other operations
primarily based on multiples of revenues and discounted cash flow
analyses. 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,
2008) under SFAS 142 and determined our goodwill was not impaired as of such
date. Due to the deterioration in the overall stock market
subsequent to September 30, 2008, our market capitalization as of December 31,
2008 decreased to a level below our current stockholders’ equity
balance. As a result, we reviewed the specific factors outlined
in SFAS 142 that would indicate whether or not a triggering event had occurred
that would necessitate us to perform an interim goodwill impairment
test. Based on our review of such factors and considering that our
market capitalization substantially exceeds our stockholders’ equity balance
after consideration of a reasonable control premium of 35% based on identified
industry transactions, we concluded that we did not have a triggering event that
would require us to perform an interim evaluation of our goodwill for potential
impairment. We based such conclusion on the fact that we do not
believe there have been any significant fundamental changes since our annual
impairment test to (i) our business as a whole or our reporting units, including
regulatory changes, (ii) our level of operating cash flows, (iii) our
expectation of future levels of operating cash flows, (iv) our executive
management team and (v) the carrying value of our other long-lived
assets.
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. We
recognized a $16.6 million pre-tax impairment charge in 2007 related to certain
of our CLEC assets that were subsequently sold in 2008.
Business combinations. As
described above, SFAS 141(R) is effective for us for all business combinations
consummated on or after January 1, 2009 and requires an acquiring entity to
recognize all of the assets acquired and liabilities assumed at the acquisition
date fair value. We have concluded that we are the accounting
acquirer in our pending acquisition of EMBARQ, which we expect to complete in
the second quarter of 2009. The allocation of the purchase price to
the assets acquired and liabilities assumed of EMBARQ (and the related estimated
lives of depreciable tangible and identifiable intangible assets) will require a
significant amount of judgment and will be considered a critical
estimate. Such allocation of the purchase price will be
performed by an independent valuation firm. For additional
information concerning this pending acquisition, see Item 1 of Part I of this
annual report.
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 liabilities for unrecognized tax benefits for various uncertain tax
positions taken in our tax returns. These liabilities are estimated
based on our judgment of the probable outcome of the uncertain tax positions and
are adjusted periodically based on changing facts and
circumstances. Changes to the liabilities for unrecognized tax
benefits could materially affect operating results in the period of
change. During 2008 and 2007, we recognized approximately $12.8
million and $32.7 million, respectively, of previously unrecognized tax benefits
(including related interest and net of federal tax benefit) in accordance with
FIN 48. Such benefits were recorded primarily as a result of the
favorable resolution of audits, administrative practices and the lapse of
statute of limitations in certain jurisdictions. See Note 12 for
additional information regarding our unrecognized tax benefits.
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 72% 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 and competitive situations may further alter our ability to
recover increased costs in our regulated operations. For our
properties acquired from Verizon in 2002, which are regulated under price-cap
regulation for interstate purposes, price changes for certain revenue components
are limited to the rate of inflation. 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, 2008, the fair value of our long-term debt was estimated to be $2.7
billion based on the overall weighted average rate of our long-term debt of 6.2%
and an overall weighted maturity of 7 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 62 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 $66.5 million
decrease in the fair value of our long-term debt. As of December 31,
2008, approximately 83% 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 over the past several years, we have used
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. Management periodically reviews our exposure to interest
rate fluctuations and implements strategies to manage the exposure.
In
January 2008, we terminated all of our existing “fixed to variable” interest
rate swaps associated with the full $500 million principal amount of our Series
L senior notes, due 2012. In connection with the termination of these
derivatives, we received aggregate cash payments of approximately $25.6 million,
which has been reflected as a premium of the associated long-term debt and is
being amortized as a reduction of interest expense through 2012 using the
effective interest method. In addition, in January 2008, we also
terminated certain other derivatives that were not deemed to be effective
hedges. Upon the termination of these derivatives, we paid an
aggregate of approximately $4.9 million (and recorded a $3.4 million pre-tax
charge in the first quarter of 2008 related to the settlement of these
derivatives). As of December 31, 2008, we had no derivative
instruments outstanding.
We are also exposed to market risk from changes in the fair value of our pension
plan assets. For 2008, the loss on our pension plan assets was
approximately 28%. Should our actual return on plan assets continue
to be significantly lower than our 8.25% expected return assumption, our net
periodic pension expense will increase in future periods and we will be required
to contribute additional funds to our pension plan after 2009. See
Critical Accounting Policies above for additional information.
Certain
shortcomings are inherent in the method of analysis presented in the computation
of fair value of financial instruments. Actual values may differ from
those presented if market conditions vary from assumptions used in the fair
value calculations. The analysis above incorporates only those risk
exposures that existed as of December 31, 2008.
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.
The
recent disruption in the credit markets has had a significant adverse impact on
a number of financial institutions and other companies. To date, our
liquidity has not been materially impacted by the current credit environment and
we do not expect that it will materially impact us in the near
future. We will continue to closely monitor our liquidity and the
credit markets; however, we cannot predict with certainty the impact to us of
any further disruption in the overall credit markets.
Operating
activities. Net cash provided by operating activities was
$853.3 million, $1.0 billion and $840.7 million in 2008, 2007 and 2006,
respectively. Payments for income taxes aggregated $208.8 million,
$185.3 million and $212.4 million in 2008, 2007 and 2006,
respectively. We also made contributions to our pension plans that
aggregated approximately $52.5 million in 2008, $1.5 million in 2007 and $31.5
million in 2006. 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 $389.0
million, $619.2 million and $193.7 million in 2008, 2007 and 2006,
respectively. We used $306.8 million of cash (net of approximately
$20.0 million of acquired cash) to purchase Madison River Communications Corp.
(“Madison River”) and pay related closing costs on April 30, 2007 (see below and
Note 2 for additional information). We received approximately $122.8
million cash from the redemption of our RTB stock upon dissolution of the RTB
during 2006. See Note 15 for additional
information. Capital expenditures during 2008, 2007 and 2006 were
$286.8 million, $326.0 million and $314.1 million, respectively.
During
2008, we paid an aggregate of approximately $149 million for 69 licenses in the
FCC’s auction of 700 megahertz (“MHz”) wireless spectrum. The 700 MHz
spectrum is not expected to be cleared for usage until mid-2009. We
are still in the planning stages regarding the use of this
spectrum. However, based on our preliminary analysis, we are
considering developing wireless voice and data service capabilities based on
equipment using LTE (Long-Term Evolution) technology. Given that this
equipment is not expected to be commercially available until 2010, we do not
expect our deployment to result in any material impact on our capital and
operating budgets in 2009.
In
anticipation of making lump sum distributions to certain participants of our
SERP in early 2009, we liquidated our investments in marketable securities in
the SERP trust during the second quarter of 2008 and thereby increased our cash
and cash equivalents by $34.9 million. The lump sum distributions
were paid in early 2009 and aggregated approximately $37 million.
Financing
activities. Net cash used in financing activities was $255.4
million in 2008, $402.1 million in 2007 and $780.2 million in
2006. In the first quarter of 2008, we paid our $240 million Series F
Senior Notes at maturity using borrowings from our credit
facility. In late March 2007, we publicly issued an aggregate of $750
million of Senior Notes (see Note 5 for additional information). The
net proceeds from the issuance of such Senior Notes aggregated approximately
$741.8 million and were used (along with cash on hand and approximately $50
million of borrowings under our commercial paper program) to (i) finance the
initial purchase price for the April 30, 2007 acquisition of Madison River ($322
million) and (ii) pay off Madison River’s existing indebtedness (including
accrued interest) at closing ($522 million). Payments of debt were
$285.4 million in 2008, $713.0 million in 2007 and $82.0 million in
2006.
As
previously mentioned, because of concerns with the overall state of the credit
markets, we increased our cash position at the end of 2008 by borrowing funds
under our credit facility to insure we had sufficient cash to fulfill our near
term cash requirements. See below for additional information
regarding our credit facility.
As
discussed in Note 1, we have entered into a definitive agreement to merge
with Embarq Corporation. Assuming we timely receive all regulatory
approvals (and all other closing conditions are met), we hope to consummate the
merger in the second quarter of 2009. In connection with the closing,
we intend to finance our merger transaction expenses with (i) available cash of
the combined company and (ii) proceeds from CenturyTel’s or EMBARQ’s
existing revolving credit facilities. As previously announced, EMBARQ
amended its credit facility in January 2009 to enable the facility to remain in
place as an $800 million unsecured revolving credit facility after the
completion of the pending merger through May 2011. The amendment will
take effect only upon the completion of the merger and the satisfaction of
certain other conditions specified in the amendment. For Note 20 for
additional information.
In
accordance with previously announced stock repurchase programs, we repurchased
9.7 million shares (for $347.3 million), 10.2 million shares (for $460.7
million), and 21.4 million shares (for $802.2 million) in 2008, 2007 and 2006,
respectively. The 2006 repurchases include 14.36 million shares
repurchased (for an aggregate final adjusted price of approximately $528.4
million) under accelerated share repurchase agreements with investment banks
(see Note 9 for additional information). We have suspended our
current share repurchase program pending completion of our acquisition of
EMBARQ.
In June
2008, our Board of Directors determined to (i) increase our annual cash dividend
to $2.80 from $.27 per share and (ii) declare a one-time dividend of $.6325 per
share, which was paid in July 2008, effectively adjusting the total second
quarter dividend to the new $.70 quarterly dividend rate. We plan to continue
our current dividend practice through the consummation of the EMBARQ
merger. Following the closing of the EMBARQ merger, we expect to
continue our current dividend practice and resume share repurchases, subject to
our intention to maintain investment grade credit ratings on our senior
debt.
In the
first quarter of 2008, we received a net cash settlement of approximately $20.7
million from the termination of all of our existing derivative
instruments. See “Market Risk” for additional information concerning
the termination of these derivatives.
As
described further in Note 5, we called for redemption on August 14, 2007, all of
our $165 million aggregate principal amount of Series K convertible senior
debentures, subject to the right of holders to convert their debentures into
shares of our common stock at a conversion price of $40.455. In lieu
of cash redemption, holders of approximately $149.6 million aggregate principal
amount of the debentures elected to convert their holdings into approximately
3.7 million shares of CenturyTel common stock. The remaining $15.4
million of outstanding debentures were retired for cash (including premium and
accrued and unpaid interest).
Other. For 2009,
we have budgeted between $280-300 million for capital expenditures,
excluding nonrecurring capital expenditures expected to arise out of our pending
EMBARQ acquisition. A few years ago, we concluded that our
prior extensive capital investment in our wireline network permitted us to
reduce wireline network capital spending to maintenance levels. Our
2009 capital expenditure budget also includes amounts for expanding our new
service offerings and expanding our data networks.
The
following table contains certain information concerning our material contractual
obligations as of December 31, 2008.
Payments due by period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
2009
|
|
|
|
2010-2011
|
|
|
|
2012-2013
|
|
|
2013 and Other
|
|
|
|
(Dollars
in thousands)
|
|
Long-term
debt, including current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturities
and capital lease obligations (1)
|
|
$ |
3,314,526 |
|
|
|
20,407 |
|
|
|
1,098,921 |
|
|
|
775,759 |
|
|
|
1,419,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on long-term debt
obligations
|
|
$ |
1,345,267 |
|
|
|
191,326 |
|
|
|
316,128 |
|
|
|
215,950 |
|
|
|
621,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
tax benefits
(2)
|
|
|
17,285 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17,285 |
|
(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) Represents
the amount of tax and interest we would pay assuming we are required to pay the
entire amount that we have reserved for our unrecognized tax benefits (see Note
12 for additional information). The timing of any payments for our
unrecognized tax benefits cannot be predicted with certainty; therefore, such
amount is reflected in the “After 2013 and Other” column in the above
table.
We
continually evaluate the possibility of acquiring additional communications
operations and expect to continue our long-term strategy of pursuing the
acquisition of attractively-priced communications properties in exchange for
cash, securities or both. At any given time, we may be engaged in
discussions or negotiations regarding additional acquisitions. We
generally do not announce our acquisitions or dispositions until we have entered
into a preliminary or definitive agreement. We may require additional
financing in connection with any such acquisitions, the consummation of which
could have a material impact on our financial condition or
operations. Approximately 4.1 million shares of our common stock and
200,000 shares of our preferred stock remain available for future issuance in
connection with acquisitions under our acquisition shelf registration
statement. We also have access to debt and equity capital
markets.
We have available a five-year, $708 million revolving credit facility which
expires in December 2011. The credit facility contains financial
covenants that require us to meet a consolidated leverage ratio (as defined in
the facility) not exceeding 4 to 1 and a minimum interest coverage ratio (as
defined in the facility) of at least 1.5 to 1. The interest rate on
revolving loans under the facility is based on our choice of several prevailing
commercial lending rates plus an additional margin that varies depending on our
credit ratings and aggregate borrowings under the facility. We must
pay a quarterly commitment fee on the unutilized portion of the facility, the
amount of which varies based on our credit ratings. Up to $150
million of the credit facility can be used for letters of credit, which reduces
the amount available for other extensions of credit. Available
borrowings under our credit facility are also effectively reduced by any
outstanding borrowings under our commercial paper program. Our
commercial paper program borrowings in turn are effectively limited to the total
amount available under our credit facility. As of December 31, 2008,
we had $563 million outstanding under our credit facility. We had no
commercial paper outstanding as of December 31, 2008.
Moody’s
Investors Service (“Moody’s”), which currently rates our debt Baa2, indicated
our debt rating is currently under review for a possible downgrade to
Baa3. Standard & Poor’s (“S&P”) rates our long-term debt BBB-
(with a stable outlook). Our commercial paper program is rated P2 by
Moody’s and A3 by S&P. Any downgrade in our credit ratings will
increase our borrowing costs and commitment fees under our $708 million
revolving credit facility. Downgrades could also restrict our access
to the capital markets, 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, 2008, 2007 and 2006. Our debt to
capitalization ratio has increased primarily due to share repurchases we have
made during the last few years.
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Debt
to total capitalization
|
|
|
51.2 |
% |
|
|
46.9 |
|
|
|
44.8 |
|
Ratio
of earnings to fixed charges and preferred stock
dividends*
|
|
|
3.74 |
|
|
|
3.85 |
|
|
|
3.94 |
|
* For
purposes of the chart above, “earnings” consist of income before income taxes
and fixed charges, and “fixed charges” include our interest expense, including
amortized debt issuance costs, and our
preferred
stock dividend costs.
REGULATION
AND COMPETITION
The
communications industry continues to undergo various fundamental regulatory,
legislative, competitive and technological changes. These changes may
have a significant impact on the future financial performance of all
communications companies.
Events affecting the communications
industry. Wireless telephone services increasingly constitute
a significant source of competition with LEC services, especially since wireless
carriers have begun to compete effectively on the basis of price with more
traditional telephone services. As a result, some customers have
chosen to completely forego use of traditional wireline phone service and
instead rely solely on wireless service for voice services. This
trend is more pronounced among residential customers, which comprise 73% 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.
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 half 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.
Federal USF programs have undergone substantial changes since 1997, and are
expected to experience more changes in the coming years as modernization of the
overall program moves forward. As mandated by the 1996 Act, in May
2001 the FCC modified its existing universal service support mechanism for rural
telephone companies by adopting an interim mechanism for a five-year period
based on embedded, or historical, costs that provide relatively predictable
levels of support to many LECs, including substantially all of our
LECs. In May 2006, the FCC extended this interim mechanism
until such time that new high-cost support rules are adopted for rural telephone
companies. Wireless and other competitive service providers continue
to seek to qualify to receive USF support. This trend, coupled with
changes in usage of telecommunications services, have placed stress on the
funding mechanism of the USF, which is subject to annual caps on
disbursements. These developments have placed additional financial
pressure on the amount of money that is necessary and available to provide
support to all eligible service providers, including support payments we receive
from the USF High Cost Loop support program. Increases in the
nationwide average cost per loop factor used to allocate funds among all USF
recipients caused our revenues from the USF High Cost Loop support program to
decrease approximately $14.6 million in 2008 when compared to
2007. We anticipate that our 2009 revenues from the USF High Cost
Loop support program will be lower than 2008 by approximately $12-14
million.
Since May
2007, the FCC and the Federal-State Joint Board on Universal Service have each
proposed a series of reforms that could, if adopted, substantially restructure
current USF programs, including comprehensive reform proposals released for
public comment in November 2008. Until the FCC acts on those
recommendations or issues final rules, we cannot estimate the impact that such
proposals would have on our operations. In addition, there are a
number of judicial appeals challenging several aspects of the FCC’s universal
service rules and various Congressional proposals seeking to substantially
modify USF programs, none of which have been resolved at this
time. We will continue to be active in monitoring these
developments.
Technological
developments have led to the development of new services that compete with
traditional LEC services. Technological improvements have enabled
cable television companies to provide traditional circuit-switched telephone
service over their cable networks, and several national cable companies have
aggressively pursued this opportunity. Additionally, several large
electric utilities have announced plans to offer communications services that
compete with LECs. Improvements in the quality of
"Voice-over-Internet Protocol" ("VoIP") service have led several cable,
Internet, data and other communications companies, as well as start-up
companies, to substantially increase their offerings of VoIP service to business
and residential customers. VoIP providers frequently use existing
broadband networks to deliver flat-rate, all distance calling plans that may
offer features that cannot readily be provided by traditional LECs and may be
priced below those currently charged for traditional local and long distance
telephone services. In late 2003, the FCC initiated rulemaking
proceedings to address the regulation of VoIP, and has adopted orders
establishing some initial broad regulatory guidelines. There can be
no assurance that future rulemaking will be on terms favorable to ILECs, or that
VoIP providers will not successfully compete for our customers.
In 2003,
the FCC opened a broad intercarrier compensation proceeding with the ultimate
goal of creating a uniform mechanism to be used by the entire telecommunications
industry for payments between carriers originating, terminating, carrying or
delivering telecommunications traffic. The FCC has received
intercarrier compensation proposals from several industry groups, and industry
negotiations are continuing with the goal of developing a consensus plan that
addresses the concerns of carriers from all industry
segments. In late 2008, the FCC issued a document that, among
other things, requested public comment on the chairman’s draft proposal which
would require carriers to reduce access charges to a rate that was significantly
lower than what we currently charge. It is currently unclear when the FCC may
take action with respect to the draft proposals. Adoption of the
chairman’s original proposal, which is included in the latest draft order, could
result in a material adverse impact on our results of
operations. Until the FCC’s proceeding concludes and the changes, if
any, to the existing rules are established, we cannot estimate the impact this
proceeding will have on our results of operations.
Many
cable, technology or other communication companies that previously offered a
limited range of services are now, like us, offering diversified bundles of
services. As such, a growing number of companies are competing to
serve the communications needs of the same customer base. Several of
these companies started offering full service bundles before us, which could
give them an advantage in building customer loyalty. Such activities
will continue to place downward pressure on the demand for our access
lines.
Recent events affecting
us. During the last few years, all of the states in which we
provide telephone services have taken legislative or regulatory steps to further
introduce competition into the LEC business. The number of companies
which have requested authorization to provide local exchange service in our
service areas has increased in recent years, especially in the markets we
acquired from Verizon in 2002 and 2000, and it is anticipated that similar
action may be taken by others in the future.
Certain
long distance carriers continue to request that certain of our LECs reduce
intrastate access tariffed rates. In addition, we have recently
experienced reductions in intrastate traffic, partially due to the displacement
of minutes by wireless, electronic mail and other optional calling
services. In 2008 we incurred a reduction in our intrastate
revenues of approximately $29.0 million compared to 2007 primarily due to these
factors. The corresponding decrease in 2007 compared to 2006 was
$20.9 million. We believe this trend of decreased intrastate minutes
will continue in 2009, although the magnitude of such decrease is
uncertain.
Over the
past several years, each of the Federal Communications Commission, Universal
Service Administrative Company and certain Congressional committees has
initiated wide-ranging reviews of the administration of the federal USF
program. As part of this process, we, along with a number of other
USF recipients, have undergone a number of USF audits and have also received
requests for information from the FCC’s Office of Inspector General (“OIG”) and
Congressional committees. In addition, in July 2008 we received a
subpoena from the OIG requesting a broad range of information regarding our
depreciation rates and methodologies since 2000. The OIG has not
identified to us any specific issues with respect to our participation in the
USF program and none of the audits completed to date has identified any material
issues regarding our participation in the USF program. While we
believe our participation is in compliance with FCC rules and in accordance with
accepted industry practices, we cannot predict with certainty the timing or
outcome of these various reviews. We have complied with and are
continuing to respond to all requests for information.
Exclusive
of acquisitions, we expect our operating revenues in 2009 to decline as we
continue to experience downward pressure primarily due to continued access line
losses, reduced universal service funding and lower network access
revenues. We expect such declines to be partially offset
primarily due to increased demand for our high-speed Internet service
offering.
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. We currently
account for our regulated telephone operations (except for the properties
acquired from Verizon in 2002) in accordance with the provisions of Statement of
Financial Accounting Standards No. 71, “Accounting for the Effects of Certain
Types of Regulation” (“SFAS 71”). 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 continuously monitor 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. As of December 31, 2008, we believe that
SFAS 71 still applies.
In
September 2008, we filed a petition with the FCC to convert our remaining
rate-of-return study areas to price cap regulation effective January 1, 2009
and, to the extent necessary, requested limited waivers of certain pricing and
universal service high-cost support rules related to our
election. Such petition was not addressed by the FCC in 2008 and
remains pending. Should the petition be approved by the FCC, we
believe this would require us to discontinue the accounting requirements of SFAS
71 as of the effective date of the conversion to price cap
regulation. In that event, implementation of Statement of Financial
Accounting Standards No. 101 ("SFAS 101"), "Regulated Enterprises -
Accounting for the Discontinuance of Application of FASB Statement No. 71,"
would require the write-off of previously established regulatory assets and
liabilities. 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
salvage value. Notwithstanding the adoption of Statement of Financial
Accounting Standards No. 143 “Accounting for Asset Retirement Obligations”
(“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, 2008 included regulatory
liabilities of approximately $216.5 million related to estimated removal costs
embedded in accumulated depreciation (as described above). Upon the
discontinuance of SFAS 71, such amount (on an after-tax basis) will be reflected
as an extraordinary gain on our consolidated statement of income for the period
in which the discontinuance takes effect.
When our
regulated operations cease to qualify for the application of SFAS 71, we do not
expect to record an 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 do not expect
such revisions in asset lives, or the elimination of other regulatory assets and
liabilities, to have a material unfavorable impact on our results of
operations. Upon the discontinuance of SFAS 71, we also would be
required to eliminate certain intercompany transactions with regulated
affiliates that currently are not eliminated under the application of SFAS
71. For 2008, approximately $197 million of revenues (and related
costs) would have been eliminated had we not been subject to the provisions of
SFAS 71. For regulatory purposes, the accounting and reporting of our
telephone subsidiaries would not be affected by the discontinued application of
SFAS 71.
If the
FCC adopts new rules on intercarrier compensation, we may withdraw our petition
for price cap regulation. If we have not discontinued the accounting
requirements of SFAS 71 prior to the effective date of the acquisition of
EMBARQ, we believe the consummation of this acquisition would require us to
discontinue the application of SFAS 71 effective as of the closing
date.
We have
certain obligations based on federal, state and local laws relating to the
protection of the environment. Costs of compliance through 2008 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 control 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, 2008. The effectiveness of our internal control over
financial reporting as of December 31, 2008 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
February
27, 2009
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 (the Company) 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 audits 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 the Company as of
December 31, 2008 and 2007, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
As
discussed in Note 12 to the consolidated financial statements, effective January
1, 2007, the Company changed its method of accounting for uncertain tax
positions. In addition, as discussed in Note 1 to the consolidated
financial statements, in 2006, the Company changed its method of accounting for
share-based payments (effective January 1, 2006) and pension and postretirement
benefits (as of December 31, 2006).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated February 27, 2009 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG
LLP
Shreveport,
Louisiana
February
27, 2009
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Stockholders
CenturyTel,
Inc.:
We
have audited CenturyTel, Inc. and subsidiaries' (the Company) internal
control over financial reporting as of December 31, 2008, 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, included in the accompanying Report of Management. Our
responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated
Framework issued by the 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 as listed in Item 15(a)(1), and
our report dated February 27, 2009 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG
LLP
Shreveport,
Louisiana
February
27, 2009
CENTURYTEL,
INC.
Consolidated
Statements of Income
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING REVENUES
|
|
$ |
2,599,747 |
|
|
|
2,656,241 |
|
|
|
2,447,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
|
955,473 |
|
|
|
937,375 |
|
|
|
888,414 |
|
Selling,
general and administrative
|
|
|
399,136 |
|
|
|
389,533 |
|
|
|
370,272 |
|
Depreciation and
amortization
|
|
|
523,786 |
|
|
|
536,255 |
|
|
|
523,506 |
|
Total operating
expenses
|
|
|
1,878,395 |
|
|
|
1,863,163 |
|
|
|
1,782,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
721,352 |
|
|
|
793,078 |
|
|
|
665,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(202,217 |
) |
|
|
(212,906 |
) |
|
|
(195,957 |
) |
Other income (expense)
|
|
|
40,954 |
|
|
|
38,770 |
|
|
|
121,568 |
|
Total other income
(expense)
|
|
|
(161,263 |
) |
|
|
(174,136 |
) |
|
|
(74,389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX EXPENSE
|
|
|
560,089 |
|
|
|
618,942 |
|
|
|
591,149 |
|
Income tax expense
|
|
|
194,357 |
|
|
|
200,572 |
|
|
|
221,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$ |
365,732 |
|
|
|
418,370 |
|
|
|
370,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE
|
|
$ |
3.57 |
|
|
|
3.82 |
|
|
|
3.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE
|
|
$ |
3.56 |
|
|
|
3.72 |
|
|
|
3.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER COMMON SHARE
|
|
$ |
2.1675 |
|
|
|
.26 |
|
|
|
.25 |
|
AVERAGE BASIC SHARES
OUTSTANDING
|
|
|
102,268 |
|
|
|
109,360 |
|
|
|
116,671 |
|
AVERAGE DILUTED SHARES
OUTSTANDING
|
|
|
102,871 |
|
|
|
113,094 |
|
|
|
122,229 |
|
See
accompanying notes to consolidated financial statements
CENTURYTEL,
INC.
Consolidated
Statements of Comprehensive Income
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$ |
365,732 |
|
|
|
418,370 |
|
|
|
370,027 |
|
OTHER
COMPREHENSIVE INCOME, NET OF TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of $965 tax
|
|
|
- |
|
|
|
- |
|
|
|
1,548 |
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investments, net of ($332), $547 and $411
tax
|
|
|
(533 |
) |
|
|
877 |
|
|
|
659 |
|
Reclassification adjustment for gain included in net income, net of
($1,730) tax
|
|
|
(2,776 |
) |
|
|
- |
|
|
|
- |
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on derivatives hedging variability of cash flows, net of $294
tax
|
|
|
- |
|
|
|
471 |
|
|
|
- |
|
Reclassification adjustment for gains included in net income, net of $267,
$254 and $234 tax
|
|
|
429 |
|
|
|
407 |
|
|
|
375 |
|
Items related to employee benefit plans*:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net actuarial loss, net of ($48,656) and $28,583 tax
|
|
|
(82,505 |
) |
|
|
52,485 |
|
|
|
- |
|
Change in net prior service credit, net of ($589) and $1,724
tax
|
|
|
(945 |
) |
|
|
2,766 |
|
|
|
- |
|
Reclassification adjustment for gains (losses) included in net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss, net of $1,198 and $4,409
tax
|
|
|
1,921 |
|
|
|
6,554 |
|
|
|
- |
|
Amortization
of net prior service credit, net of $2,261 and ($771) tax
|
|
|
3,627 |
|
|
|
(1,236 |
) |
|
|
- |
|
Amortization of unrecognized transition asset, net of ($55) tax
|
|
|
- |
|
|
|
(89 |
) |
|
|
- |
|
Net change in other comprehensive income (loss) (net of reclassification adjustment), net of
taxes
|
|
|
(80,782 |
) |
|
|
62,235 |
|
|
|
2,582 |
|
COMPREHENSIVE INCOME
|
|
$ |
284,950 |
|
|
|
480,605 |
|
|
|
372,609 |
|
* Reflected
in 2008 and 2007 due to the December 31, 2006 adoption of SFAS 158.
See
accompanying notes to consolidated financial
statements.
CENTURYTEL,
INC.
Consolidated
Balance Sheets
|
|
December 31, |
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
243,327 |
|
|
|
34,402 |
|
Accounts receivable
|
|
|
|
|
|
|
|
|
Customers,
less allowance of $10,973 and $12,129
|
|
|
153,838 |
|
|
|
152,809 |
|
Interexchange carriers and other, less allowance of $5,317 and
$8,232
|
|
|
76,454 |
|
|
|
70,218 |
|
Materials and supplies, at average cost
|
|
|
8,862 |
|
|
|
8,558 |
|
Other
|
|
|
72,926 |
|
|
|
26,412 |
|
Total current assets
|
|
|
555,407 |
|
|
|
292,399 |
|
|
|
|
|
|
|
|
|
|
NET PROPERTY, PLANT AND
EQUIPMENT
|
|
|
2,895,892 |
|
|
|
3,108,376 |
|
|
|
|
|
|
|
|
|
|
GOODWILL
AND OTHER ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,015,674 |
|
|
|
4,010,916 |
|
Other
|
|
|
787,222 |
|
|
|
772,862 |
|
Total goodwill and other assets
|
|
|
4,802,896 |
|
|
|
4,783,778 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
8,254,195 |
|
|
|
8,184,553 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
20,407 |
|
|
|
279,898 |
|
Accounts
payable
|
|
|
135,086 |
|
|
|
120,381 |
|
Accrued
expenses and other current liabilities
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
99,648 |
|
|
|
64,380 |
|
Income taxes
|
|
|
- |
|
|
|
54,233 |
|
Other taxes
|
|
|
44,137 |
|
|
|
48,961 |
|
Interest
|
|
|
75,769 |
|
|
|
80,103 |
|
Other
|
|
|
26,773 |
|
|
|
30,942 |
|
Advance billings and customer
deposits
|
|
|
56,570 |
|
|
|
57,637 |
|
Total current liabilities
|
|
|
458,390 |
|
|
|
736,535 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
|
3,294,119 |
|
|
|
2,734,357 |
|
|
|
|
|
|
|
|
|
|
DEFERRED CREDITS AND OTHER
LIABILITIES
|
|
|
1,338,446 |
|
|
|
1,304,456 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $1.00 par value, authorized 350,000,000 shares, issued
and outstanding
100,277,216 and 108,491,736 shares
|
|
|
100,277 |
|
|
|
108,492 |
|
Paid-in
capital
|
|
|
39,961 |
|
|
|
91,147 |
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(123,489 |
) |
|
|
(42,707 |
) |
Retained
earnings
|
|
|
3,146,255 |
|
|
|
3,245,302 |
|
Preferred stock -
non-redeemable
|
|
|
236 |
|
|
|
6,971 |
|
Total stockholders' equity
|
|
|
3,163,240 |
|
|
|
3,409,205 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$ |
8,254,195 |
|
|
|
8,184,553 |
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Statements of Cash Flows
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
365,732 |
|
|
|
418,370 |
|
|
|
370,027 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
523,786 |
|
|
|
536,255 |
|
|
|
523,506 |
|
Gains
on asset dispositions and liquidation of marketable
securities
|
|
|
(12,452 |
) |
|
|
(15,643 |
) |
|
|
(118,649 |
) |
Deferred income taxes
|
|
|
67,518 |
|
|
|
1,018 |
|
|
|
49,685 |
|
Share-based compensation
|
|
|
16,390 |
|
|
|
19,962 |
|
|
|
11,904 |
|
Income from unconsolidated cellular entity
|
|
|
(12,045 |
) |
|
|
(14,578 |
) |
|
|
(5,861 |
) |
Distributions from unconsolidated cellular entity
|
|
|
15,960 |
|
|
|
10,229 |
|
|
|
- |
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,978 |
) |
|
|
15,920 |
|
|
|
7,909 |
|
Accounts payable
|
|
|
14,043 |
|
|
|
(13,698 |
) |
|
|
24,906 |
|
Accrued taxes
|
|
|
(64,778 |
) |
|
|
11,604 |
|
|
|
(49,735 |
) |
Other current assets and other current liabilities,
net
|
|
|
(15,612 |
) |
|
|
23,782 |
|
|
|
10,269 |
|
Retirement benefits
|
|
|
(26,066 |
) |
|
|
27,350 |
|
|
|
5,963 |
|
Excess tax benefits from share-based compensation
|
|
|
(1,123 |
) |
|
|
(6,427 |
) |
|
|
(12,034 |
) |
Decrease in noncurrent assets
|
|
|
9,744 |
|
|
|
12,718 |
|
|
|
9,078 |
|
Increase (decrease) in other noncurrent liabilities
|
|
|
(27,561 |
) |
|
|
(20,781 |
) |
|
|
709 |
|
Other,
net
|
|
|
7,742 |
|
|
|
23,905 |
|
|
|
13,042 |
|
Net cash provided by operating activities
|
|
|
853,300 |
|
|
|
1,029,986 |
|
|
|
840,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
for property, plant and equipment
|
|
|
(286,817 |
) |
|
|
(326,045 |
) |
|
|
(314,071 |
) |
Purchase
of wireless spectrum
|
|
|
(148,964 |
) |
|
|
- |
|
|
|
- |
|
Acquisitions,
net of cash acquired
|
|
|
- |
|
|
|
(306,805 |
) |
|
|
- |
|
Proceeds
from liquidation of marketable securities
|
|
|
34,945 |
|
|
|
- |
|
|
|
- |
|
Proceeds
from redemption of Rural Telephone Bank
stock
|
|
|
- |
|
|
|
5,206 |
|
|
|
122,819 |
|
Proceeds
from sale of assets
|
|
|
15,809 |
|
|
|
8,231 |
|
|
|
5,865 |
|
Other, net
|
|
|
(3,968 |
) |
|
|
225 |
|
|
|
(8,344 |
) |
Net cash used in investing activities
|
|
|
(388,995 |
) |
|
|
(619,188 |
) |
|
|
(193,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
of debt
|
|
|
(285,401 |
) |
|
|
(712,980 |
) |
|
|
(81,995 |
) |
Proceeds
from issuance of debt
|
|
|
563,115 |
|
|
|
741,840 |
|
|
|
23,000 |
|
Repurchase
of common stock
|
|
|
(347,264 |
) |
|
|
(460,676 |
) |
|
|
(802,188 |
) |
Net
proceeds from settlement of hedges
|
|
|
20,745 |
|
|
|
- |
|
|
|
- |
|
Proceeds
from issuance of common stock
|
|
|
14,599 |
|
|
|
49,404 |
|
|
|
97,803 |
|
Excess
tax benefits from share-based compensation
|
|
|
1,123 |
|
|
|
6,427 |
|
|
|
12,034 |
|
Cash
dividends
|
|
|
(220,266 |
) |
|
|
(29,052 |
) |
|
|
(29,203 |
) |
Other, net
|
|
|
(2,031 |
) |
|
|
2,973 |
|
|
|
383 |
|
Net cash used in financing activities
|
|
|
(255,380 |
) |
|
|
(402,064 |
) |
|
|
(780,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
208,925 |
|
|
|
8,734 |
|
|
|
(133,178 |
) |
Cash and cash equivalents at beginning of
year
|
|
|
34,402 |
|
|
|
25,668 |
|
|
|
158,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF
YEAR
|
|
$ |
243,327 |
|
|
|
34,402 |
|
|
|
25,668 |
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Consolidated
Statements of Stockholders’ Equity
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
STOCK (represents dollars and shares)
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
108,492 |
|
|
|
113,254 |
|
|
|
131,074 |
|
Repurchase
of common stock
|
|
|
(9,676 |
) |
|
|
(10,213 |
) |
|
|
(21,432 |
) |
Conversion
of debt into common stock
|
|
|
- |
|
|
|
3,699 |
|
|
|
- |
|
Conversion
of preferred stock into common stock
|
|
|
367 |
|
|
|
26 |
|
|
|
22 |
|
Issuance
of common stock through dividend
reinvestment, incentive and benefit plans
|
|
|
1,094 |
|
|
|
1,726 |
|
|
|
3,590 |
|
Balance at end of year
|
|
|
100,277 |
|
|
|
108,492 |
|
|
|
113,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAID-IN
CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
91,147 |
|
|
|
24,256 |
|
|
|
129,806 |
|
Repurchase
of common stock
|
|
|
(93,075 |
) |
|
|
(155,036 |
) |
|
|
(222,998 |
) |
Conversion
of debt into common stock
|
|
|
- |
|
|
|
142,732 |
|
|
|
- |
|
Conversion
of preferred stock into common stock
|
|
|
6,368 |
|
|
|
453 |
|
|
|
378 |
|
Issuance
of common stock through dividend reinvestment, incentive and benefit
plans
|
|
|
13,505 |
|
|
|
47,678 |
|
|
|
94,213 |
|
Excess
tax benefits from share-based compensation
|
|
|
1,123 |
|
|
|
6,427 |
|
|
|
12,034 |
|
Share based compensation and
other
|
|
|
20,893 |
|
|
|
24,637 |
|
|
|
10,823 |
|
Balance at end of year
|
|
|
39,961 |
|
|
|
91,147 |
|
|
|
24,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS, NET OF TAX
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(42,707 |
) |
|
|
(104,942 |
) |
|
|
(9,619 |
) |
Effect
of adoption of SFAS 158, net of tax (see Note 1)
|
|
|
- |
|
|
|
- |
|
|
|
(97,905 |
) |
Net
change in other comprehensive loss (net of reclassification adjustment), net of
tax
|
|
|
(80,782 |
) |
|
|
62,235 |
|
|
|
2,582 |
|
Balance at end of year
|
|
|
(123,489 |
) |
|
|
(42,707 |
) |
|
|
(104,942 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,245,302 |
|
|
|
3,150,933 |
|
|
|
3,358,162 |
|
Net
income
|
|
|
365,732 |
|
|
|
418,370 |
|
|
|
370,027 |
|
Repurchase
of common stock
|
|
|
(244,513 |
) |
|
|
(295,427 |
) |
|
|
(557,758 |
) |
Cumulative
effect of adoption of SAB 108 (see Note 1)
|
|
|
- |
|
|
|
- |
|
|
|
9,705 |
|
Cumulative
effect of adoption of FIN 48 (see Note 12)
|
|
|
- |
|
|
|
478 |
|
|
|
- |
|
Cash
dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - $2.1675, $.26 and $.25 per share
|
|
|
(220,086 |
) |
|
|
(28,684 |
) |
|
|
(28,823 |
) |
Preferred
stock
|
|
|
(180 |
) |
|
|
(368 |
) |
|
|
(380 |
) |
Balance at end of year
|
|
|
3,146,255 |
|
|
|
3,245,302 |
|
|
|
3,150,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK - NON-REDEEMABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
6,971 |
|
|
|
7,450 |
|
|
|
7,850 |
|
Conversion of preferred stock into common
stock
|
|
|
(6,735 |
) |
|
|
(479 |
) |
|
|
(400 |
) |
Balance at end of year
|
|
|
236 |
|
|
|
6,971 |
|
|
|
7,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS' EQUITY
|
|
$ |
3,163,240 |
|
|
|
3,409,205 |
|
|
|
3,190,951 |
|
See
accompanying notes to consolidated financial statements.
CENTURYTEL,
INC.
Notes to
Consolidated Financial Statements
December
31, 2008
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pending acquisition - On
October 26, 2008, we entered into a definitive merger agreement to acquire
Embarq Corporation (“EMBARQ”) in a stock-for-stock transaction. Under
the terms of the agreement, EMBARQ shareholders will receive 1.37 CenturyTel
shares for each share of EMBARQ common stock they own at closing. On
December 31, 2008, EMBARQ had outstanding approximately 142.4 million shares of
common stock and $5.7 billion of long-term debt. The two companies
have a combined operating presence in 33 states with approximately 7.7 million
access lines and two million broadband customers. Completion of the
transaction is subject to the receipt of regulatory approvals, including
approvals from the Federal Communications Commission (“FCC”) and certain state
public service commissions, as well as other customary closing
conditions. Subject to these conditions, we anticipate closing this
transaction in the second quarter of 2009.
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 continuously
monitor 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. As of December 31, 2008, we believe that SFAS 71 still
applies.
In
September 2008, we filed a petition with the FCC to convert our remaining
rate-of-return study areas to price cap regulation. Such petition was
not addressed by the FCC in 2008 and remains pending. Should
the petition be approved by the FCC, we believe such an event would require us
to discontinue the accounting requirements of SFAS 71 as of the effective date
of the conversion to price cap regulation. Our consolidated balance
sheet as of December 31, 2008 included regulatory liabilities of approximately
$216.5 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 $84.4 million. Upon the discontinuance of SFAS 71, such
net amount ($132.1 million) will be reflected as an extraordinary gain on our
consolidated statement of income. Upon the discontinuance of SFAS 71,
we also would be required to eliminate certain intercompany transactions with
regulated affiliates that currently are not eliminated under the application of
SFAS 71. For 2008, approximately $197 million of revenues (and
related costs) would have been eliminated had we not been subject to the
provisions of SFAS 71. For regulatory purposes, the accounting and
reporting of our telephone subsidiaries would not be affected by the
discontinued application of SFAS 71.
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 advance 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 switched access
services, nonrecurring network access services, nonrecurring local services and
long distance services. The earned but unbilled portion of this
revenue is recognized as revenue in the period that the services are
provided. Revenues from installation activities are deferred and
recognized as revenue over the estimated life of the customer
relationship. The costs associated with such installation activities,
up to the related amount of deferred revenue, are deferred and recognized as an
operating expense over the same period.
Certain
of our telephone subsidiaries’ revenues are based on tariffed access charges
filed directly with the FCC; the remainder of our telephone subsidiaries
participate in revenue sharing arrangements with other telephone companies for
interstate revenue (except for broadband related revenues) and for certain
intrastate revenue. Such sharing arrangements are funded by toll
revenue and/or access charges within state jurisdictions and by access charges
in the interstate market. Revenues earned through certain 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. SFAS 142 also stipulates
certain factors to consider regarding whether or not a triggering event has
occurred that would require performance of an interim goodwill impairment test.
We test impairment of goodwill at least annually by comparing the fair value of
the reporting unit to its carrying value (including goodwill). We base our
estimates of the fair value of the reporting unit on valuation models using
criterion such as multiples of earnings. See Note 3 for additional
information.
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). During 2007, we recognized a $16.6
million pre-tax impairment charge in order to write-down the value of certain of
our long-lived assets in certain of our CLEC markets to their estimated
realizable value. Such assets were subsequently sold in two separate
transactions in 2008.
Affiliated transactions -
Certain of our service subsidiaries provide installation and maintenance
services, materials and supplies, and managerial, operational, technical,
accounting and administrative services to other subsidiaries. In
addition, CenturyTel provides and bills management services to subsidiaries and
in certain instances makes interest bearing advances to finance construction of
plant and purchases of equipment and to meet working capital
requirements. These transactions are recorded by our telephone
subsidiaries at their cost to the extent permitted by regulatory
authorities. Intercompany transactions with regulated affiliates
subject to SFAS 71 have not been eliminated in connection with consolidating the
results of operations of CenturyTel and its
subsidiaries. Intercompany transactions with affiliates not subject
to SFAS 71 have been eliminated.
Income taxes - We file a
consolidated federal income tax return with our eligible
subsidiaries. We use the asset and liability method of accounting for
income taxes under which deferred tax assets and liabilities are established for
the future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases.
Postretirement and pension
plans – We adopted the provisions of Statement of Financial Accounting
Standards No. 158, “Employers’ Accounting for Defined Benefit Plans and Other
Postretirement Plans” (“SFAS 158”) as of December 31, 2006. SFAS 158
requires us to recognize the overfunded or underfunded status of our defined
benefit and postretirement plans as an asset or a liability on our balance
sheet, with an adjustment to stockholders’ equity (reflected as an increase or
decrease in accumulated other comprehensive income or loss). The
effect of applying SFAS 158 reduced our stockholders’ equity by approximately
$97.9 million as of December 31, 2006.
Cumulative effect adjustment
– In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, “Considering the Effect of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Results” (“SAB
108”). SAB 108 addresses how the effects of prior year uncorrected
misstatements should be considered when quantifying misstatements in current
year financial statements. SAB 108 requires companies to quantify
misstatements using both a balance sheet approach and income statement approach
and to evaluate whether either approach results in quantifying an error that is
material in light of the relevant quantitative and qualitative
factors.
As of
December 31, 2006, we identified two misstatements that previously were deemed
immaterial using the income statement approach that were deemed material upon
application of the balance sheet approach. Such misstatements relate
to (i) the failure to capitalize interest in connection with the development of
our billing system, which began in the late 1990’s; and (ii) the failure to
defer the revenues and costs associated with installation activities related to
our service offerings. Using the guidance of SAB 108, we recorded a
net cumulative effect adjustment to retained earnings (as of January 1, 2006),
which increased retained earnings approximately $9.7 million (presented on an
after-tax basis). Of the $9.7 million net increase to retained
earnings, approximately $14.0 million related to the capitalized interest
adjustment, which was partially offset by a reduction to retained earnings of
approximately $4.3 million related to the installation activities
adjustment.
Stock-based compensation –
Effective January 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards No. 123 (Revised 2004), “Share-Based Payment”,
which require us to measure our cost of awarding employees with equity
instruments based upon the fair value of the award on the grant
date. See Note 14 for additional information.
Derivative financial
instruments – We account for derivative instruments and hedging
activities in accordance with Statement of Financial Accounting Standards No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS
133”), as amended. SFAS 133, as amended, requires that all derivative
instruments, such as interest rate swaps, be recognized in the financial
statements and measured at fair value regardless of the purpose or intent of
holding them. On the date a derivative contract is entered into, we
designate the derivative as either a fair value or cash flow hedge. A
hedge of the fair value of a recognized asset or liability or of an unrecognized
firm
commitment is a fair value hedge. A hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a recognized asset
or liability is a cash flow hedge. We also formally assess, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items. If we determine that a derivative is not,
or is no longer, highly effective as a hedge, we would discontinue hedge
accounting prospectively. We recognize all derivatives on the balance
sheet at their fair value. Changes in the fair value of derivative
financial instruments are either recognized in income or stockholders’ equity
(as a component of accumulated other comprehensive income (loss)), depending on
the use of the derivative and whether it qualifies for hedge
accounting. 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. See Note 6 for additional
information.
Earnings per share - Basic
earnings per share amounts are determined on the basis of the weighted average
number of common shares outstanding during the applicable accounting
period. Diluted earnings per share gives effect to all potential
dilutive common shares that were outstanding during the period. See
Note 13 for additional information.
Cash equivalents - We
consider short-term investments with a maturity at date of purchase of three
months or less to be cash equivalents.
(2)
ACQUISITIONS
On April
30, 2007, we acquired all of the outstanding stock of Madison River
Communications Corp. (“Madison River”) from Madison River Telephone Company, LLC
for an initial aggregate purchase price of approximately $322 million
cash. In connection with the acquisition, we also paid all of Madison
River’s existing indebtedness (including accrued interest), which approximated
$522 million. At the time of this acquisition, Madison River operated
approximately 164,000 predominantly rural access lines in four states with more
than 30% high-speed Internet penetration and its network included ownership in a
2,100 route mile fiber network. We believe this acquisition adds
attractive markets with good demographics and growth prospects and its fiber
network is complementary to our existing operations.
We
accounted for the acquisition of Madison River as a purchase under the guidance
of Statement of Financial Accounting Standards No. 141, “Business Combinations”
(“SFAS 141”) and Statement of Financial Accounting Standards No. 71, “Accounting
for the Effects of Certain Types of Regulation” (“SFAS 71”). SFAS 141
requires us to record the assets acquired and liabilities assumed at their
respective fair values. In accordance with SFAS 71, we recorded the
fixed assets of Madison River’s regulated telephone operations at historical
book value since those values are used to develop the rates we charge to our
customers (which are approved by regulatory authorities).
We
reflected the results of operations of the Madison River properties in our
consolidated results of operations beginning May 1, 2007.
The total
cost of the Madison River acquisition is composed of the following components
(amounts in thousands):
Cash
paid (1)
|
|
$ |
321,516 |
|
Closing
costs (2)
|
|
|
5,268 |
|
Total
purchase price
|
|
$ |
326,784 |
|
(1) Reflects the cash payment of $671,000 we received in third
quarter 2007 in accordance with the purchase agreement upon finalization of the
working capital portion of the purchase price.
(2) Closing costs primarily consist of advisory and legal fees
incurred in connection with the acquisition.
The
purchase price was allocated to the assets acquired and liabilities assumed as
follows (amounts in thousands):
Current
assets (1)
|
|
$ |
33,761 |
|
Net
property, plant and equipment
|
|
|
208,317 |
|
Identifiable
intangible assets
|
|
|
|
|
Customer
list
|
|
|
156,800 |
|
Franchise
|
|
|
6,400 |
|
Goodwill
|
|
|
579,780 |
|
Other
assets
|
|
|
21,998 |
|
Current
liabilities (2)
|
|
|
(25,578 |
) |
Long-term
debt (2)
|
|
|
(520,000 |
) |
Deferred
income taxes
|
|
|
(105,168 |
) |
Other
liabilities
|
|
|
(29,526 |
) |
Total
purchase price
|
|
$ |
326,784 |
|
(1) Includes approximately $20.0 million of acquired
cash and cash equivalents.
(2) We paid all the long-term debt and $2.2 million of
related accrued interest (included in “current liabilities” in the above table)
immediately after closing.
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (revised), “Business Combinations” (“SFAS
141(R)”), which is effective for us for all business combinations for which the
acquisition date is on or after January 1, 2009. We will account for
our pending acquisition of EMBARQ using the guidance of SFAS
141(R). Because it was probable that the acquisition date of the
pending EMBARQ business combination would be subsequent to the January 1, 2009
effective date of SFAS 141(R), we elected to expense our EMBARQ acquisition
related costs that had been incurred through December 31, 2008 in the fourth
quarter of 2008 (which aggregated approximately $5.0 million). Such
charge is reflected in selling, general and administrative expense in our 2008
consolidated statement of income. We will expense additional
acquisition related costs as incurred after December 31,
2008.
(3)
|
GOODWILL
AND OTHER ASSETS
|
Goodwill
and other assets at December 31, 2008 and 2007 were composed of the
following:
December
31,
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
4,015,674 |
|
|
|
4,010,916 |
|
Billing
system development costs, less accumulated
amortization of $49,979 and $38,285
|
|
|
181,210 |
|
|
|
192,904 |
|
Investment
in 700 MHz wireless spectrum licenses
|
|
|
148,964 |
|
|
|
- |
|
Intangible
assets subject to amortization
|
|
|
|
|
|
|
|
|
Customer list, less accumulated amortization of $35,026 and
$18,149
|
|
|
146,283 |
|
|
|
163,160 |
|
Cash
surrender value of life insurance contracts
|
|
|
96,606 |
|
|
|
95,654 |
|
Deferred
costs associated with installation activities
|
|
|
77,202 |
|
|
|
81,908 |
|
Pension
asset
|
|
|
- |
|
|
|
28,536 |
|
Intangible
assets not subject to amortization
|
|
|
42,750 |
|
|
|
42,750 |
|
Marketable
securities
|
|
|
- |
|
|
|
35,811 |
|
Investment
in unconsolidated cellular partnership
|
|
|
33,662 |
|
|
|
33,714 |
|
Deferred
interest rate hedge contracts
|
|
|
19,149 |
|
|
|
23,692 |
|
Investment
in debt security
|
|
|
- |
|
|
|
22,807 |
|
Other
|
|
|
41,396 |
|
|
|
51,926 |
|
|
|
$ |
4,802,896 |
|
|
|
4,783,778 |
|
Our
goodwill was derived from numerous previous acquisitions whereby the purchase
price exceeded the fair value of the net assets acquired. Goodwill
increased in 2008 as a result of resolving various income tax uncertainties
related to our Madison River acquisition. The vast majority of our
goodwill is attributable to our telephone operations, which we internally
operate and manage based on three geographic regions. We test for
goodwill impairment for our telephone operations at the region level due to the
similar economic characteristics of the individual reporting units that comprise
each region. 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 of our
telephone operations are based on valuation models using techniques such as
multiples of earnings (before interest, taxes and depreciation and
amortization). We also evaluate goodwill impairment of our other operations
primarily based on multiples of revenues and discounted cash flow
analyses. 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, 2008) under SFAS 142 and determined our goodwill was not impaired as of such
date. Due to the deterioration in the overall stock market
subsequent to September 30, 2008, our market capitalization as of December 31,
2008 decreased to a level below our current stockholders’ equity
balance. As a result, we reviewed the specific factors outlined
in SFAS 142 that would indicate whether or not a triggering event had occurred
that would necessitate us to perform an interim goodwill impairment
test. Based on our review of such factors and considering that our
market capitalization
substantially exceeds our stockholders’ equity balance after consideration of a
reasonable control premium of 35% based on identifiable industry transactions,
we concluded that we did not have a triggering event that would require us to
perform an interim evaluation of our goodwill for potential
impairment. We based such conclusion on the fact that we do not
believe there have been any significant fundamental changes since our annual
impairment test to (i) our business as a whole or our underlying reporting
units, including regulatory changes, (ii) our level of operating cash flows,
(iii) our expectation of future levels of operating cash flows, (iv) our
executive management team and (v) the carrying value of our other long-lived
assets.
We
accounted for the costs to develop an integrated billing and customer care
system in accordance with Statement of Position 98-1, “Accounting for the Costs
of Computer Software Developed or Obtained for Internal
Use.” Aggregate capitalized costs (before accumulated amortization)
totaled $231.2 million and are being amortized over a twenty-year
period.
During
2008, we paid an aggregate of approximately $149 million for 69 licenses in the
FCC’s auction of 700 megahertz (“MHz”) wireless spectrum. The 700 MHz
spectrum is not expected to be cleared for usage until mid-2009 and we are still
in the planning stages regarding the use of this spectrum.
In
connection with various acquisitions we have made over the past several years,
we have allocated amounts to a customer list intangible asset, including $156.8
million from our Madison River acquisition in 2007 and $22.7 million from our
acquisition of properties from Verizon Communications, Inc. (“Verizon”) in
2002. Such assets are being amortized on a straight-line basis over
periods that range from 5-15 years. Total amortization expense for
these customer base and other intangible assets for 2008, 2007 and 2006 was
$16.9 million, $12.2 million and $3.1 million, respectively, and is expected to
be $16.5 million annually from 2009 through 2011, $16.1 million in 2012 and
$16.0 million in 2013 (excluding the effects of any acquisitions consummated
after the date hereof).
The costs
associated with installation activities are deferred and recognized as an
operating expense over the estimated life of the customer relationship (10
years). Such costs are only deferred to the extent of the related
deferred revenue.
In connection with the acquisitions of properties from Verizon in 2002 and
Madison River in 2007, we assigned an aggregate of $41.7 million of the
respective purchase prices as an intangible asset associated with franchise
costs (which includes amounts necessary to maintain eligibility to provide
telecommunications services in its licensed service
areas). Such assets have an indefinite life and therefore are
not subject to amortization currently.
In
anticipation of making lump sum distributions to certain participants of our
Supplemental Executive Retirement Plan (“SERP”) in early 2009, we liquidated our
marketable security investments in the SERP trust during the second quarter of
2008 and thereby increased our cash and cash equivalents. The lump
sum distributions were paid in early 2009 and aggregated approximately $37
million (see Note 11 for additional information).
In the
third quarter of 2004, we entered into an agreement with DISH Network
Corporation (“DISH”) to provide co-branded DISH satellite television services to
our residential customers. As part of the transaction, we invested
$25 million in a DISH convertible subordinated debt security, which had a fair
value at date of issuance of approximately $20.8 million and matures in
2011. Commencing August 25, 2009, we can require DISH to purchase all
or a portion of the debt security without premium. Therefore, as of
December 31, 2008, the $23.4 million balance has been reflected in “Other
current assets” on the balance sheet in lieu of the previous classification of
this asset under “Goodwill and other assets”.
(4)
PROPERTY, PLANT AND EQUIPMENT
Net
property, plant and equipment at December 31, 2008 and 2007 was composed of the
following:
December
31,
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Cable
and wire
|
|
$ |
4,659,001 |
|
|
|
4,570,930 |
|
Central
office
|
|
|
2,861,929 |
|
|
|
2,775,479 |
|
General
support
|
|
|
815,638 |
|
|
|
811,488 |
|
Fiber
transport
|
|
|
327,010 |
|
|
|
289,392 |
|
Information
origination/termination
|
|
|
81,296 |
|
|
|
78,981 |
|
Construction
in progress
|
|
|
72,129 |
|
|
|
99,641 |
|
Other
|
|
|
51,448 |
|
|
|
40,195 |
|
|
|
|
8,868,451 |
|
|
|
8,666,106 |
|
Accumulated depreciation
|
|
|
(5,972,559 |
) |
|
|
(5,557,730 |
) |
Net property, plant and
equipment
|
|
$ |
2,895,892 |
|
|
|
3,108,376 |
|
Depreciation
expense was $506.9 million, $524.1 million and $520.4 million in 2008, 2007 and
2006, respectively.
(5)
LONG-TERM DEBT
Our
long-term debt as of December 31, 2008 and 2007 was as follows:
December
31,
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
CenturyTel
|
|
|
|
|
|
|
4.32%* Senior credit facility
|
|
$ |
563,115 |
|
|
|
- |
|
Senior notes and debentures:
|
|
|
|
|
|
|
|
|
7.20% Series D, due 2025
|
|
|
100,000 |
|
|
|
100,000 |
|
6.30% Series F
|
|
|
- |
|
|
|
240,000 |
|
6.875% Series G, due 2028
|
|
|
425,000 |
|
|
|
425,000 |
|
8.375% Series H, due 2010
|
|
|
500,000 |
|
|
|
500,000 |
|
7.875% Series L, due 2012
|
|
|
500,000 |
|
|
|
500,000 |
|
5.0%
Series M, due 2015
|
|
|
350,000 |
|
|
|
350,000 |
|
6.0% Series N, due 2017
|
|
|
500,000 |
|
|
|
500,000 |
|
5.5% Series O, due 2013
|
|
|
250,000 |
|
|
|
250,000 |
|
Unamortized net discount
|
|
|
(6,539 |
) |
|
|
(7,840 |
) |
Unamortized premium associated with derivative
instruments:
|
|
|
|
|
|
|
|
|
Series H senior notes
|
|
|
5,128 |
|
|
|
7,991 |
|
Series L senior notes
|
|
|
20,018 |
|
|
|
3,048 |
|
Total CenturyTel
|
|
|
3,206,722 |
|
|
|
2,868,199 |
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
First mortgage debt |
|
|
|
|
|
|
|
|
5.36%*
notes, payable to agencies of the U. S. government and cooperative
lending associations,
due in installments through 2028
|
|
|
107,704 |
|
|
|
120,788 |
|
Other
debt
|
|
|
|
|
|
|
|
|
Unsecured medium-term notes
|
|
|
- |
|
|
|
25,000 |
|
10.0% notes
|
|
|
100 |
|
|
|
100 |
|
Capital
lease obligations
|
|
|
- |
|
|
|
168 |
|
Total subsidiaries
|
|
|
107,804 |
|
|
|
146,056 |
|
Total
long-term debt
|
|
|
3,314,526 |
|
|
|
3,014,255 |
|
Less current maturities
|
|
|
20,407 |
|
|
|
279,898 |
|
Long-term debt, excluding current
maturities
|
|
$ |
3,294,119 |
|
|
|
2,734,357 |
|
*
Weighted average interest rate at December 31, 2008
The
approximate annual debt maturities for the five years subsequent to December 31,
2008 are as follows: 2009 - $20.4 million; 2010 - $518.9 million; 2011 - $580.0
million; 2012 - $514.6 million; and 2013 - $261.2 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, 2008, approximately $2.0 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 our property and (ii) consolidate with or
merge into, or transfer or lease all or substantially all of its assets to, any
other party. The indenture does not contain any provisions that are
impacted by our credit ratings, or that restrict the issuance of new securities
in the event of a material adverse change to us.
Approximately
13% of our property, plant and equipment is pledged to secure the long-term debt
of subsidiaries.
On March
29, 2007, we publicly issued $500 million of 6.0% Senior Notes, Series N, due
2017 and $250 million of 5.5% Senior Notes, Series O, due 2013. Our
$741.8 million of net proceeds from the sale of these Senior Notes were used to
pay a substantial portion of the approximately $844 million of cash that was
needed in order to (i) pay the initial purchase price for the acquisition of
Madison River on April 30, 2007 ($322 million) and (ii) pay off Madison River’s
existing indebtedness (including accrued interest) at closing ($522
million). We funded the remainder of these cash outflows from
borrowings under our commercial paper program and cash on hand. See
Note 2 for additional information concerning the acquisition of Madison
River.
We called
for redemption on August 14, 2007 all of our $165 million aggregate principal
amount 4.75% convertible senior debentures, Series K, due 2032 at a redemption
price of $1,023.80 per $1,000 principal amount of debentures, plus accrued and
unpaid interest through August 13, 2007. In accordance with the
indenture, holders could elect to convert their debentures into shares of
CenturyTel common stock at a conversion price of $40.455 per share prior to
August 10, 2007. In lieu of cash redemption, holders of approximately
$149.6 million aggregate principal amount of the debentures elected to convert
their holdings into approximately 3.7 million shares of CenturyTel common
stock. The remaining $15.4 million of outstanding debentures were
retired for cash (including premium and accrued and unpaid
interest). As a result, we no longer have any of the Series K
debentures outstanding.
As of
December 31, 2008, we had available a $708 million five-year revolving credit
facility which expires in December 2011. 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 also
have a commercial paper program under which borrowings are effectively limited
to the total amount available under our credit facility. As of
December 31, 2008, we had approximately $563 million outstanding under our
credit facility. We had no amounts outstanding under our commercial
paper program as of December 31, 2008.
(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 were “fixed
to variable” interest rate swaps that effectively converted our fixed rate
interest payment obligations under these notes into obligations to pay variable
rates. In January 2008, we terminated all of our existing “fixed to
variable” interest rate swaps associated with the full $500 million principal
amount of our Series L senior notes. In connection with the
termination of these derivatives, we received aggregate cash payments of
approximately $25.6 million, which has been reflected as a premium of the
associated long-term debt and is being amortized as a reduction of interest
expense through 2012 using the effective interest method. In
addition, in January 2008, we also terminated certain other derivatives that
were not deemed to be effective hedges. Upon the termination of these
derivatives, we paid an aggregate of approximately $4.9 million (and recorded a
$3.4 million pre-tax charge in the first quarter of 2008 related to the
settlement of these derivatives). As of December 31, 2008, we had no
derivative instruments outstanding.
In
anticipation of the issuance of Senior Notes in connection with the Madison
River acquisition, we entered into four cash flow hedges that effectively locked
in the interest rate on an aggregate of $400 million of debt. The
issuance of these Senior Notes was completed in late March 2007 with the
issuance of $500 million of 6.0% Senior Notes, due 2017, and $250 million of
5.5% Senior Notes, due 2013. We locked in the interest rate on (i)
$200 million of 10-year debt at 5.0675% and (ii) $200 million of 10-year debt at
5.05%. In March 2007, upon settlement of the hedges, we received an
aggregate of $765,000 cash, which is being amortized as a reduction of interest
expense over the 10-year term of the debt.
(7)
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 2008 and 2007 were
composed of the following:
December
31,
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Deferred
federal and state income taxes
|
|
$ |
854,102 |
|
|
|
810,571 |
|
Accrued
postretirement benefit costs
|
|
|
276,082 |
|
|
|
278,230 |
|
Deferred
revenue
|
|
|
99,549 |
|
|
|
105,491 |
|
Accrued
pension costs
|
|
|
72,058 |
|
|
|
37,296 |
|
Other
|
|
|
36,655 |
|
|
|
72,868 |
|
|
|
$ |
1,338,446 |
|
|
|
1,304,456 |
|
For additional information on deferred federal and state income taxes, accrued
postretirement benefit costs and
accrued pension costs, see Notes 12, 10 and 11, respectively.
(8)
REDUCTIONS IN WORKFORCE
During each of the last three years, we have announced workforce reductions
involving an aggregate of approximately 700 jobs, primarily due to (i) increased
competitive pressures and the loss of access lines over the last several years;
(ii) completion of our Madison River integration plan; and (iii) the elimination
of certain customer service personnel due to reduced call volumes. In
connection therewith, we incurred net pre-tax charges of approximately $1.7
million in 2008 (consisting of a $2.0 million charge to operating expenses, net
of a $307,000 favorable revenue impact related to such expenses as allowed
through our rate-making process), $2.2 million in 2007 (consisting of a $2.7
million charge to operating expenses, net of a $527,000 favorable revenue
impact) and $7.5 million in 2006 (consisting of a $9.4 million charge to
operating expenses, net of a $1.9 million favorable revenue impact) for
severance and related costs.
The
following table reflects additional information regarding the severance-related
liability for 2008, 2007 and 2006 (in thousands):
Balance
at December 31, 2005
|
|
$ |
- |
|
Amount
accrued to expense
|
|
|
9,431 |
|
Adjustments
to accrual amounts
|
|
|
(529 |
) |
Amount
paid
|
|
|
(8,445 |
) |
Balance
at December 31, 2006
|
|
$ |
457 |
|
Amount
accrued to expense
|
|
|
2,741 |
|
Amount
paid
|
|
|
(1,363 |
) |
Balance
at December 31, 2007
|
|
$ |
1,835 |
|
Amount
accrued to expense
|
|
|
2,046 |
|
Amount
paid
|
|
|
(2,083 |
) |
Balance
at December 31, 2008
|
|
$ |
1,798 |
|
(9)
STOCKHOLDERS’ EQUITY
Common stock - Unissued
shares of CenturyTel common stock were reserved as follows:
December
31,
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
Incentive
compensation programs
|
|
|
5,513 |
|
Acquisitions
|
|
|
4,064 |
|
Employee
stock purchase plan
|
|
|
4,321 |
|
Dividend
reinvestment plan
|
|
|
188 |
|
Conversion of convertible preferred
stock
|
|
|
13 |
|
|
|
|
14,099 |
|
In
accordance with stock repurchase programs described below, we repurchased 9.7
million shares (for $347.3 million), 10.2 million shares (for $460.7 million)
and 21.4 million shares (for $802.2 million) in 2008, 2007 and 2006,
respectively. The 2006 repurchases included 14.36 million shares
repurchased (for a total price of $528.4 million) under accelerated share
repurchase agreements (see below for additional information).
In August
2007, our board of directors authorized a $750 million share repurchase program
which expires on September 30, 2009, unless extended by the
board. Through December 31, 2008, we had repurchased
approximately 13.2 million shares for $503.9 million under this
program. We have suspended our current share repurchase program
pending completion of our acquisition of EMBARQ.
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 $200 million
share repurchase program approved in February 2005. In February 2006,
we repurchased the first $500 million of common stock through accelerated share
repurchase agreements entered into with various investment banks, repurchasing
and retiring approximately 14.36 million shares of common stock at an average
initial price of $34.83 per share. We funded repurchases under these
agreements through short-term borrowings and cash on hand. As part of
the accelerated share repurchase transactions, we simultaneously entered into
forward contracts with the investment banks whereby the investment banks
purchased an aggregate of 14.36 million shares of our common stock during the
terms of the contracts. At the end of the repurchase period in
mid-July 2006, we paid an aggregate of approximately $28.4 million cash to the
investment banks to compensate them for the difference between their weighted
average purchase price during the repurchase period and the initial average
price. We reflected such settlement amount as an adjustment to
retained earnings in our financial statements during 2006. We
repurchased the remaining $500 million of common stock of this program through
open market transactions through June 2007.
During
2006, our stockholders’ equity was reduced by approximately $97.9 million upon
the adoption of SFAS 158 and increased approximately $9.7 million upon the
application of SAB 108. See Note 1 for additional
information.
Under
CenturyTel’s Articles of Incorporation, each share of common stock beneficially
owned continuously by the same person since May 30, 1987 generally entitles the
holder thereof to ten votes per share. All other shares entitle the holder to
one vote per share. At December 31, 2008, the holders of 4.3 million
shares of common stock (or 31% of our total voting power) were entitled to ten
votes per share. In January 2009, in connection with the
special meeting of shareholders to approve share issuances in connection with
the pending EMBARQ merger, our shareholders also approved a charter amendment to
eliminate these special voting rights of long-term shareholders upon the
consummation of the EMBARQ merger.
Preferred stock - As of
December 31, 2008, we had 2.0 million shares of authorized preferred stock, $25
par value per share. At December 31, 2008 and 2007, there were
approximately 9,400 and 279,000 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.
(10)
POSTRETIREMENT BENEFITS
We
sponsor a health care plan (which uses a December 31 measurement date) that
provides postretirement benefits to all qualified retired
employees. Over the past few years, we amended certain retiree
contribution and retirement eligibility provisions of our plan, including a 2008
amendment that increased the level of prescription drug co-payment obligations
by retirees.
The
following is a reconciliation of the beginning and ending balances for the
benefit obligation and the plan assets.
December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
306,633 |
|
|
|
357,417 |
|
|
|
353,942 |
|
Service cost
|
|
|
4,926 |
|
|
|
6,923 |
|
|
|
6,982 |
|
Interest cost
|
|
|
19,395 |
|
|
|
20,133 |
|
|
|
18,980 |
|
Participant contributions
|
|
|
2,789 |
|
|
|
2,016 |
|
|
|
1,583 |
|
Plan amendments
|
|
|
(9,093 |
) |
|
|
(4,552 |
) |
|
|
(7,978 |
) |
Acquisition
|
|
|
- |
|
|
|
2,277 |
|
|
|
- |
|
Direct subsidy receipts
|
|
|
1,092 |
|
|
|
1,299 |
|
|
|
717 |
|
Actuarial (gain) loss
|
|
|
(11,992 |
) |
|
|
(60,312 |
) |
|
|
319 |
|
Benefits paid
|
|
|
(20,863 |
) |
|
|
(18,568 |
) |
|
|
(17,128 |
) |
Benefit obligation at end of
year
|
|
$ |
292,887 |
|
|
|
306,633 |
|
|
|
357,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$ |
28,324 |
|
|
|
30,080 |
|
|
|
29,545 |
|
Return (loss) on plan assets
|
|
|
(6,166 |
) |
|
|
1,916 |
|
|
|
3,280 |
|
Employer contributions
|
|
|
12,721 |
|
|
|
12,880 |
|
|
|
12,800 |
|
Participant contributions
|
|
|
2,789 |
|
|
|
2,016 |
|
|
|
1,583 |
|
Benefits paid
|
|
|
(20,863 |
) |
|
|
(18,568 |
) |
|
|
(17,128 |
) |
Fair value of plan assets at end of
year
|
|
$ |
16,805 |
|
|
|
28,324 |
|
|
|
30,080 |
|
Net
periodic postretirement benefit cost for 2008, 2007 and 2006 included the
following components:
Year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
4,926 |
|
|
|
6,923 |
|
|
|
6,982 |
|
Interest
cost
|
|
|
19,395 |
|
|
|
20,133 |
|
|
|
18,980 |
|
Expected
return on plan assets
|
|
|
(2,337 |
) |
|
|
(2,482 |
) |
|
|
(2,437 |
) |
Amortization
of unrecognized actuarial loss
|
|
|
- |
|
|
|
3,595 |
|
|
|
3,719 |
|
Amortization of unrecognized prior service
credit
|
|
|
(2,606 |
) |
|
|
(2,020 |
) |
|
|
(855 |
) |
Net periodic postretirement benefit
cost
|
|
$ |
19,378 |
|
|
|
26,149 |
|
|
|
26,389 |
|
The
following table sets forth the amounts recognized as liabilities on the balance
sheet for postretirement benefits at December 31, 2008, 2007 and
2006.
December
31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation
|
|
$ |
(292,887 |
) |
|
|
(306,633 |
) |
|
|
(357,417 |
) |
Fair value of plan assets
|
|
|
16,805 |
|
|
|
28,324 |
|
|
|
30,080 |
|
Accrued benefit cost
|
|
$ |
(276,082 |
) |
|
|
(278,309 |
) |
|
|
(327,337 |
) |
In
accordance with SFAS 158, the unamortized prior service credit ($17.9 million as
of December 31, 2008) and unrecognized net actuarial loss ($11.6 million as of
December 31, 2008) components have been reflected as a $7.2 million after-tax
decrease to accumulated other comprehensive loss within stockholders’
equity. The estimated amount of amortization income of the above
unrecognized items that will be amortized from accumulated other comprehensive
loss and reflected as a component of net periodic postretirement cost during
2009 is $3.5 million for the prior service credit.
Assumptions
used in accounting for postretirement benefits as of December 31, 2008 and 2007
were:
|
2008
|
|
2007
|
Determination
of benefit obligation
|
|
|
|
Discount rate
|
6.90%
|
|
6.50
|
Healthcare
cost increase trend rates (Medical/Prescription Drug)
|
|
|
|
Following year
|
7.0%/10.0%
|
|
7.0/10.0
|
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
|
2011/2014
|
|
2010/2013
|
|
|
|
|
Determination
of benefit cost
|
|
|
|
Discount rate
|
6.50%
|
|
5.75
|
Expected return on plan assets |
8.25% |
|
8.25 |
We employ
a total return investment approach whereby a mix of equities and fixed income
investments are used to maximize the long-term return of plan assets for a
prudent level of risk. The intent of this strategy is to minimize
plan expenses by outperforming plan liabilities over the long
term. Risk tolerance is established through careful consideration of
plan liabilities, plan funded status and corporate financial
condition. We measure and monitor investment risk on an ongoing basis
through annual liability measurements, periodic asset studies and periodic
portfolio reviews.
Our
postretirement benefit plan weighted-average asset allocations at December 31,
2008 and 2007 by asset category are as follows:
|
2007
|
|
2008
|
Equity
securities
|
46.7%
|
|
55.8
|
Debt
securities
|
26.4
|
|
26.8
|
Cash
and cash equivalents
|
26.9
|
|
17.3
|
Other
|
-
|
|
0.1
|
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
|
|
|
1-Percentage
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Effect
on annual total of service and interest cost components
|
|
$ |
214 |
|
|
|
(282 |
) |
Effect on postretirement benefit
obligation
|
|
$ |
2,763 |
|
|
|
(3,632 |
) |
We expect
to contribute approximately $13 million to our postretirement benefit plan in
2009.
Our
estimated future projected benefit payments under our postretirement benefit
plan are as follows:
|
|
Before
Medicare
|
|
|
Medicare
|
|
|
Net
of
|
|
Year
|
|
Subsidy
|
|
|
Subsidy
|
|
|
Medicare Subsidy
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
19,377 |
|
|
|
1,212 |
|
|
|
18,165 |
|
2010
|
|
$ |
21,514 |
|
|
|
1,394 |
|
|
|
20,120 |
|
2011
|
|
$ |
23,388 |
|
|
|
1,595 |
|
|
|
21,793 |
|
2012
|
|
$ |
24,316 |
|
|
|
1,842 |
|
|
|
22,474 |
|
2013
|
|
$ |
25,465 |
|
|
|
2,035 |
|
|
|
23,430 |
|
2014-2018
|
|
$ |
137,634 |
|
|
|
6,384 |
|
|
|
131,250 |
|
(11) DEFINED
BENEFIT AND OTHER RETIREMENT PLANS
We
sponsor defined benefit pension plans for substantially all
employees. We also sponsor a Supplemental Executive Retirement Plan
(“SERP”) to provide certain officers with supplemental retirement, death and
disability benefits. In late February 2008, our board of directors
approved certain actions related to our SERP, including (i) the freezing of
additional benefit accruals effective February 29, 2008 and (ii) amending the
plan to permit participants to receive in 2009 a lump sum distribution of the
present value of their accrued plan benefits. Because of the
elimination of future benefit accruals, we also enhanced plan termination
benefits by (i) crediting each active participant with three additional years of
service and (ii) crediting each participant who is not currently in pay status
under the plan with three additional years of age in connection with calculating
the present value of any lump sum distribution to be made in 2009. We
recorded a curtailment loss of approximately $8.2 million in 2008 related to the
above-described items. In anticipation of making the lump sum
distributions in early 2009, we liquidated our investments in marketable
securities in the SERP trust and recognized a $4.5 million pre-tax gain in the
second quarter of 2008. We also will record a one-time settlement
charge in the first quarter of 2009 of approximately $7.7 million in connection
with the lump sum distributions that were made in early 2009. We use
a December 31 measurement date for all our plans.
The following is a reconciliation of the beginning and ending balances for the
aggregate benefit obligation and the plan assets for our above-referenced
defined benefit plans.
December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
469,437 |
|
|
|
474,302 |
|
|
|
460,599 |
|
Service cost
|
|
|
13,761 |
|
|
|
16,431 |
|
|
|
17,679 |
|
Interest cost
|
|
|
29,373 |
|
|
|
28,180 |
|
|
|
25,935 |
|
Plan amendments
|
|
|
2,393 |
|
|
|
61 |
|
|
|
(3,827 |
) |
Acquisition
|
|
|
- |
|
|
|
15,266 |
|
|
|
- |
|
Actuarial
(gain) loss
|
|
|
(24,819 |
) |
|
|
(16,153 |
) |
|
|
6,789 |
|
Curtailment
|
|
|
8,235 |
|
|
|
- |
|
|
|
- |
|
Settlements
|
|
|
(1,945 |
) |
|
|
(410 |
) |
|
|
(13,232 |
) |
Benefits paid
|
|
|
(33,734 |
) |
|
|
(48,240 |
) |
|
|
(19,641 |
) |
Benefit obligation at end of
year
|
|
$ |
462,701 |
|
|
|
469,437 |
|
|
|
474,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$ |
459,198 |
|
|
|
452,293 |
|
|
|
407,367 |
|
Return (loss) on plan assets
|
|
|
(123,210 |
) |
|
|
41,537 |
|
|
|
46,297 |
|
Acquisition
|
|
|
- |
|
|
|
12,502 |
|
|
|
- |
|
Employer contributions
|
|
|
52,521 |
|
|
|
1,516 |
|
|
|
31,502 |
|
Settlements
|
|
|
(1,945 |
) |
|
|
(410 |
) |
|
|
(13,232 |
) |
Benefits paid
|
|
|
(33,734 |
) |
|
|
(48,240 |
) |
|
|
(19,641 |
) |
Fair value of plan assets at end of
year
|
|
$ |
352,830 |
|
|
|
459,198 |
|
|
|
452,293 |
|
Net
periodic pension expense for 2008, 2007 and 2006 included the following
components:
Year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
13,761 |
|
|
|
16,431 |
|
|
|
17,679 |
|
Interest
cost
|
|
|
29,373 |
|
|
|
28,180 |
|
|
|
25,935 |
|
Expected
return on plan assets
|
|
|
(36,667 |
) |
|
|
(36,780 |
) |
|
|
(32,706 |
) |
Curtailment
loss
|
|
|
8,235 |
|
|
|
- |
|
|
|
- |
|
Settlements
|
|
|
410 |
|
|
|
410 |
|
|
|
3,344 |
|
Recognized
net losses
|
|
|
3,119 |
|
|
|
7,367 |
|
|
|
9,670 |
|
Net amortization and
deferral
|
|
|
258 |
|
|
|
(131 |
) |
|
|
19 |
|
Net periodic pension
expense
|
|
$ |
18,489 |
|
|
|
15,477 |
|
|
|
23,941 |
|
The
following table sets forth the combined plans’ funded status and amounts
recognized in our consolidated balance sheet at December 31, 2008,
2007 and 2006.
December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation
|
|
$ |
(462,701 |
) |
|
|
(469,437 |
) |
|
|
(474,302 |
) |
Fair value of plan assets
|
|
|
352,830 |
|
|
|
459,198 |
|
|
|
452,293 |
|
Net amount recognized
|
|
$ |
(109,871 |
) |
|
|
(10,239 |
) |
|
|
(22,009 |
) |
In
accordance with SFAS 158, the unamortized prior service cost ($1.2 million as of
December 31, 2008) and unrecognized net actuarial loss ($206.9 million as of
December 31, 2008) components have been reflected as a $208.1 million net
reduction ($128.2 million after-tax) to accumulated other comprehensive loss
within stockholders’ equity. The estimated amount of amortization
expense (income) of the above unrecognized amounts that will be amortized from
accumulated other comprehensive loss and reflected as a component of net
periodic pension cost for 2009 are (i) $238,000 for the prior service cost and
(ii) $24.2 million for the net actuarial loss (which includes the $7.7 million
settlement charge mentioned above).
Amounts recognized on the balance sheet consist of:
December
31,
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Pension
asset (reflected in Other Assets)*
|
|
$ |
- |
|
|
|
28,536 |
|
Accrued
expenses and other current liabilities*
|
|
|
(37,813 |
) |
|
|
(1,479 |
) |
Other deferred credits*
|
|
|
(72,058 |
) |
|
|
(37,296 |
) |
Net amount recognized
|
|
$ |
(109,871 |
) |
|
|
(10,239 |
) |
* In
accordance with SFAS 158, those plans that are overfunded are reflected as
assets; those plans that are underfunded are reflected as
liabilities.
Our
aggregate accumulated benefit obligation as of December 31, 2008 and 2007 was
$418.8 million and $410.6 million, respectively.
Assumptions used in accounting for pension plans as of December 31, 2008 and
2007 were:
|
|
2008
|
|
|
2007
|
|
Determination
of benefit obligation
|
|
|
|
|
|
|
Discount rate
|
|
|
6.60-6.90 |
% |
|
|
6.30-6.50 |
|
Weighted average rate of compensation increase
|
|
|
4.0 |
% |
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
Determination
of benefit cost
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.30-6.50 |
% |
|
|
5.80 |
|
Weighted average rate of compensation increase
|
|
|
4.0 |
% |
|
|
4.0 |
|
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. The fair value of substantially all of our pension plan
assets is determined by reference to observable market data consisting of
published market quotes.
Our pension plans weighted-average asset allocations at December 31, 2008 and
2007 by asset category are as follows:
|
|
2008
|
|
|
2007
|
|
Equity
securities
|
|
|
64.3 |
% |
|
|
70.8 |
|
Debt
securities
|
|
|
32.7 |
|
|
|
27.2 |
|
Other
|
|
|
3.0 |
|
|
|
2.0 |
|
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.
During
2008, we contributed approximately $52.5 million to our pension
plans. The amount of the 2009 contribution will be determined based
on a number of factors, including the results of the 2009 actuarial valuation
report. While we expect our required minimum cash contribution for
these plans for 2009 to be minimal, we may make discretionary contributions in
2009.
Our
estimated future projected benefit payments under our defined benefit pension
plans are as follows: 2009 - $68.1 million (which includes approximately $37
million of lump sum distributions made in early 2009 related to the SERP); 2010
- $34.6 million; 2011 - $34.1 million; 2012 - $35.3 million; 2013 - $37.6
million; and 2014-2018 - $204.7 million.
Through
December 31, 2006, we also sponsored an Employee Stock Ownership Plan (“ESOP”)
which covered most employees with one year of service and was funded by our
contributions determined annually by the Board of Directors. Our
expense related to the ESOP during 2006 was $7.9 million. Our
contribution to the ESOP was discontinued after 2006.
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
$10.5 million in 2008, $10.6 million in 2007 and $8.6 million in
2006.
(12)
INCOME TAXES
Income
tax expense included in the Consolidated Statements of Income was as
follows:
Year ended December
31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
Federal
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
141,604 |
|
|
|
192,424 |
|
|
|
146,201 |
|
Deferred
|
|
|
59,669 |
|
|
|
2,220 |
|
|
|
37,687 |
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(14,765 |
) |
|
|
7,130 |
|
|
|
25,236 |
|
Deferred
|
|
|
7,849 |
|
|
|
(1,202 |
) |
|
|
11,998 |
|
|
|
$ |
194,357 |
|
|
|
200,572 |
|
|
|
221,122 |
|
Income
tax expense was allocated as follows:
Year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense in the consolidated statements of income
|
|
$ |
194,357 |
|
|
|
200,572 |
|
|
|
221,122 |
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense for tax purposes in excess of amounts recognized for
financial reporting purposes
|
|
|
(1,123 |
) |
|
|
(6,427 |
) |
|
|
(12,034 |
) |
Tax effect of the change in accumulated other comprehensive loss
|
|
|
(47,581 |
) |
|
|
(34,985 |
) |
|
|
(63,837 |
) |
The
following is a reconciliation from the statutory federal income tax rate to our
effective income tax rate:
Year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(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
|
|
|
2.0 |
|
|
|
2.8 |
|
|
|
4.1 |
|
Recognition
of previously unrecognized tax benefits
|
|
|
(2.3 |
) |
|
|
(5.3 |
) |
|
|
- |
|
Other, net
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
(1.7 |
) |
Effective income tax rate
|
|
|
34.7 |
% |
|
|
32.4 |
|
|
|
37.4 |
|
In 2008
and 2007, we recognized net after-tax benefits of approximately $12.8 million
and $32.7 million, respectively, which includes related interest and is net of
federal benefit, related to the recognition of previously unrecognized tax
benefits. See below for additional information. Income tax
expense was reduced by approximately $1.7 million in 2008 and $6.4 million in
2006 due to the resolution of various income tax audit issues.
The tax
effects of temporary differences that gave rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007
were as follows:
December 31,
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
Deferred
tax assets
|
|
|
|
|
|
|
Postretirement and pension benefit costs
|
|
$ |
155,772 |
|
|
|
119,119 |
|
Net state operating loss carryforwards
|
|
|
35,548 |
|
|
|
31,646 |
|
Other
employee benefits
|
|
|
24,474 |
|
|
|
22,229 |
|
Other
|
|
|
37,946 |
|
|
|
49,841 |
|
Gross deferred tax assets
|
|
|
253,740 |
|
|
|
222,835 |
|
Less valuation allowance
|
|
|
(33,858 |
) |
|
|
(30,907 |
) |
Net deferred tax assets
|
|
|
219,882 |
|
|
|
191,928 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
Property, plant and equipment, primarily due to depreciation
differences
|
|
|
(343,812 |
) |
|
|
(373,181 |
) |
Goodwill and other intangible assets
|
|
|
(688,765 |
) |
|
|
(604,809 |
) |
Other
|
|
|
(11,986 |
) |
|
|
(12,900 |
) |
Gross deferred tax liabilities
|
|
|
(1,044,563 |
) |
|
|
(990,890 |
) |
Net deferred tax liability
|
|
$ |
(824,681 |
) |
|
|
(798,962 |
) |
Of the
$824.7 million net deferred tax liability as of December 31, 2008, approximately
$854.1 million is reflected as a net long-term liability (in “Other deferred
credits”) and approximately $29.4 million is reflected as a net current deferred
tax asset (in “Other current assets”).
We
establish valuation allowances when necessary to reduce the deferred tax assets
to amounts we expect to realize. As of December 31, 2008, we had
available tax benefits associated with net state operating loss carryforwards,
which expire through 2028, of $35.5 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
$33.9 million through the valuation allowance as of December 31, 2008 as it is
more likely than not that this amount of net operating loss carryforwards will
not be utilized prior to expiration.
In June
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the
accounting for uncertainty in income taxes recognized in financial
statements. FIN 48 required us, effective January 1, 2007, to
recognize and measure tax benefits taken or expected to be taken in a tax return
and disclose uncertainties in income tax positions.
Upon the
initial adoption of FIN 48, we recorded a cumulative effect adjustment to
retained earnings as of January 1, 2007 (which increased retained earnings by
approximately $478,000 as of such date) related to certain previously
unrecognized tax benefits that did not meet the criteria for liability
recognition upon the adoption of FIN 48.
During
2008, primarily as a result of certain issues being effectively settled through
examination, our tax expense was reduced approximately $12.8 million (including
related interest and net of federal benefit) upon the recognition of amounts
that were previously reflected as a liability for unrecognized tax
benefits.
During
2007, primarily as a result of certain issues being effectively settled through
examination and the lapse of statute of limitations, our tax expense was reduced
approximately $32.7 million (including related interest and net of federal
benefit) upon the recognition of amounts that were previously reflected as a
liability for unrecognized tax benefits.
The
following table reflects the activity of our gross unrecognized tax benefits
(excluding both interest and any related federal benefit) during 2008 (amounts
expressed in thousands).
Unrecognized
tax benefits at January 1, 2008
|
|
$ |
33,829 |
|
Increase
in tax positions taken in the current year
|
|
|
320 |
|
Decrease
due to the reversal of tax positions taken in a prior year
|
|
|
(12,315 |
) |
Decrease from the lapse of statute of
limitations
|
|
|
(1,840 |
) |
Unrecognized tax benefits at December 31,
2008
|
|
$ |
19,994 |
|
Of the
above ending balance of $20.0 million, approximately $4.1 million is included as
a component of “Deferred credits and other liabilities” and the remainder is
included in “Other current assets”. If
we were to prevail on all unrecognized tax benefits recorded on our balance
sheet, approximately $17.3 million (including interest and net of federal
benefit) would benefit the effective tax rate.
Our
policy is to reflect accrued interest associated with unrecognized tax benefits
as income tax. We had accrued interest (presented before related tax
benefits) of approximately $5.3 million and $12.9 million as of December 31,
2008 and December 31, 2007.
We file
income tax returns, including returns for our subsidiaries, with federal, state
and local jurisdictions. Our uncertain income tax positions are
related to tax years that are currently under or remain subject to examination
by the relevant taxing authorities. Our open income tax years by
major jurisdiction are as follows.
Jurisdiction
|
Open tax
years
|
Federal
|
2005-current
|
State
|
|
Georgia
|
2002-current
|
Louisiana
|
2005-current
|
Oregon
|
2002-current
|
Wisconsin
|
2003-current
|
Other states
|
2002-current
|
Since the
period for assessing additional liability typically begins upon the filing of a
return, it is possible that certain jurisdictions could assess tax for years
prior to the open tax years disclosed above. Additionally, it is
possible that certain jurisdictions in which we do not believe we have an income
tax filing responsibility, and accordingly did not file a return, may attempt to
assess a liability, or that other jurisdictions to which we pay taxes may
attempt to assert that we owe additional taxes.
Based on (i) the potential outcomes of these ongoing examinations, (ii) the
expiration of statute of limitations for specific jurisdictions, (iii) the
negotiated settlement of certain disputed issues, or (iv) a jurisdiction’s
administrative practices, it is reasonably possible that the related
unrecognized tax benefits for tax positions previously taken may decrease by up
to $12.3 million within the next 12 months. The actual amount of such
decrease, if any, will depend on several future developments and events, many of
which are outside our control.
(13)
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,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
Income
(Numerator):
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
365,732 |
|
|
|
418,370 |
|
|
|
370,027 |
|
Dividends applicable to preferred
stock
|
|
|
(155 |
) |
|
|
(368 |
) |
|
|
(380 |
) |
Net
income applicable to common stock for computing basic earnings per
share
|
|
|
365,577 |
|
|
|
418,002 |
|
|
|
369,647 |
|
Interest
on convertible debentures, net of tax
|
|
|
- |
|
|
|
2,832 |
|
|
|
4,828 |
|
Dividends applicable to preferred
stock
|
|
|
155 |
|
|
|
368 |
|
|
|
380 |
|
Net
income as adjusted for purposes of computing
diluted earnings per share
|
|
$ |
365,732 |
|
|
|
421,202 |
|
|
|
374,855 |
|
Shares
(Denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding during period
|
|
|
103,467 |
|
|
|
110,183 |
|
|
|
117,363 |
|
Nonvested
restricted stock
|
|
|
(1,199 |
) |
|
|
(823 |
) |
|
|
(692 |
) |
Weighted
average number of shares outstanding during period for computing basic
earnings per share
|
|
|
102,268 |
|
|
|
109,360 |
|
|
|
116,671 |
|
Incremental
common shares attributable to dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable under convertible securities
|
|
|
169 |
|
|
|
2,951 |
|
|
|
4,493 |
|
Shares issuable upon settlement of accelerated share repurchase
agreements
|
|
|
- |
|
|
|
- |
|
|
|
365 |
|
Shares issuable
under incentive compensation plans
|
|
|
434 |
|
|
|
783 |
|
|
|
700 |
|
Number
of shares as adjusted for purposes of
computing diluted earnings per share
|
|
|
102,871 |
|
|
|
113,094 |
|
|
|
122,229 |
|
Basic earnings per share
|
|
$ |
3.57 |
|
|
|
3.82 |
|
|
|
3.17 |
|
Diluted earnings per share
|
|
$ |
3.56 |
|
|
|
3.72 |
|
|
|
3.07 |
|
In July
2007, we called for redemption on August 14, 2007 all of our $165 million
aggregate principal amount 4.75% convertible senior debentures, Series K, due
2032. In accordance with the indenture, holders could elect to
convert their debentures into shares of CenturyTel common stock at a conversion
price of $40.455 per share prior to August 10, 2007. In lieu of cash
redemption, holders of approximately $149.6 million aggregate principal amount
of the debentures elected to convert their holdings into approximately 3.7
million shares of CenturyTel common stock.
In
connection with calculating our diluted earnings per share in 2006 for our
accelerated share repurchase program discussed in Note 9, we assumed the
accelerated share repurchase market price adjustment would be settled through
our issuance of additional shares of common stock, which was allowed (at our
discretion) in the agreement. Accordingly, the estimated shares
issuable based on the fair value of the forward contract was included in the
weighted average shares outstanding for the computation of diluted earnings per
share.
The
weighted average number of shares of common stock subject to issuance under
outstanding options that were excluded from the computation of diluted earnings
per share because the exercise price of the option was greater than the average
market price of the common stock was 2.1 million for 2008, 792,000 for 2007 and
1.0 million for 2006.
In June 2008, the Financial
Accounting Standards Board issued FSP EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities”. Based on this pronouncement, we have concluded that our
outstanding non-vested restricted stock is a participating security and
therefore should be included in the earnings allocation in computing earnings
per share using the two-class method. The pronouncement is effective
for us beginning in first quarter 2009 and, upon adoption, will require us to
recast our previously reported earnings per share. If our diluted
earnings per share would have been calculated using the provisions of FSP EITF
03-6-1 for 2008, our diluted earnings per share would have been $3.52 per share
as compared to $3.56 per share.
(14)
STOCK COMPENSATION PROGRAMS
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123(R)”). SFAS 123(R) requires us to measure our cost of
awarding employees with equity instruments based upon the fair value of the
award on the grant date. Such cost will be recognized as compensation
expense over the period during which the employee is required to provide service
in exchange for the award. Compensation cost is also recognized over
the applicable remaining vesting period for any outstanding options that were
not fully vested as of January 1, 2006. We did not have any unvested
outstanding options as of January 1, 2006 since our Board of Directors
accelerated the vesting of all unvested options effective as of December 31,
2005. We elected the modified prospective transition method as
permitted by SFAS 123(R); accordingly, we did not restate prior period
results.
We
currently maintain programs which allow the Board of Directors, through its
Compensation Committee, to grant incentives to certain employees and our outside
directors in any one or a combination of several forms, including incentive and
non-qualified stock options; stock appreciation rights; restricted stock; and
performance shares. As of December 31, 2008, we had reserved
approximately 5.5 million shares of common stock which may be issued in
connection with awards under our current incentive programs. We also
offer an Employee Stock Purchase Plan whereby employees can purchase our common
stock at a 15% discount based on the lower of the beginning or ending stock
price during recurring six-month periods stipulated in such
program.
In late February 2008, the Compensation Committee authorized all long-term
incentive grants for 2008 to be in the form of restricted stock instead of a mix
of stock options and restricted stock as had been granted in recent
years. During 2008, prior to this authorization, 25,700 options were
granted with a weighted average grant date fair value of $8.85 per share using a
Black-Scholes option pricing model using the following
assumptions: dividend yield - .6%; expected volatility - 25%;
weighted average risk free interest rate - 2.9%; and expected term - 4.5
years.
During
2007 we granted 983,920 stock options with exercise prices at market
value. The weighted average fair value of each option was
estimated as of the date of grant to be $14.57 using a Black-Scholes option
pricing model using the following assumptions: dividend yield - .6%;
expected volatility - 28% (executive officers) and 25% (all other employees);
weighted average risk free interest rate - 4.6% (rates ranged from 3.5% to
5.1%); and expected term - 6.5 years (executive officers) and 4.5 years (all
other employees).
During
2006 we granted 1,007,175 stock options with exercise prices at market
value. The weighted average fair value of each of the 2006 options
was estimated as of the date of grant to be $12.75 using a Black-Scholes
option-pricing model with the following assumptions: dividend yield - .7%;
expected volatility - 30%; weighted average risk-free interest rate - 4.65%
(rates ranged from 4.28% to 5.22%); and expected option life - 7 years
(executive officers) and 5 years (all other employees).
All of
the options described in the preceding three paragraphs expire ten years after
the date of grant and have a three-year vesting period.
The
expected volatility was based on the historical volatility of our common stock
over the 6.5- and 4.5- year terms mentioned above. The expected term
was determined based on the historical exercise and forfeiture rates for similar
grants.
Stock option transactions during 2008 were as follows:
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Average
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
of options
|
|
|
price
|
|
|
term (in years)
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2007
|
|
|
3,632,205 |
|
|
$ |
36.80 |
|
|
|
|
|
|
|
Granted
|
|
|
25,700 |
|
|
|
36.14 |
|
|
|
|
|
|
|
Exercised
|
|
|
(43,210 |
) |
|
|
32.52 |
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(87,548 |
) |
|
|
42.40 |
|
|
|
|
|
|
|
Outstanding
December 31, 2008
|
|
|
3,527,147 |
|
|
$ |
36.71 |
|
|
|
5.7 |
|
|
$ |
59,000 |
|
Exercisable
December 31, 2008
|
|
|
2,617,969 |
|
|
$ |
34.72 |
|
|
|
4.9 |
|
|
$ |
59,000 |
|
During
2008, we issued 643,397 shares of restricted stock to certain employees and our
outside directors at a weighted-average price of $34.86 per
share. During 2007, we issued 288,896 shares of restricted stock to
certain employees and our outside directors at a weighted-average price of
$45.89 per share. During 2006, we issued 293,943 shares of restricted
stock to certain employees and our outside directors at a weighted-average price
of $36.02 per share. Such restricted stock vests over a five-year
period (for employees) and a three-year period (for outside
directors). Nonvested restricted stock transactions during 2008
were as follows:
|
Number
|
|
|
Average
grant
|
|
|
of shares
|
|
|
date fair value
|
|
Nonvested
at January 1, 2008
|
|
846,880 |
|
|
$ |
36.85 |
|
Granted
|
|
643,397 |
|
|
|
34.86 |
|
Vested
|
|
(181,310 |
) |
|
|
38.30 |
|
Forfeited
|
|
(19,350 |
) |
|
|
35.63 |
|
Nonvested
at December 31, 2008
|
|
1,289,617 |
|
|
$ |
35.67 |
|
The total
compensation cost for share-based payment arrangements in 2008, 2007 and 2006
was $16.4 million, $20.0 million and $11.9 million, respectively. We
recognized a tax benefit related to such arrangements of approximately $5.8
million in 2008, $7.5 million in 2007 and $4.5 million in 2006. As of
December 31, 2008, there was $35.3 million of total unrecognized compensation
cost related to the share-based payment arrangements, which is expected to be
recognized over a weighted-average period of 3.2 years.
We
received net cash proceeds of $1.4 million during 2008 in connection with option
exercises. The total intrinsic value of options exercised (the amount
by which the market price of the stock on the date of exercise exceeded the
market price of the stock on the date of grant) was $208,000 during 2008, $17.2
million during 2007 and $31.0 million during 2006. The excess tax
benefit realized from stock options exercised and restricted stock released
during 2008 was $90,000. The total fair value of restricted stock that vested
during 2008, 2007, and 2006 was $6.2 million, $6.4 million, and $2.6 million,
respectively.
(15)
GAIN ON ASSET DISPOSITIONS
In third
quarter 2008, we sold our interest in a non-operating investment for
approximately $7.2 million and recorded a pre-tax gain of approximately $3.2
million. In anticipation of making the lump sum distributions in
early 2009, we liquidated our investments in marketable securities in the SERP
trust and recognized a $4.5 million pre-tax gain in the second quarter of
2008. In first quarter 2008, we sold a non-operating investment for
approximately $4.2 million and recorded a pre-tax gain of approximately $4.1
million.
In the third quarter of 2007, we recorded a pre-tax gain of approximately $10.4
million related to the sale of our interest in a real estate
partnership. In April 2006, upon dissolution of the Rural Telephone
Bank (“RTB”), we received $122.8 million in cash for redemption of our
investment in stock of the RTB and recorded a pre-tax gain of approximately
$117.8 million in the second quarter of 2006 related to this
transaction. Upon final distribution of all funds related to the RTB
dissolution in November 2007, we received an additional $5.2 million cash and
recorded a pre-tax gain of such amount. Such gains are included in
“Other income (expense)” on our Consolidated Statements of Income.
(16)
SUPPLEMENTAL CASH FLOW AND OTHER DISCLOSURES
The
amount of interest actually paid, net of amounts capitalized of $2.4 million,
$1.3 million, and $1.9 million during 2008, 2007 and 2006, respectively, was
$204.1 million, $205.2 million, and $191.9 million during 2008, 2007 and 2006,
respectively. Income taxes paid were $208.8 million in 2008, $185.3
million in 2007, and $212.4 million in 2006. Income tax refunds totaled $4.6
million in 2008, $1.1 million in 2007, and $3.0 million in 2006.
We have
consummated the acquisitions of various operations, along with certain other
assets, during the three years ended December 31, 2008. In connection
with these acquisitions, the following assets were acquired and liabilities
assumed:
Year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$ |
- |
|
|
|
208,317 |
|
|
|
- |
|
Goodwill
|
|
|
- |
|
|
|
579,780 |
|
|
|
- |
|
Long-term
debt, deferred credits and other liabilities
|
|
|
- |
|
|
|
(654,694 |
) |
|
|
- |
|
Other
assets and liabilities, excluding cash and
cash equivalents
|
|
|
- |
|
|
|
173,402 |
|
|
|
5,222 |
|
Decrease in cash due to
acquisitions
|
|
$ |
- |
|
|
|
306,805 |
|
|
|
5,222 |
|
See Note
2 for additional information related to our acquisition of Madison River in
2007.
In June
2006, the Financial Accounting Standards Board issued EITF 06-3, “How Taxes
Collected From Customers and Remitted to Governmental Authorities Should be
Presented in the Income Statement” (“EITF 06-3”), which requires disclosure of
the accounting policy for any tax assessed by a governmental authority that is
directly imposed on a revenue-producing transaction. We adopted the
disclosure requirements of EITF 06-3 effective January 1, 2007.
We
collect various taxes from our customers and subsequently remit such funds to
governmental authorities. Substantially all of these taxes are
recorded through the balance sheet. We are required to contribute to
several universal service fund programs and generally include a surcharge amount
on our customers’ bills which is designed to recover our contribution
costs. Such amounts are reflected on a gross basis in our statement
of income (included in both operating revenues and expenses) and aggregated
approximately $42 million for 2008, $41 million for 2007 and $40 million for
2006.
(17)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
following table presents the carrying amounts and estimated fair values of
certain of our financial instruments at December 31, 2008 and 2007.
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
Amount
|
|
|
value
|
|
|
|
|
(Dollars
in thousands)
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets
|
|
|
|
|
|
|
|
Other
|
|
$ |
129,981 |
|
|
|
129,981 |
|
(2 |
) |
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including current maturities)
|
|
$ |
3,314,526 |
|
|
|
2,720,227 |
|
(1 |
) |
Other
|
|
$ |
56,570 |
|
|
|
56,570 |
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$ |
3,048 |
|
|
|
3,048 |
|
(2 |
) |
Other
|
|
$ |
168,039 |
|
|
|
172,175 |
|
(2 |
) |
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including current maturities)
|
|
$ |
3,014,255 |
|
|
|
2,975,707 |
|
(1 |
) |
Interest rate swaps
|
|
$ |
834 |
|
|
|
834 |
|
(2 |
) |
Other
|
|
$ |
57,637 |
|
|
|
57,637 |
|
(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.
We
believe the carrying amount of cash and cash equivalents, accounts receivable,
short-term debt, accounts payable and accrued expenses approximates the fair
value due to the short maturity of these instruments, which have not been
reflected in the above table.
In September 2006, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157,
effective for us beginning January 1, 2008, defines fair value, establishes a
framework for measuring fair value and expands the disclosures about fair value
measurements required or permitted under other accounting
pronouncements. SFAS 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used to measure fair
value. These tiers include: Level 1 (defined as observable inputs
such as quoted market prices in active markets); Level 2 (defined as inputs
other than quoted prices in active markets that are either directly or
indirectly observable); and Level 3 (defined as unobservable inputs in which
little or no market data exists).
As of December 31, 2008, we held life insurance contracts with cash surrender
value that are required to be measured at fair value on a recurring
basis. The following table depicts those assets held and the related
tier designation pursuant to SFAS 157.
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Dec. 31, 2008
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
surrender value of life insurance contracts
|
|
$ |
96,606 |
|
|
|
96,606 |
|
|
|
- |
|
|
|
- |
|
(18)
BUSINESS SEGMENTS
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.
Our operating revenues for our products and services include the following
components:
Year ended December 31,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$ |
874,041 |
|
|
|
889,960 |
|
|
|
871,767 |
|
Network
access
|
|
|
820,383 |
|
|
|
941,506 |
|
|
|
878,702 |
|
Data
|
|
|
524,194 |
|
|
|
460,755 |
|
|
|
351,495 |
|
Fiber
transport and CLEC
|
|
|
162,050 |
|
|
|
159,317 |
|
|
|
149,088 |
|
Other
|
|
|
219,079 |
|
|
|
204,703 |
|
|
|
196,678 |
|
Total operating revenues
|
|
$ |
2,599,747 |
|
|
|
2,656,241 |
|
|
|
2,447,730 |
|
For a
description of each of the sources of revenues, see “Items 1 and 7” elsewhere in
this report.
Interexchange
carriers and other accounts receivable on the balance sheets are primarily
amounts due from various long distance carriers, principally AT&T, and
several large local exchange operating companies.
(19)
COMMITMENTS AND CONTINGENCIES
Construction
expenditures and investments in vehicles, buildings and equipment during 2009
are estimated to be between $280-300 million,
excluding nonrecurring capital expenditures expected to arise out of our pending
EMBARQ acquisition. We generally do not enter into firm,
committed contracts for such activities.
In Barbrasue Beattie
and James Sovis, on behalf of themselves and all others similarly situated, v.
CenturyTel, Inc., filed on October 28, 2002, in the United States
District Court for the Eastern District of Michigan (Case No. 02-10277), the
plaintiffs allege that we unjustly and unreasonably billed customers for inside
wire maintenance services, and seek unspecified monetary damages and injunctive
relief under various legal theories on behalf of a purported class of over two
million customers in our telephone markets. On March 10, 2006, the
Court certified a class of plaintiffs and issued a ruling that the billing
descriptions we used for these services during anapproximately
18-month period between October 2000 and May 2002 were legally
insufficient. Our appeal of this class certification decision was
denied. Our preliminary analysis indicates that we billed less than
$10 million for inside wire maintenance services under the billing descriptions
and time periods specified in the District Court ruling described
above. Should other billing descriptions be determined to be
inadequate or if claims are allowed for additional time periods, the amount of
our potential exposure could increase significantly above amounts previously
accrued. The Court’s order does not specify the award of damages, the
scope and amounts of which, if any, remain subject to additional fact-finding
and resolution of what we believe are valid defenses to plaintiff’s
claims. Accordingly, we currently cannot reasonably estimate the
maximum amount of possible loss if this matter proceeds to
litigation. However, we do not believe that the ultimate outcome of
this matter will have a material adverse effect on our financial position or
on-going 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.
(20) SUBSEQUENT
EVENT
On January 23, 2009, EMBARQ announced
that it had entered into an amendment to its Credit Agreement dated as of May
10, 2006. Amendment No. 1 will become effective only upon the
consummation of the pending merger between a subsidiary of CenturyTel and
EMBARQ, and the satisfaction of other conditions specified in Amendment No.
1. Amendment No. 1 effects a waiver of the event of default that
would have arisen under the Credit Agreement solely as a result of the merger
and enables the Credit Agreement, as amended, to remain in place after the
merger is completed. Previously, in connection with the merger
agreement dated October 26, 2008, we had entered into a commitment letter with
various lenders which provided for an $800 million bridge facility that would be
available to, among other things, refinance borrowings under the Credit
Agreement in the event a waiver of the event of default arising from the
consummation of the merger could not have been obtained and other financing was
unavailable. On January 23, 2009, we terminated the commitment
letter. Upon entering into and terminating the commitment letter, we
paid an aggregate of $8 million to the lenders. Such amount will be
reflected as an expense in the first quarter of 2009.
On January 27, 2009, EMBARQ
stockholders approved the proposed merger and CenturyTel shareholders approved
the issuance of CenturyTel common stock to EMBARQ shareholders in connection
with the proposed merger.
CENTURYTEL,
INC.
Consolidated
Quarterly Income Statement Information
(Unaudited)
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
quarter
|
|
|
quarter
|
|
|
quarter
|
|
|
quarter
|
|
|
|
(Dollars
in thousands, except per share amounts)
|
|
2008
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
648,614 |
|
|
|
658,106 |
|
|
|
650,073 |
|
|
|
642,954 |
|
Operating
income
|
|
$ |
183,493 |
|
|
|
180,690 |
|
|
|
180,727 |
|
|
|
176,442 |
|
Net
income
|
|
$ |
88,760 |
|
|
|
92,167 |
|
|
|
84,733 |
|
|
|
100,072 |
|
Basic
earnings per share
|
|
$ |
.84 |
|
|
|
.89 |
|
|
|
.84 |
|
|
|
1.01 |
|
Diluted
earnings per share
|
|
$ |
.83 |
|
|
|
.88 |
|
|
|
.84 |
|
|
|
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
600,855 |
|
|
|
689,991 |
|
|
|
708,833 |
|
|
|
656,562 |
|
Operating
income
|
|
$ |
168,083 |
|
|
|
231,836 |
|
|
|
224,185 |
|
|
|
168,974 |
|
Net
income
|
|
$ |
77,870 |
|
|
|
112,265 |
|
|
|
113,202 |
|
|
|
115,033 |
|
Basic
earnings per share
|
|
$ |
.70 |
|
|
|
1.03 |
|
|
|
1.04 |
|
|
|
1.05 |
|
Diluted
earnings per share
|
|
$ |
.68 |
|
|
|
1.00 |
|
|
|
1.01 |
|
|
|
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
611,291 |
|
|
|
608,907 |
|
|
|
619,837 |
|
|
|
607,695 |
|
Operating
income
|
|
$ |
157,924 |
|
|
|
164,993 |
|
|
|
168,942 |
|
|
|
173,679 |
|
Net
income
|
|
$ |
69,260 |
|
|
|
152,210 |
|
|
|
76,324 |
|
|
|
72,233 |
|
Basic
earnings per share
|
|
$ |
.57 |
|
|
|
1.32 |
|
|
|
.66 |
|
|
|
.63 |
|
Diluted
earnings per share
|
|
$ |
.55 |
|
|
|
1.26 |
|
|
|
.64 |
|
|
|
.62 |
|
In the
first quarter of 2008, we recognized a $4.1 million pre-tax gain upon the sale
of a non-operating investment. In the second quarter of 2008, we
recognized an $8.2 million curtailment loss in connection with amending our
SERP. We also recognized a $4.5 million pre-tax gain upon liquidation
of our investments in marketable securities in the SERP trust in the second
quarter of 2008. In the third quarter of 2008, we recorded a one-time
pre-tax gain of approximately $3.2 million related to the sale of a
non-operating investment. In the fourth quarter of 2008, we
recognized (i) a net benefit of approximately $12.8 million after-tax related to
the recognition of previously unrecognized tax benefits, (ii) a pre-tax benefit
of approximately $10.0 million related to the recognition of previously accrued
transaction related and other contingencies and (iii) a $5.0 million charge
associated with costs associated with our pending acquisition of
EMBARQ.
In the third quarter of 2007, we recorded a one-time pre-tax gain of
approximately $10.4 million related to the sale of our interest in a real estate
partnership. The results of operations of the Madison River
properties are reflected in the above table subsequent to the April 30, 2007
acquisition date. In second quarter 2007, we recorded $49 million of
revenues upon the settlement of a dispute with a carrier. In third
quarter 2007, we recognized $42.2 million of revenues upon the expiration of a
regulatory monitoring period. In fourth quarter 2007, we recognized a
net benefit of approximately $32.7 million after-tax related to the release of
previously unrecognized tax benefits. In fourth quarter 2007, we
recorded a pre-tax charge of approximately $16.6 million related to the
impairment of certain of our CLEC assets.
The
fourth quarter of 2006 included an $11.7 million pre-tax charge related to the
impairment of certain non-operating investments. The second
quarter of 2006 included a $117.8 million pre-tax gain recorded upon the
redemption of Rural Telephone Bank stock and a $6.4 million net tax benefit due
to the resolution of various income tax audit issues.
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, 2008. 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, we did not make any change to our internal control over financial
reporting that materially affected, or that we believe is reasonably likely to
materially affect, our internal control over financial reporting. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events and contingencies, and there can be no assurance
that any design will succeed in achieving its stated goals. Because
of inherent limitations in any control system, misstatements due to error or
fraud could occur and not be detected.
Reports on Internal Control 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
In February 2009, the Compensation Committee of the Board granted equity awards
and took other related actions, including establishing for senior management
bonus targets for 2009 based upon attaining certain specified levels of
operating cash flow and end-user revenues.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
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
|
56
|
Chairman
of the Board of Directors
and Chief Executive Officer
|
|
|
|
Karen
A. Puckett
|
48
|
President
and Chief Operating Officer
|
|
|
|
R.
Stewart Ewing, Jr.
|
57
|
Executive
Vice President and
Chief Financial Officer
|
|
|
|
David
D. Cole
|
51
|
Senior
Vice President –
Operations Support
|
|
|
|
Stacey
W. Goff
|
43
|
Senior
Vice President, General Counsel
and Secretary
|
|
|
|
Michael
Maslowski
|
61
|
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.
The balance of the information required by Item 10 is incorporated by reference
to our definitive proxy statement relating to our 2008 annual meeting of
stockholders (the "Proxy Statement"), which Proxy Statement will be filed
pursuant to Regulation 14A within the first 120 days of 2009.
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, 2008.
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
Number
of securities
|
|
|
|
|
|
|
|
|
remaining
available for
|
|
|
|
(a)
|
|
|
(b)
|
|
future
issuance under
|
|
|
|
Number
of securities to
|
|
|
Weighted-average
|
|
plans
(excluding
|
|
|
|
be
issued upon conversion
|
|
|
exercise
price of
|
|
securities
reflected in
|
|
Plan category
|
|
of outstanding options
|
|
|
outstanding options
|
|
column (a))
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
3,527,147 |
|
|
$ |
36.71 |
|
|
1,987,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan approved by shareholders
|
|
|
- |
|
|
|
- |
|
|
4,321,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security
holders
|
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
3,527,147 |
|
|
|
- |
|
|
6,308,549 |
|
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.
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 control over financial
reporting
|
|
Reports
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements, Financial Statement Schedule and Effectiveness
of
the Company’s Internal Control over Financial
Reporting
|
|
Consolidated
Statements of Income for the years ended December 31, 2008, 2007 and
2006
|
|
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2008,
2007 and 2006
|
|
Consolidated
Balance Sheets - December 31, 2008 and
2007
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2008,
2007 and 2006
|
|
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.
|
|
1
|
Agreement
and Plan of Merger, dated as of October 26, 2008 among CenturyTel, Embarq
Corporation and Cajun Acquisition Company (incorporated by reference to
Exhibit
99.1
of our Current Report on Form 8-K filed on October 30,
2008).
|
|
3.1
|
Articles
of Incorporation, as amended and restated through November 14, 2008
(incorporated by reference to Exhibit 4.1 of CenturyTel’s registration
statement on Form S-3
filed
February 9, 2009, File No.
333-157188).
|
|
3.2
|
Bylaws,
as amended and restated 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 August 21, 2007 (incorporated by
reference to Exhibit 3 of our Quarterly Report on Form 10-Q for
the
quarter
ended September 30, 2007).
|
|
3.4
|
Charters
of Committees of Board of
Directors
|
|
(a)
|
Charter
of the Audit Committee of the Board of Directors, as amended through
November 15, 2006 (incorporated by reference to Exhibit 3.4(a) of our
Annual Report on
Form
10-K for the year ended December 31,
2006).
|
|
(b)
|
Charter
of the Compensation Committee of the Board of Directors, as amended
through February 27, 2007 (incorporated by reference to Exhibit 3.4 of our
Quarterly
Report
on Form 10-Q for the quarter ended March 31,
2007).
|
|
(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 26, 2008, (incorporated by reference to Exhibit 3.4(d) of
our
Annual
Report on Form 10-K for the year ended December 31,
2007).
|
|
4.1
|
Form
of common stock certificate (incorporated by reference to Exhibit 4.3 of
our Annual Report on Form 10-K for the year ended December 31,
2000).
|
|
4.2
|
Instruments
relating to our public senior
debt
|
|
(a)
|
Indenture
dated as of March 31, 1994 between CenturyTel and Regions Bank (formerly
First American Bank & Trust of Louisiana), as Trustee (incorporated
by
reference to Exhibit
4.1 of our Registration Statement on Form S-3, Registration No.
33-52915).
|
|
(b)
|
Form
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)
|
Form
of CenturyTel’s 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)
|
Form
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).
|
|
(f)
|
Third
Supplemental Indenture dated as of February 14, 2005 between CenturyTel
and Regions Bank, 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).
|
|
(g)
|
Form
of 5% Senior Notes, Series M, due 2015 (included in Exhibit
4.2(f)).
|
|
(h)
|
Fourth
Supplemental Indenture dated as of March 26, 2007 between CenturyTel and
Regions Bank, as Trustee, designating and outlining the terms
and
conditions of
CenturyTel’s 6.0% Senior Notes, Series N, due 2017 and 5.5% Senior Notes,
Series O, due 2013 (incorporated by reference to Exhibit
4.1
of our Current Report on Form
8-K dated March 29, 2007).
|
|
(i)
|
Form
of 6.0% Senior Notes, Series N, due 2017 and 5.5% Senior Notes, Series O,
due 2013 (included in Exhibit
4.2(h)).
|
|
4.3
|
Five-Year
Revolving Credit Facility, dated December 14, 2006, between CenturyTel and
the lenders named therein (incorporated by reference to Exhibit
4.3
of our Annual Report
on Form 10-K for the year ended December 31,
2006).
|
|
10.1
|
Qualified
Employee Benefit Plans (excluding several narrow-based qualified plans
that cover union employees or other limited groups of
employees)
|
|
(a)
|
CenturyTel
Dollars & Sense 401(k) Plan and Trust, as amended and restated as of
December 31, 2006 (incorporated by reference to Exhibit 10.1(a) of
our
Annual Report on Form 10-K for the year ended December 31, 2006),
amendments thereto dated December 31, 2007 (incorporated by reference
to
Exhibit
10.1(a) of our Annual Report on Form 10-K for the year ended December 31,
2007) and amendment thereto dated November 20, 2008,
included
elsewhere herein.
|
|
(b)
|
CenturyTel
Union 401(k) Plan and Trust, as amended and restated through December 31,
2006 (incorporated by reference to Exhibit 10.1(b) of our Annual
Report
on Form 10-K for the year ended December 31, 2006) and amendment thereto
dated December 31, 2007, (incorporated by reference to Exhibit 10.1(b)
of
our Annual Report on Form 10-K for the year ended December 31, 2007),
amendment thereto dated December 31, 2006 (incorporated by reference to
Exhibit
10.1(b)
of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)
and amendment thereto dated November 20, 2008, included elsewhere
herein.
|
|
(c)
|
Amended
and Restated Retirement Plan, effective as of December 31, 2006
(incorporated by reference to Exhibit 10.1(c) of our Annual Report on Form
10-K for the
year
ended December 31, 2006) and amendment thereto dated December 31, 2007
(incorporated by reference to Exhibit 10.1(c) of our Annual Report on Form
10-K
for
the year ended December 31, 2007), amendment thereto dated as of April 2,
2007 (incorporated by reference to Exhibit 10.1(c) of our Quarterly Report
on Form
10-Q
for the quarter ended March 31, 2008) and amendment thereto dated October
24, 2008, 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) of
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
of
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)
of
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) of 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 of 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 of 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 21, 2000, entered into by
CenturyTel
and its officers (incorporated by reference to Exhibit 10.1 (t) of 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 of 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 of 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)
of 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) and
amendment thereto dated October 24, 2008, included
elsewhere
herein.
|
|
(i)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into by
CenturyTel in connection with options
granted
to the outside directors as of May 10, 2002 (incorporated by reference to
Exhibit 10.2 of Registrant’s Quarterly
Report
on Form 10-Q for the period ended September 30,
2002).
|
|
(ii)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into by
CenturyTel in connection with options
granted
to the outside directors as of May 9, 2003 (incorporated by reference to
Exhibit 10.2(e)(ii) of our Annual Report on
Form
10-K for the year ended December 31,
2003).
|
|
(iii)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into by
CenturyTel in connection with options
granted
to the outside directors as of May 7, 2004 (incorporated by reference to
Exhibit 10.2(d)(iii) of our Annual Report
on
Form 10-K for the year ended December 31,
2005).
|
|
(e)
|
Amended
and Restated 2002 Management Incentive Compensation Plan, dated as of
February 25, 2004 (incorporated by reference to
Exhibit
10.2(f) of our Annual Report on Form 10-K for the year ended December 31,
2003) and amendment thereto dated October 24, 2008,
included
elsewhere herein.
|
|
(i)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into
between CenturyTel and certain of its officers and key
employees
at various dates since May 9, 2002 (incorporated by reference to Exhibit
10.4 of our Quarterly Report on Form 10-Q for the
period
ended September 30, 2002).
|
|
(ii)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan and dated as of
February 24, 2003, entered into by CenturyTel and
its
officers (incorporated by reference to Exhibit 10.2(f)(ii) of our Annual
Report on Form 10-K for the year ended December 31,
2002).
|
|
(iii)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan and dated as of
February 25, 2004, entered into by CenturyTel and
its
officers (incorporated by reference to Exhibit 10.2(f)(iii) of our Annual
Report on Form 10-K for the year ended December 31,
2003).
|
|
(iv)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 24, 2003, entered into by CenturyTel and
its
executive officers (incorporated by reference to Exhibit 10.1 of our
Quarterly Report on Form 10-Q for the period ended March 31,
2003).
|
|
(v)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 25, 2004, entered into by CenturyTel and
its
executive officers (incorporated by reference to Exhibit 10.2(f)(v) of our
Quarterly Report on Form 10-Q for the period ended March 31,
2004).
|
|
(vi)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan and dated as of
February 17, 2005, entered into by CenturyTel and its
executive
officers (incorporated by reference to Exhibit 10.2(e)(v) of our Annual
Report on From 10-K for the year ended December 31,
2004).
|
|
(vii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 17, 2005, entered into by CenturyTel and its
executive
officers (incorporated by reference to Exhibit 10.2(e)(vi) of our Annual
Report on Form 10-K for the year ended December 31,
2004).
|
|
(f)
|
2005
Directors Stock Plan (incorporated by reference to our 2005 Proxy
Statement filed April 15, 2005) and amendment thereto dated
October
24,
2008, included elsewhere herein.
|
|
(i)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and each of its outside directors as of May
13,
2005 (incorporated by reference to Exhibit 10.4 of our Current Report on
Form 8-K dated May 13, 2005).
|
|
(ii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and each of its outside directors as of May
12,
2006 (incorporated by reference to Exhibit 10.1 of our Quarterly Report on
Form 10-Q for the period ended June 30,
2006).
|
|
(iii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and each of its outside directors as of May
11,
2007, included elsewhere herein.
|
|
(iv)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and each of its outside directors as of
May
9,
2008, included elsewhere herein.
|
|
(g)
|
2005
Management Incentive Compensation Plan (incorporated by reference to our
2005 Proxy Statement filed April 15, 2005) and amendment thereto
dated
October 24, 2008, included elsewhere
herein.
|
|
(i)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into
between CenturyTel and certain officers and key employees
at
various dates since May 12, 2005 (incorporated by reference to Exhibit
10.2 of our Quarterly Report on Form 10-Q for the period ended
September
30, 2005).
|
|
(ii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and certain officers and key employees
at
various dates since May 12, 2005 (incorporated by reference to Exhibit
10.3 of our Quarterly Report on Form 10-Q for the period ended
September
30, 2005).
|
|
(iii)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan and dated as of
February 21, 2006, entered into between CenturyTel and its
executive
officers (incorporated by reference to Exhibit 10.2(g)(iii) of our Annual
Report on Form 10-K for the year ended December 31,
2005).
|
|
(iv)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 21, 2006, entered into between CenturyTel
and
its executive officers (incorporated by reference to Exhibit 10.2(g)(iv)
of our Annual Report on Form 10-K for the year ended December 31,
2005).
|
|
(v)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan and dated as of
February 26, 2007, entered into between CenturyTel and its
executive
offices (incorporated by reference to Exhibit 10.1 of our Quarterly Report
on Form 10-Q for the quarter ended March 31,
2007).
|
|
(vi)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 26, 2007, entered into between CenturyTel and
its
executive officers (incorporated by reference to Exhibit 10.2 of our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2007).
|
|
(vii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 21, 2008, entered into between CenturyTel and
its
executive officers (incorporated by reference to Exhibit 10.2 of our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2008).
|
|
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) of 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) of 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 of 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), amendment thereto
dated
April
17, 2000 (incorporated by reference to Exhibit 10.3(a) of our Annual
Report on Form 10-K for the year ended December 31, 2001) and amendment
thereto
dated February 27, 2007 (incorporated by reference to Exhibit 10.1 of our
Quarterly Report on Form 10-Q for the quarter ended June 30,
2007).
|
|
(b)
|
Supplemental
Executive Retirement Plan, 2008 Restatement, effective January 1, 2008,
(incorporated by reference to Exhibit 10.3(b) of our Annual Report
on
Form
10-K for the year ended December 31, 2007) and amendment thereto dated May
5, 2008, included elsewhere herein, and amendment thereto dated October
24,
2008, included elsewhere herein.
|
|
(c)
|
Supplemental
Dollars & Sense Plan, 2008 Restatement, effective January
1, 2008, (incorporated by reference to Exhibit 10.3(c) of our Annual
Report on
Form
10-K for the year ended December 31, 2007) and amendment thereto dated
October 24, 2008, included elsewhere
herein.
|
|
(d)
|
Supplemental
Defined Benefit Plan, 2008 Restatement, effective as of January 1, 2008,
(incorporated by reference to Exhibit 10.3(d) of our Annual
Report
on Form 10-K for the year ended December 31, 2007) and amendment thereto
dated October 24, 2008, included elsewhere
herein.
|
|
(e)
|
Amended
and Restated Salary Continuation (Disability) Plan for Officers, dated
November 26, 1991 (incorporated by reference to Exhibit 10.16 of
our
Annual Report on Form 10-K for the year ended December 31,
1991).
|
|
(f)
|
2005
Executive Officer Short-Term Incentive Program (incorporated by reference
to our 2005 Proxy Statement filed April 5,
2005).
|
|
(g)
|
2001
Employee Stock Purchase Plan (incorporated by reference to our 2001 Proxy
Statement).
|
|
10.4
|
Employment,
Severance and Related
Agreements
|
|
(a)
|
Amended
and Restated Change of Control Agreement, effective January 1, 2008, by
and between Glen F. Post, III and CenturyTel, (incorporated
by
reference to Exhibit 10.4(a) of our Annual Report on Form 10-K for the
year ended December 31, 2007).
|
|
(b)
|
Form
of Amended and Restated Change of Control Agreement, effective January 1,
2008, by and between CenturyTel and each of its other
executive
officers (incorporated by reference to Exhibit 10.4(b) of our Annual
Report on Form 10-K for the year ended December 31,
2007).
|
|
(c)
|
Form
of Indemnification Agreement for Officers and Directors (incorporated by
reference to Exhibit 10.4(e) of our Annual Report on Form
10-K
for the year ended December 31,
2005).
|
|
(d)
|
Amended
and Restated CenturyTel, Inc. Bonus Life Insurance Plan for Executive
Officers, dated as of April 3, 2008, (incorporated by reference
to
Exhibit 10.4 of our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008).
|
|
12
|
Ratio
of Earnings to Fixed Charges and Preferred Stock Dividends, 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 Form 8-Ks were filed on the dates indicated during the fourth
quarter of 2008.
October 27, 2008
Items
2.02 and 9.01 – Results of Operations and Financial Condition and Financial
Statements and Exhibits. Press release
announcing third quarter 2008 results of operations.
|
Items 8.01 and 9.01 – Other Events
and Financial Statements and Exhibits. Documents concerning the
announced merger under which
CenturyTel
will acquire Embarq Corporation, including (i) joint press release
announcing the merger; (ii) joint investor presentation principally
concerning
the merger; (iii) transcript of joint investor presentation and (iv)
letter to CenturyTel employees concerning the execution of
the merger
agreement.
|
|
Items
1.01 and 9.01 – Entry Into a Material Definitive Agreement and Financial
Statements and Exhibits. Agreement and Plan of Merger dated as
of
October
26, 2008 among Registrant, Embarq Corporation and Cajun Acquisition
Company.
|
|
November 18,
2008
Items 5.03 and 9.01 – Other Events and
Financial Statements and Exhibits. Articles of Amendment to the
Amended and Restated Articles of
Incorporation
of CenturyTel, Inc.
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
CenturyTel,
Inc.,
|
|
|
|
|
|
|
Date: February
27, 2009
|
|
By: /s/ Glen F. Post,
III
|
|
|
Glen
F. Post, III
|
|
|
Chairman
of the Board and
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
/s/ Glen F. Post, III
|
|
Chairman
of the Board and
|
|
|
Glen
F. Post, III
|
|
Chief
Executive Officer
|
|
February
27, 2009
|
|
|
|
|
|
|
|
|
|
|
/s/ R. Stewart Ewing,
Jr.
|
|
Executive
Vice President and
|
|
|
R.
Stewart Ewing, Jr.
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Neil A. Sweasy
|
|
|
|
|
Neil
A. Sweasy
|
|
Vice
President and Controller |
|
|
|
|
|
|
|
|
|
|
|
|
/s/ William R. Boles,
Jr.
|
|
|
|
|
William
R. Boles, Jr.
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Virginia Boulet
|
|
|
|
|
Virginia
Boulet
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Calvin Czeschin
|
|
|
|
|
Calvin
Czeschin
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James B. Gardner
|
|
|
|
|
James
B. Gardner
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ W. Bruce Hanks
|
|
|
|
|
W.
Bruce Hanks
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Gregory J. McCray
|
|
|
|
|
Gregory
J. McCray
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ C. G. Melville,
Jr.
|
|
|
|
|
C.
G. Melville, Jr.
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Fred R. Nichols
|
|
|
|
|
Fred
R. Nichols
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Harvey P. Perry
|
|
|
|
|
Harvey
P. Perry
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jim D. Reppond
|
|
|
|
|
Jim
D. Reppond
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Joseph R. Zimmel
|
|
|
|
|
Joseph
R. Zimmel
|
|
Director
|
|
|
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
CENTURYTEL,
INC.
For the
years ended December 31, 2008, 2007 and 2006
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
charged
to
|
|
|
Deductions
|
|
|
|
|
|
Balance
|
|
|
|
beginning
|
|
|
costs
and
|
|
|
from
|
|
|
Other
|
|
|
at
end
|
|
Description
|
|
of period
|
|
|
expenses
|
|
|
allowance
|
|
|
changes
|
|
|
of period
|
|
|
|
(Dollars
in thousands)
|
|
Year
ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
20,361 |
|
|
|
9,866 |
|
|
|
(13,524 |
)
(1) |
|
|
(413 |
)
(2) |
|
|
16,290 |
|
Valuation allowance for deferred tax
assets
|
|
$ |
30,907 |
|
|
|
1,603 |
|
|
|
- |
|
|
|
1,348 |
|
|
|
33,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
20,905 |
|
|
|
14,466 |
|
|
|
(16,617 |
)
(1) |
|
|
1,607 |
(2) |
|
|
20,361 |
|
Valuation allowance for deferred tax assets
|
|
$ |
61,049 |
|
|
|
3,744 |
|
|
|
(33,886 |
) |
|
|
- |
|
|
|
30,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
21,721 |
|
|
|
20,199 |
|
|
|
(21,009 |
)
(1) |
|
|
(6 |
)
(2) |
|
|
20,905 |
|
Valuation allowance for deferred tax assets
|
|
$ |
54,412 |
|
|
|
6,637 |
|
|
|
- |
|
|
|
- |
|
|
|
61,049 |
|
(1) Customers’
accounts written-off, net of recoveries.
(2) 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.