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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, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7784
CENTURYTEL, INC.
(Exact name of Registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 CenturyTel Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (318) 388-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
___________________ _________________________________________
Common Stock, par value $1.00 New York Stock Exchange
Berlin Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Berlin Stock Exchange
Corporate Units issued May 2002 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark if the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates (affiliates
being for these purposes only directors, executive officers and holders of more
than five percent of the Company's outstanding voting securities) was $4.2
billion as of June 28, 2002. As of February 28, 2003, there were 143,069,486
shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be furnished in connection with
the 2003 annual meeting of shareholders are incorporated by reference in Part
III of this Report.
PART I
Item 1. Business
General. CenturyTel, Inc. ("CenturyTel") is a regional integrated
communications company engaged primarily in providing local exchange telephone
services. For the year ended December 31, 2002, local exchange telephone
operations provided 88% of the consolidated revenues from continuing operations
of CenturyTel and its subsidiaries (the "Company"). All of the Company's
operations are conducted within the continental United States.
At December 31, 2002, the Company's local exchange telephone subsidiaries
operated approximately 2.4 million telephone access lines, primarily in rural,
suburban and small urban areas in 22 states, with the largest customer bases
located in Wisconsin, Missouri, Alabama, Arkansas, Washington, Michigan,
Louisiana, Colorado, Ohio and Oregon. According to published sources, the
Company is the eighth largest local exchange telephone company in the United
States based on the number of access lines served. For more information, see
"Telephone Operations."
On August 1, 2002, the Company sold substantially all of its wireless
operations for an aggregate of approximately $1.59 billion in cash. For
additional information, see "Recent acquisitions and dispositions" below.
The Company also provides long distance, Internet access, competitive
local exchange carrier, fiber network, security monitoring, and other
communications and business information services in certain local and regional
markets. For more information, see "Other Operations."
Recent acquisitions and dispositions. On July 1, 2002, the Company
completed the acquisition of approximately 300,000 telephone access lines in the
state of Alabama from Verizon Communications, Inc. ("Verizon") for approximately
$1.022 billion cash. On August 31, 2002, the Company completed the acquisition
of approximately 350,000 telephone access lines in the state of Missouri from
Verizon for approximately $1.179 billion cash. The assets purchased included (i)
telephone access lines and related property and equipment comprising Verizon's
local exchange operations in predominantly rural markets throughout Alabama and
Missouri, (ii) Verizon's assets used to provide digital subscriber line ("DSL")
and other high speed data services within the purchased exchanges and (iii)
approximately 2,800 route miles of fiber optic cable within the purchased
exchanges. The acquired assets did not include Verizon's cellular, personal
communications services ("PCS"), long distance, dial-up Internet, or directory
publishing operations, or rights under various Verizon contracts, including
those relating to customer premise equipment. The Company did not assume any
liabilities of Verizon other than (i) those associated with contracts,
facilities and certain other assets transferred in connection with the purchase
and (ii) certain employee-related liabilities, including liabilities for
postretirement health benefits.
On February 28, 2002, the Company purchased the fiber network and customer
base of KMC Telecom's operations in Monroe and Shreveport, Louisiana which
allows the Company to offer broadband and competitive local exchange services to
customers in these markets.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related assets from Verizon in
four separate transactions for approximately $1.5 billion in cash. Under these
transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related local exchange assets comprising 106 exchanges
throughout Arkansas for approximately $842 million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra")
purchased approximately 127,000 telephone access lines and related local
exchange assets comprising 107 exchanges throughout Missouri for
approximately $297 million cash. The Company currently owns 75.7% of
Spectra, which was organized to acquire and operate these Missouri
properties. At closing, the Company made a preferred equity investment
in Spectra of approximately $55 million (which represented a 57.1%
interest) and financed substantially all of the remainder of the
purchase price. In the first quarter of 2001, the Company purchased an
additional 18.6% interest in Spectra for $47.1 million.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related local exchange assets comprising 42
exchanges throughout Wisconsin for approximately $197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related local
exchange assets comprising 35 exchanges throughout Wisconsin for
approximately $172 million in cash. The Company owns 89% of TelUSA,
which was organized to acquire and operate these Wisconsin properties.
At closing, the Company made an equity investment in TelUSA of
approximately $37.8 million and financed substantially all of the
remainder of the purchase price.
In August 2000, the Company acquired the assets of CSW Net, Inc., a
regional Internet service provider that offers dial-up and dedicated Internet
access, and web site and domain hosting to more than 18,000 customers in 28
communities in Arkansas.
On August 1, 2002, the Company sold substantially all of its wireless
operations to an affiliate of ALLTEL Corporation ("Alltel") and certain partners
in the Company's markets that exercised "first refusal" purchase rights for an
aggregate of approximately $1.59 billion in cash. In connection with this
transaction, the Company divested its (i) interests in its majority-owned and
operated cellular systems, which at June 30, 2002 served approximately 783,000
customers and had access to approximately 7.8 million pops (the estimated
population of licensed cellular telephone markets multiplied by the Company's
proportionate equity interest in the licensed operators thereof), (ii) minority
cellular equity interests representing approximately 1.8 million pops at June
30, 2002, and (iii) licenses to provide PCS covering 1.3 million pops in
Wisconsin and Iowa. As a result, the Company's wireless operations have been
reflected as discontinued operations in the Company's accompanying consolidated
financial statements.
In the second quarter of 2001, the Company sold to Leap Wireless
International, Inc. 30 PCS operating licenses for an aggregate of $205 million.
The Company received approximately $118 million of the purchase price in cash at
closing and collected the remainder in installments through the fourth quarter
of 2001.
In June 1999, the Company sold all of the operations of its Brownsville
and McAllen, Texas, cellular systems to Western Wireless Corporation for
approximately $96 million cash. The Company received its proportionate share of
the sale proceeds of approximately $45 million after-tax.
In May 1999, the Company sold substantially all of its Alaska telephone
and wireless operations for approximately $300 million after-tax. In February
2000, the Company sold its interest in Alaska RSA #1, which completed the
Company's divestiture of its Alaska operations.
The Company continually evaluates the possibility of acquiring additional
telecommunications assets in exchange for cash, securities or both, and at any
given time may be engaged in discussions or negotiations regarding additional
acquisitions. The Company generally does not announce its acquisitions until it
has entered into a preliminary or definitive agreement. Over the past few years,
the number and size of communications properties on the market has increased
substantially. Although the Company's primary focus will continue to be on
acquiring interests that are proximate to its properties or that serve a
customer base large enough for the Company to operate efficiently, other
communications interests may also be acquired and these acquisitions could have
a material impact upon the Company.
Pending Acquisition and Disposition. In connection with the August 2002
sale of its wireless operations to Alltel, the Company retained a minority
interest in one market, which it agreed to sell to Alltel for approximately $68
million, subject to several closing conditions. Alltel has asserted that some of
these closing conditions have not been satisfied, and the parties are currently
in discussions regarding such conditions. No assurance can be given that this
sale will occur.
On February 13, 2003, a federal bankruptcy court approved the Company's
$38 million bid to acquire the assets of Digital Teleport, Inc., a regional
fiber optics communications company providing wholesale data transport services
to other communications carriers over a currently usable 3,800 route mile
network located in Missouri, Arkansas, Oklahoma and Kansas. The Company intends
to use the acquired assets to sell services to new and existing customers and to
reduce the Company's reliance on third party transport providers. The
transaction is expected to be completed in the second quarter of 2003, subject
to regulatory approvals and other closing conditions.
Where to find additional information. Effective February 28, 2003, the
Company makes available free of charge on its website (www.centurytel.com)
filings made with the Securities and Exchange Commission ("SEC") on Forms 10-K,
10-Q and 8-K as soon as reasonably practicable after such filings are made with
the SEC.
Other. As of December 31, 2002, the Company had approximately 6,960
employees, approximately 1,900 of whom were members of 15 different bargaining
units represented by the International Brotherhood of Electrical Workers, the
Communications Workers of America, or the NTS Employee Committee. Relations with
employees continue to be generally good.
CenturyTel was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous 15 to
20 years. CenturyTel's principal executive offices are located at 100 CenturyTel
Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.
TELEPHONE OPERATIONS
According to published sources, the Company is the eighth largest local
exchange telephone company in the United States, based on the approximately 2.4
million access lines it served at December 31, 2002. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominantly rural, suburban and small urban
markets in 22 states. The table below sets forth certain information with
respect to the Company's access lines as of December 31, 2002 and 2001.
December 31, 2002 December 31, 2001
- ------------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
- ------------------------------------------------------------------------------
Wisconsin (1) 490,116 21% 498,331 28%
Missouri (2) 478,207 20 130,651 7
Alabama 289,015 12 - -
Arkansas 268,220 11 271,617 15
Washington 188,733 8 189,868 11
Michigan 112,713 5 114,643 6
Louisiana 104,408 4 104,043 6
Colorado 96,799 4 97,571 6
Ohio 84,452 4 84,636 5
Oregon 76,751 3 78,592 4
Montana 65,666 3 65,974 4
Texas 48,931 2 51,451 3
Minnesota 30,930 1 31,110 2
Tennessee 27,365 1 27,660 2
Mississippi 24,156 1 23,579 1
New Mexico 6,565 - 6,396 -
Idaho 5,976 - 6,119 -
Wyoming 5,494 - 5,408 -
Indiana 5,468 - 5,490 -
Iowa 2,099 - 2,072 -
Arizona 1,986 - 1,937 -
Nevada 514 - 495 -
- ------------------------------------------------------------------------------
2,414,564 100% 1,797,643 100%
==============================================================================
(1) As of December 31, 2002 and 2001, approximately 61,060 and 61,990,
respectively, of these lines are owned and operated by CenturyTel's
89%-owned affiliate.
(2) As of December 31, 2002 and 2001, approximately 130,740 and 130,651,
respectively, of these lines are owned and operated by CenturyTel's
75.7%-owned affiliate.
As indicated in the following table, the Company has generally experienced
growth in its telephone operations over the past several years, a substantial
portion of which was attributable to the third quarter 2002 acquisitions of
telephone properties from Verizon, the third quarter 2000 acquisitions of
telephone properties from Verizon, the acquisitions of other telephone
properties and the expansion of services. A portion of the Company's access line
growth was offset by the May 1999 sale of the Company's Alaska telephone
operations.
Year ended or as of December 31,
- -------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Access lines 2,414,564 1,797,643 1,800,565 1,272,867 1,346,567
% Residential 76% 76 76 75 74
% Business 24% 24 24 25 26
Operating revenues $ 1,733,592 1,505,733 1,253,969 1,126,112 1,077,343
Capital expenditures $ 319,536 351,010 275,523 233,512 223,190
- -------------------------------------------------------------------------------------------
The Company hopes to expand its telephone operations by (i) acquiring
additional telephone properties, (ii) providing service to new customers, (iii)
increasing network usage and (iv) providing additional services which may be
made possible by advances in technology and improvements in the Company's
infrastructure. For information on developing competitive trends, see
"-Regulation and Competition."
Services
The Company's local exchange telephone subsidiaries derive revenue from
providing (i) local telephone services, (ii) network access services and (iii)
other related services. The following table reflects the percentage of telephone
operating revenues derived from these respective services:
2002 2001 2000
- -------------------------------------------------------------------------
Local service 34.9% 32.6 32.6
Network access 56.1 58.1 58.0
Other 9.0 9.3 9.4
- -------------------------------------------------------------------------
100.0% 100.0 100.0
=========================================================================
Local service. Local service revenues are derived from the provision of
local exchange telephone services in the Company's service areas. Access lines
declined 1.1% in 2002 (exclusive of the 2002 Verizon acquisitions) and declined
0.2% in 2001. Internal access line growth during 2000 was 2.8%. The Company
believes the decline in the number of access lines during 2002 and 2001 is
primarily due to declines in second lines, soft general economic conditions in
the Company's markets and the displacement of traditional wireline telephone
services by other competitive service providers. Even when the economy recovers,
the Company believes that any rebound in access lines will be limited by
continued declines in second lines caused primarily by DSL substitution and the
impact of competitive services. Based on current conditions, the Company
expects to incur a decline in access lines of 1 to 2% for 2003.
The installation of digital switches, high-speed data circuits and related
software has been an important component of the Company's growth strategy
because it allows the Company to offer enhanced voice services (such as call
forwarding, conference calling, caller identification, selective call ringing
and call waiting) and data services (such as data private line, digital
subscriber line, frame relay and local area/wide area networks) and to thereby
increase utilization of existing access lines. In 2002 the Company continued to
expand the availability of enhanced services offered in certain service areas.
Network access. Network access revenues primarily relate to services
provided by the Company to long distance carriers, wireless carriers and other
customers in connection with the use of the Company's facilities to originate
and terminate interstate and intrastate long distance telephone calls. Certain
of the Company's interstate network access revenues are based on tariffed access
charges prescribed by the Federal Communications Commission ("FCC"); the
remainder of such revenues are derived under revenue sharing arrangements with
other local exchange carriers ("LECs") administered by the National Exchange
Carrier Association ("NECA"), a quasi-governmental non-profit organization
formed by the FCC in 1983 for such purposes.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on tariffed access charges, which are subject to state regulatory
commission approval. Additionally, certain of the Company's intrastate network
access revenues, along with intrastate and intra-LATA (Local Access and
Transport Areas) long distance revenues, are derived through revenue sharing
arrangements with other LECs.
In 2002 the Company incurred a reduction in its intrastate revenues
(exclusive of the properties acquired from Verizon in 2002) of approximately
$27.7 million compared to 2001 primarily due to (i) a reduction in intrastate
minutes (partially due to the displacement of minutes by wireless and instant
messaging services) and (ii) decreased access rates in certain states. The
Company believes such trend of decreased intrastate minutes will continue in
2003. Although the magnitude of such decrease cannot be precisely estimated, the
Company believes such decrease will be less than that incurred in 2002.
The Company is continuing to install fiber optic cable in certain high
traffic routes providing diversity, increased bandwidth capability and improved
quality of service for its telephone operations in strategic operating areas. At
December 31, 2002 the Company's telephone subsidiaries had over 15,100 miles of
fiber optic cable in use.
Other. Other telephone revenues include revenues related to (i) leasing,
selling, installing, maintaining and repairing customer premise
telecommunications equipment and wiring, (ii) providing billing and collection
services for long distance companies and (iii) participating in the publication
of local directories.
Certain large communications companies for which the Company currently
provides billing and collection services continue to indicate their desire to
reduce their billing and collection expenses, which has resulted and may
continue to result in future reductions of the Company's billing and collection
revenues.
For further information on the regulation of the Company's revenues, see
"-Regulation and Competition."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") or the Rural Telephone Bank
("RTB"). The RUS has made long-term loans to telephone companies since 1949 for
the purpose of improving telephone service in rural areas. The RUS continues to
make new loans at interest rates that range from 5% to 7% based on borrower
qualifications and the cost of funds to the United States government. The RTB,
established in 1971, makes long-term loans at interest rates based on its
average cost of funds as determined by statutory formula (which ranged from
6.05% to 6.51% for the RTB's fiscal year ended September 30, 2002), and in some
cases makes loans concurrently with RUS loans. Some of the Company's telephone
plant is pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS and RTB. The Company's telephone subsidiaries that have
borrowed from government agencies generally may not loan or advance any funds to
CenturyTel, but may pay dividends if certain financial covenants are met.
For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.
Regulation and Competition
Traditionally, LECs have operated as regulated monopolies. Consequently,
most of the Company's telephone operations have traditionally been regulated
extensively by various state regulatory agencies (generally called public
service commissions or public utility commissions) and by the FCC. As discussed
in greater detail below, passage of the Telecommunications Act of 1996 (the
"1996 Act"), coupled with state legislative and regulatory initiatives and
technological changes, fundamentally altered the telephone industry by reducing
the regulation of LECs and permitting competition in each segment of the
telephone industry. CenturyTel anticipates that these trends towards reduced
regulation and increased competition will continue.
State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions which typically have the power to grant and revoke
franchises authorizing companies to provide communications services. Most of
such commissions have traditionally regulated pricing through "rate of return"
regulation that focuses on authorized levels of earnings by LECs. Most of these
commissions also (i) regulate the purchase and sale of LECs, (ii) prescribe
depreciation rates and certain accounting procedures and (iii) regulate various
other matters, including certain service standards and operating procedures.
In recent years, state legislatures and regulatory commissions in most of
the 22 states in which the Company operates have either reduced the regulation
of LECs or have announced their intention to do so, and it is expected that this
trend will continue. Wisconsin, Missouri, Alabama, Arkansas, Louisiana and
several other states have implemented laws or rulings which require or permit
LECs to opt out of rate of return regulation in exchange for agreeing to
alternative forms of regulation which typically permit the LEC greater freedom
to establish local service rates in exchange for agreeing not to charge rates in
excess of specified caps. As discussed further below, subsidiaries operating
over half of the Company's access lines in various states have agreed to be
governed by alternative regulation plans, and the Company continues to explore
its options for similar treatment in other states. Other states have imposed new
regulatory models that do not rely on "rate of return" regulation. The Company
believes that reduced regulatory oversight of certain of the Company's telephone
operations may allow the Company to offer new and competitive services faster
than under the traditional regulatory process. For a discussion of legislative,
regulatory and technological changes that have introduced competition into the
local exchange industry, see "-Developments Affecting Competition."
A portion of the Company's telephone operations in Wisconsin has been
regulated under an alternative regulation plan since June 1996; such plan was
subsequently modified in early 2000. In late 1999 and early 2000, most of the
Company's remaining Wisconsin telephone subsidiaries agreed to be subject to
alternative regulation plans. Each of these alternative regulation plans has a
five-year term and permits the Company to adjust local rates within specified
parameters if it meets certain quality-of-service and infrastructure-development
commitments. These plans also include initiatives designed to promote
competition. In November 2002, the Company applied to have its Wisconsin access
lines acquired in December 1998 regulated under a similar alternative regulation
plan. The Company's Wisconsin access lines acquired in mid-2000 continue to be
regulated under "rate of return" regulation.
All of the Company's Missouri LECs are regulated under a price-cap
regulation plan (effective in 2002) whereby basic service rates are adjusted
annually based on an inflation-based factor; non-basic services may be increased
up to 8% annually. The plan also allows the LECs to rebalance local basic
service rates up to four times in the first four years of such regulation as a
result of access rate or toll reductions.
Since 1995, the Company's Alabama LEC acquired as part of the acquisitions
from Verizon in 2002 has been subject to an alternative regulation plan. Under
this plan, local rates were frozen initially for five years, after which time
such rates can be increased by an amount equal to the consumer price index less
a 1% efficiency factor; non-basic service rates can be increased 10% per year.
In January 2003, the Company's Alabama LEC and the other independent LECs
in the state filed a Petition for Adoption of Streamlined Regulation Plan with
the Alabama Public Service Commission ("Alabama PSC"). As part of this proposed
plan, basic local service rates could be increased by 3% per year while
non-basic service rates could be increased as much as 7% per year. Access rates
could not be reduced unless the Alabama PSC offsets the revenue loss by some
other means. All rate adjustments proposed in the plan must be approved by the
Alabama PSC before being implemented. The Alabama PSC is expected to issue a
request for comments on the proposed plan in the second quarter of 2003.
The Company's Arkansas LECs, excluding the properties acquired from
Verizon in 2000, are regulated under an alternative regulation plan adopted in
1997, which initially froze access rates for three years, after which time such
rates can be adjusted based on an inflation-based factor. Local service rates
can be adjusted without commission approval; however, such rates are subject to
commission review if certain petition criteria are met. In addition, since 1995
the Company's Michigan LECs have been subject to a regulatory structure that
focuses on price and quality of service as opposed to traditional rate of return
regulation, and which relies more on existing federal and state law regarding
antitrust consumer protection and fair trade to provide safeguards for
competition and consumers.
Since 1997 all of the Company's LECs operating in Louisiana have been
regulated under a Consumer Price Protection Plan (the "Louisiana Plan"). This
form of regulation focuses on price and quality of service. Under the Louisiana
Plan, the Company's Louisiana LECs' local rates and access rates have remained
unchanged since 1997, but may currently be increased within certain parameters.
The Company's Louisiana LECs have the option to propose a new plan at any time
if the Louisiana Public Service Commission determines that (i) effective
competition exists or (ii) unforeseen events threaten the LEC's ability to
provide adequate service or impair its financial health.
Notwithstanding the movement towards alternative regulation, LECs
operating approximately 45% of the Company's total access lines continue to be
subject to "rate of return" regulation for intrastate purposes. These LECs
remain subject to the powers of state regulatory commissions to conduct earnings
reviews and adjust service rates, either of which could lead to revenue
reductions.
FCC regulation. The FCC regulates the interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other LECs by the Company
for use of its local network in connection with the origination and termination
of interstate telephone calls. Additionally, the FCC has prescribed certain
rules and regulations for telephone companies, including regulations regarding
the use of radio frequencies; a uniform system of accounts; and rules regarding
the separation of costs between jurisdictions and, ultimately, between
interstate services.
Effective January 1, 1991, the FCC adopted price-cap regulation relating
to interstate access rates for the Regional Bell Operating Companies. All other
LECs may elect to be subject to price-cap regulation. Under price-cap
regulation, limits imposed on a company's interstate rates are adjusted
periodically to reflect inflation, productivity improvement and changes in
certain non-controllable costs. In May 1993 the FCC adopted an optional
incentive regulatory plan for LECs not subject to price-cap regulation. A LEC
electing the optional incentive regulatory plan would, among other things, file
tariffs based primarily on historical costs and not be allowed to participate in
the relevant NECA pooling arrangements. The Company has not elected price-cap
regulation or the optional incentive regulatory plan for its incumbent
operations; however, the properties acquired from Verizon in 2002 are operated
under price-cap regulation. In connection with this acquisition, the Company
obtained a waiver of the FCC's "all or nothing" rule. This waiver is valid until
the FCC reviews the future appropriateness of the "all or nothing" rule. Absent
the waiver, present rules require a carrier that purchases access lines subject
to price-cap regulation to convert all of its properties to price-cap
regulation.
On October 11, 2001, the FCC modified its interstate access charge rules
and universal service support system for rate of return local exchange carriers.
This order, among other things, (i) increased the caps on the subscriber line
charges ("SLC") to the levels paid by most subscribers nationwide; (ii) allowed
limited SLC deaveraging, which will enhance the competitiveness of rate of
return carriers by giving them pricing flexibility; (iii) lowered per minute
rates collected for federal access charges; (iv) created a new explicit
universal service support mechanism that will replace other implicit support
mechanisms in a manner designed to ensure that rate structure changes do not
affect the overall recovery of interstate access costs by rate of return
carriers serving high cost areas and (v) terminated the FCC's proceeding on the
represcription of the authorized rate of return for rate of return LECs, which
will remain at 11.25%. The effect of this order on the Company was revenue
neutral for interstate purposes; however, intrastate revenues were adversely
affected in Arkansas and Ohio as the intrastate access rates in these states
mirror the interstate access rates.
The FCC is pursuing rulemaking regarding the development of an appropriate
federal incentive plan for rate of return LECs. The Company is actively
monitoring this proceeding and has provided comments to the FCC on this issue.
High-cost support funds, revenue sharing arrangements and related matters.
A significant number of the Company's telephone subsidiaries recover a portion
of their costs under federal and state cost recovery mechanisms that
traditionally have allowed LECs serving small communities and rural areas to
provide communications services reasonably comparable to those available in
urban areas and at reasonably comparable prices.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that will provide predictable levels of
support to rural local exchange carriers, including substantially all of the
Company's local exchange carriers. During 2002 and 2001 the Company's telephone
subsidiaries received $192.4 million (which included $9.9 million related to the
Company's operations acquired from Verizon in 2002) and $168.7 million,
respectively, from the federal Universal Service Fund, representing 9.8% and
8.0%, respectively, of the Company's consolidated revenues from continuing
operations for 2002 and 2001. Increasingly, wireless carriers have sought and
received payments from the Universal Service Fund, which the Company believes is
currently enhancing their ability to compete with wireline services and, in the
long term, could adversely impact the amount of funding available for LECs. In
addition, the Company's telephone subsidiaries received $31.7 million and $31.5
million in 2002 and 2001, respectively, from intrastate support funds.
In 1997, the FCC also established new programs to provide discounted
telecommunications services annually to schools, libraries and rural health care
providers. All communications carriers providing interstate telecommunications
services, including the Company's LECs and long distance operations, are
required to contribute to these programs. Prior to May 2001, the Company's LECs
recovered their funding contributions in their rates for interstate services.
Subsequent to May 2001, in accordance with a 2001 FCC order, such contributions
are not recovered through access charges but instead are charged as an explicit
item on customer's bills. The Company's contribution by its LEC and long
distance operations, both of which is passed on to its customers, was
approximately $10.6 million and $4.4 million, respectively, in 2002, and $6.4
million and $3.2 million, respectively, in 2001.
In late 2002, the FCC requested that the Federal-State Joint Board
("FSJB") on Universal Service review various FCC rules governing high cost
universal service support, including rules regarding eligibility to receive
support payments in markets served by LECs and competitive carriers. On February
7, 2003, the FSJB issued a notice for public comment on whether present rules
fulfill their purpose and whether or not modifications are needed. The Company
has been active in various dockets before the FCC and various state commissions
related to wireless carriers seeking support payments for service in the
Company's service areas.
In January 2003, the Louisiana Public Service Commission directed its
staff to review the feasibility of converting the $42 million Louisiana Local
Optional Service Fund ("LOS Fund") into a state universal service fund. A
recommendation by the Commission staff is expected by the end of 2003.
Currently, the LOS Fund is funded primarily by BellSouth, which proposes to
expand the base of contributors into the LOS Fund. The Company currently
receives approximately $21 million from the LOS Fund each year. There can be no
assurance that this funding will remain at current levels.
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "- State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
Substantially all of the Company's LECs (except for the properties
acquired from Verizon in 2002) concur with the common line tariff and certain of
the Company's LECs concur with the traffic sensitive tariffs filed by the NECA;
such LECs participate in the access revenue sharing arrangements administered by
the NECA for interstate services. All of the intrastate network access revenues
of the Company's LECs are based on access charges, cost separation studies or
special settlement arrangements. See "- Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. Long distance carriers
have also aggressively pursued regulatory or legislative changes that would
reduce access rates. See "Services - Network Access" above for additional
information.
Developments affecting competition. The communications industry continues
to undergo fundamental changes which are likely to significantly impact the
future operations and financial performance of all communications companies.
Primarily as a result of legislative and regulatory initiatives and
technological changes, competition has been introduced and encouraged in each
sector of the telephone industry. As a result, the number of companies offering
competitive services has increased substantially.
As indicated above, in February 1996 Congress enacted 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. The 1996 Act imposes several duties on a LEC if it receives a
specific request from another entity which seeks to connect with or provide
services using the LEC's network. In addition, each incumbent LEC is obligated
to (i) negotiate interconnection agreements in good faith, (ii) provide
"unbundled" access to all aspects of the LEC's network, (iii) offer resale of
its telecommunications services at wholesale rates and (iv) permit competitors
to collocate their physical plant on the LEC's property, or provide virtual
collocation if physical collocation is not practicable. On February 20, 2003,
the FCC revised its rules outlining the obligations of incumbent LECs to lease
elements of their networks on an unbundled basis to competitors. The new
framework eliminates the prior obligation of incumbent LECs to lease their
high-speed data lines to competitors. Incumbent LECs will remain obligated to
offer other telecommunications services to resellers at wholesale rates. This
new rule also provides for a significant role of state regulatory commissions in
implementing these new guidelines and establishing wholesale service rates.
Under the 1996 Act's rural telephone company exemption, approximately 50%
of the Company's telephone access lines are exempt from certain of these
interconnection requirements unless and until the appropriate state regulatory
commission overrides the exemption upon receipt from a competitor of a bona fide
request meeting certain criteria. States are permitted to adopt laws or
regulations that provide for greater competition than is mandated under the 1996
Act. Management believes that competition in its telephone service areas has
increased and will continue to increase as a result of the 1996 Act and
additional FCC interpretations related to interconnection and the portability of
universal service support. While competition through use of the Company's
network is still limited in most of its markets, the Company will continue to
witness competition from a variety of resellers and facilities-based service
providers, including wireless and cable companies.
In addition to these changes in federal regulation, all of the 22 states
in which the Company provides telephone services have taken legislative or
regulatory steps to further introduce competition into the LEC business.
As a result of these regulatory developments, incumbent LECs ("ILECs")
increasingly face competition from competitive local exchange carriers
("CLECs"), particularly in high population areas. CLECs provide competing
services through reselling the ILECs' local services, through use of the ILECs'
unbundled network elements or through their own facilities. The number of
companies which have requested authorization to provide local exchange service
in the Company's service areas has increased substantially in recent years,
especially in the Company's Verizon markets acquired in 2002 and 2000, and it is
anticipated that similar action may be taken by others in the future.
In addition to facing direct competition from CLECs, 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. Customers
may also use wireless or Internet voice service to bypass ILECs' switching
services. In addition, technological and regulatory developments have increased
the feasibility of competing services offered by cable television companies,
several of whom are pursuing these opportunities. Other potential sources of
competition include noncarrier systems that are capable of bypassing ILECs'
local networks, either partially or completely, through substitution of special
access for switched access or through concentration of telecommunications
traffic on a few of the ILECs' access lines. The Company anticipates that all
these trends will continue and lead to increased competition with the Company's
LECs.
Wireless telephone services increasingly constitute a significant source
of competition with LEC services, especially as wireless carriers expand and
improve their network coverage and continue to lower their prices. As a result,
some customers have chosen to completely forego use of traditional wireline
phone service and instead rely solely on wireless service. This trend is
particularly evident among younger customers, and in urban areas. The Company
anticipates this trend will continue, particularly if wireless service rates
continue to decline and the quality of wireless service in the Company's
markets improves. Technological and regulatory developments in cellular
telephone, personal communications services, digital microwave, 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.
Historically, ILECs had little or no competition associated with
intra-LATA long distance calls in their service areas. Principally as a result
of recent state regulatory changes, companies offering competing toll services
have emerged in the Company's local exchange markets.
To the extent that the telephone industry increasingly experiences
competition, the size and resources of each respective competitor may
increasingly influence its prospects. Many companies currently providing or
planning to provide competitive communication services have substantially
greater financial and marketing resources than the Company, and several are not
subject to the same regulatory constraints as the Company.
The Company anticipates that the traditional operations of LECs will
continue to be impacted by continued technological developments as well as
legislative and regulatory initiatives affecting the ability of LECs to provide
new services and the capability of long distance companies, CLECs, wireless
companies, cable television companies and others to provide competitive LEC
services. Competition relating to services traditionally provided by LECs has
thus far affected large urban areas to a greater extent than rural, suburban and
small urban areas such as those in which the Company operates. The Company
intends to actively monitor these developments, to observe the effect of
emerging competitive trends in initial competitive markets and to continue to
evaluate new business opportunities that may arise out of future technological,
legislative and regulatory developments.
The Company anticipates that regulatory changes and competitive pressures
will continue to place downward pressure on its telephone revenues. However, the
Company anticipates that such reductions may be minimized by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. The Company expects its internal telephone revenues
(exclusive of the properties acquired from Verizon in 2002) to decline in 2003
primarily due to continued access line loss and reduced intrastate revenues;
however, the Company expects its internal consolidated revenues to increase in
2003 primarily due to expected increased demand for its long distance, DSL and
other product offerings, as discussed further below.
OTHER OPERATIONS
The Company provides long distance, Internet access, competitive local
exchange services, fiber network, security monitoring, and other communications
and business information services in certain local and regional markets. The
results of these operations, which accounted for 12.1% and 7.6%, respectively,
of the Company's operating revenues and operating income during 2002, are
reflected for financial reporting purposes in the "Other operations" section.
Long distance. In 1996 the Company began marketing long distance service
in its equal access telephone operating areas. At December 31, 2002, the Company
provided long distance services to approximately 648,800 customers.
Approximately 75% of the Company's long distance revenues are derived from
service provided to residential customers. Although the Company owns and
operates switches in LaCrosse, Wisconsin; Shreveport, Louisiana and Vancouver,
Washington which are utilized to provide long distance services, it anticipates
that most of its near-term long distance service revenues will be provided by
reselling service purchased from other facilities-based long distance providers.
The Company intends to continue to expand its long distance business,
principally through reselling arrangements.
Internet access. The Company began offering traditional Internet access
services to its telephone customers in 1995. In late 1999, the Company began
offering in select markets digital subscriber line ("DSL") Internet access
services, a high-speed premium-priced data service. At December 31, 2002, the
Company provided Internet access services to a total of approximately 179,400
customers, 131,500 of which receive traditional dial-up Internet service in
select markets in 17 states (which markets represent 85% of the access lines
served by the Company's LECs), and 47,900 of which receive retail DSL services
in markets that cover approximately 59% of the access lines served by the
Company's LECs.
Competitive local exchange services. In late 2000, the Company began
offering competitive local exchange telephone services, coupled with long
distance, Internet access and other Company services, to small to medium-sized
businesses in Monroe and Shreveport, Louisiana. On February 28, 2002, the
Company purchased the fiber network and customer base of KMC Telecom's
operations in Monroe and Shreveport, Louisiana, which allowed the Company to
offer broadband and competitive local exchange services to customers in these
markets. At December 31, 2002, the Company had approximately 141,000 equivalent
access lines in its competitive local exchange carrier business.
Fiber network. In connection with its long-range plans to sell capacity to
other carriers and certain businesses in or near certain of its select markets,
the Company began providing service in the second quarter of 2001 to customers
over a 700-mile fiber optic ring connecting several communities in southern and
central Michigan.
On February 13, 2003, a federal bankruptcy court approved the Company's
$38 million bid to acquire the assets of Digital Teleport, Inc., a regional
fiber optics communication company providing wholesale data transport services
to other communications carriers over a currently usable 3,800 route mile
network located in Missouri, Arkansas, Oklahoma and Kansas. The Company intends
to use the acquired assets to sell services to new and existing customers and to
reduce the Company's reliance on third party transport providers. The
transaction is expected to be completed in the second quarter of 2003, subject
to regulatory approvals and other closing conditions.
Security monitoring. The Company offers 24-hour burglary and fire
monitoring services to approximately 8,600 customers in select markets in
Louisiana, Arkansas, Mississippi, Texas and Ohio.
The Company also provides audiotext services; printing, database
management and direct mail services; and cable television services. From time to
time the Company also makes investments in other domestic or foreign
communications companies.
Certain service subsidiaries of the Company provide installation and
maintenance services, materials and supplies, and managerial, technical,
accounting and administrative services to the telephone and other operating
subsidiaries. In addition, the Company provides and bills management services to
subsidiaries and in certain instances makes interest-bearing advances to finance
construction of plant, purchases of equipment or acquisitions of other
businesses. These transactions are recorded by the Company's regulated telephone
subsidiaries at their cost to the extent permitted by regulatory authorities.
Intercompany profit on transactions with regulated affiliates is limited to a
reasonable return on investment and has not been eliminated in connection with
consolidating the results of operations of CenturyTel and its subsidiaries. Such
intercompany profit is reflected as a reduction of cost of sales and operating
expenses in "Other operations".
OTHER DEVELOPMENTS
The Company is in the process of developing an integrated billing and
customer care system which will provide the Company with, in addition to
standard billing functionality currently being provided by our legacy system,
custom built hardware and software technology for more efficient and effective
customer care, billing and provisioning systems. The costs to develop such
system have been capitalized in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and aggregated $139.5 million at December 31, 2002. A portion of
these billing system costs related to the wireless business ($30.5 million) was
written off as a component of discontinued operations in the third quarter of
2002 as a result of the sale of substantially all of the Company's wireless
operations on August 1, 2002. Excluding this write-off, the Company's aggregate
billing system costs are expected to approximate $180 million upon completion
and are expected to be amortized over a twenty-year period. The Company expects
to begin amortizing the billing system in 2003 as customer groups are migrated
to this new system. In addition, the Company expects to incur duplicative system
costs in 2003 until such time as all customers are migrated to the new system.
Such amortization and duplicative system costs are expected to reduce diluted
earnings per share by $.04 for 2003.
The system remains in the development stage and has required substantially
more time and money to develop than originally anticipated. Although the Company
expects to complete all phases of the system in early 2004, there is no
assurance that this deadline (or the Company's budget) will be met or that the
system will function as anticipated. If the system does not function as
anticipated, the Company may have to write off part or all of its remaining
costs.
SPECIAL CONSIDERATIONS
Risk Factors
We have a substantial amount of indebtedness.
Principally, as a result of our recent acquisitions, we have a
substantial amount of indebtedness. This could hinder our ability to adjust to
changing market and economic conditions, as well as our ability to access the
capital markets to refinance maturing debt in the ordinary course of business.
In connection with executing our business strategies, we are continuously
evaluating the possibility of acquiring additional communications assets, and we
may elect to finance acquisitions by incurring additional indebtedness. If we
incur significant additional indebtedness, our credit ratings could be adversely
affected. As a result, our borrowing costs would likely increase, our access to
capital may be adversely affected and our ability to satisfy our obligations
under our current indebtedness could be adversely affected.
Our operations have undergone material changes, and our actual operating
results will differ from the results indicated in our historical and pro
forma financial statements.
As a result of our recently completed Verizon acquisitions and wireless
divestiture, our mix of operating assets differs materially from those
operations upon which our historical financial statements are based.
Consequently, our historical financial statements may not be reliable as an
indicator of future results. Moreover, the pro forma financial information that
we have filed with the Securities and Exchange Commission, while helpful in
illustrating certain effects of our recently completed transactions and related
financings, does not attempt to predict or suggest future operating results. The
pro forma information was prepared for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if such transactions had been consummated on the dates and in
accordance with the assumptions described in such information, nor is it
necessarily indicative of our future operating results or financial position.
The results of operations for the Verizon assets acquired are reflected in our
consolidated results of operations subsequent to each acquisition.
Our future results will suffer if we do not effectively manage our growth.
Recently, we have rapidly expanded our operations primarily through
acquisitions and new product and service offerings, and we intend to pursue
similar growth opportunities in the future. Our future success depends, in part,
upon our ability to manage our growth, including our ability to:
o upgrade our billing and other information systems
o retain and attract technological, managerial and other key
personnel to work at our Monroe, Louisiana headquarters and
regional offices
o effectively manage our day to day operations while attempting
to execute our business strategy of expanding our wireline
operations and our emerging businesses
o realize the projected growth and revenue targets developed b
management for our newly acquired and emerging businesses, and
o continue to identify new acquisition or growth opportunities
that we can finance, complete and operate on attractive terms.
Our rapid growth poses substantial challenges for us to integrate new
operations into our existing business in an efficient and timely manner, to
successfully monitor our operations, costs, regulatory compliance and service
quality, and to maintain other necessary internal controls. We cannot assure you
that these efforts will be successful, or that we will realize our expected
operating efficiencies, cost savings, revenue enhancements, synergies or other
benefits. If we are not able to meet these challenges effectively, our results
of operations may be harmed.
We cannot assure you that we will acquire additional properties.
We hope to grow primarily 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 levels of 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.
If we cannot expand through acquisitions, our growth could be limited
primarily to growth associated with providing new or additional services. Our
access lines (exclusive of acquisitions) declined 1.1% in 2002 and 0.2% in 2001,
and we expect to incur a further decline of 1 to 2% for 2003.
We cannot assure you that our new billing system will be successful.
We are developing a new integrated billing and customer care system. The
system remains in the development stage and has required substantially more time
and money to develop than originally anticipated. We expect our aggregate costs
associated with the billing system to total $180 million upon completion of the
system (excluding a write-off that we recorded in the third quarter of 2002).
Although we expect to complete all phases of the system in early 2004, we cannot
assure you that this deadline (or our budget) will be met or that the system
will function as anticipated. If the system does not function as anticipated, we
may have to write off part or all of our remaining costs.
Our industry is highly regulated, and continues to undergo various
fundamental regulatory changes.
As a diversified full service incumbent local exchange carrier, or
ILEC, we have traditionally been subject to significant regulation from federal,
state and local authorities. This regulation restricts our ability to raise our
rates and to compete, and imposes substantial compliance costs on us. In recent
years, the communications industry has undergone various fundamental regulatory
changes that have generally reduced the regulation of telephone companies and
permitted competition in each segment of the telephone industry. These and
subsequent changes could adversely affect us by reducing the fees that we are
permitted to charge, altering our tariff structures, or otherwise changing the
nature of our operations and competition in our industry. 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 face competition, which could adversely affect us.
As a result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive, and we expect
these trends to continue. The number of companies that have requested
authorization to provide local exchange service in our markets has increased in
recent years, and we anticipate that others will take similar action in the
future. As an ILEC, our competitors include competitive local exchange carriers,
or CLECs, and other providers (or potential providers) of communications
services, such as Internet service providers, wireless telephone companies,
satellite companies, alternative access providers, neighboring ILECs, long
distance companies and cable companies that may provide services competitive
with ours or services that we intend to introduce. Wireless telephone services,
in particular, increasingly constitute a significant source of competition with
LEC services, especially as wireless owners expand and improve their network
coverage and continue to lower their prices. We cannot assure you that we will
be able to compete effectively with all of these industry participants.
We expect competition to intensify as a result of new competitors and
the development of new technologies, products and services. We cannot predict
which future technologies, products or services will be important to maintain
our competitive position or what funding will be required to develop and provide
these technologies, products or services. Our ability to compete successfully
will depend on how well we market our products and services, and on our ability
to anticipate and respond to various competitive factors affecting the industry,
including a changing regulatory environment that may affect us differently from
our competitors, new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors.
Many of our current and potential competitors have market presence,
engineering, technical and marketing capabilities and financial, personnel and
other resources substantially greater than ours. In addition, some of our
competitors can raise capital at a lower cost than we can, and have
substantially stronger brand names. Consequently, some competitors may be able
to charge lower prices for their products and services, to develop and expand
their communications and network infrastructures more quickly, to adapt more
swiftly to new or emerging technologies and changes in customer requirements,
and to devote greater resources to the marketing and sale of their products and
services than we can.
While we expect our internal consolidated revenues to grow as the
economy improves, we expect our internal telephone revenues (exclusive of the
properties acquired from Verizon in 2002) to decline in 2003 primarily due to
continued access line loss and reduced intrastate revenues.
We could be harmed by rapid changes in technology.
The communications industry is experiencing significant technological
changes. Rapid changes in technology could result in the development of products
or services that compete with or displace those offered by traditional LECs. If
we cannot develop new products to keep pace with technological advances, or if
such products are not widely embraced by our customers, we could be adversely
impacted.
We are reliant on support funds provided under federal and state laws.
We receive a substantial portion of our revenues from the federal
Universal Service Fund and, to a lesser extent, intrastate support funds. These
governmental programs are reviewed and amended from time to time, and we cannot
assure you that they will not be changed or impacted in a manner adverse to us.
We could be harmed by the recent adverse developments affecting other
communications companies.
Recently, WorldCom, Inc. and several other large communications
companies have declared bankruptcy or suffered financial difficulties, which
caused our provision for uncollectible receivables to increase. Likewise, a
number of our suppliers have recently experienced financial challenges, which
could cause us to experience delays, interruptions or additional expenses
associated with upgrading and expanding our information systems and networks and
offering new products and services. Continued weakness in the communications
industry could have additional future adverse effects on us, including reducing
our ability to collect receivables and to access the capital markets on
favorable terms.
Our agreements and organizational documents and applicable law could
limit another party's ability to acquire us at a premium.
Under our articles of incorporation, each share of common stock that
has been beneficially owned by the same person or entity continually since May
30, 1987 generally entitles the holder to ten votes on all matters duly
submitted to a vote of shareholders. As of March 17, 2003, the holders of our
ten-vote shares held approximately 42% of our total voting power. In
addition, a number of other provisions in our agreements and organizational
documents, including our shareholder rights plan, and various provisions of
applicable law may delay, defer or prevent a future takeover of CenturyTel
unless the takeover is approved by our board of directors. This could deprive
our shareholders of any related takeover premium.
Forward-Looking Statements
This report on Form 10-K and other documents filed by us under the federal
securities laws include, and future oral or written statements or press releases
by us and our management may include, certain forward-looking statements,
including without limitation statements with respect to our anticipated future
operating and financial performance, financial position and liquidity, growth
opportunities and growth rates, business prospects, regulatory and competitive
outlook, investment and expenditure plans, investment results, financing
opportunities and sources (including the impact of financings on our financial
position, financial performance or credit ratings), pricing plans, strategic
alternatives, business strategies, and other similar statements of expectations
or objectives that are highlighted by words such as "expects," "anticipates,"
"intends," "plans," "believes," "projects," "seeks," "estimates," "hopes,"
"should," and "may," and variations thereof and similar expressions. Such
forward-looking statements are inherently speculative and are based upon several
assumptions concerning future events, many of which are outside of our control.
These forward-looking statements, and the assumptions upon which such statements
are based, are subject to uncertainties that could cause our actual results to
differ materially from such statements. These uncertainties include but are not
limited to those set forth below:
o our ability to effectively manage our growth, including without limitation
our ability to (i) integrate newly-acquired operations into our
operations, (ii) attract and retain technological, managerial and other
key personnel to work at our Monroe, Louisiana headquarters or regional
offices, (iii) achieve projected economies of scale and cost savings, (iv)
achieve projected growth and revenue targets developed by management in
valuing newly-acquired businesses, (v) successfully upgrade our billing
and other information systems in a timely and cost-efficient manner and
(vi) otherwise monitor our operations, costs, regulatory compliance, and
service quality and maintain other necessary internal controls.
o the risks inherent in rapid technological change, including without
limitation the risk that technologies will not be developed or embraced by
us on a timely or cost-effective basis or perform according to
expectations.
o the effects of ongoing changes in the regulation of the communications
industry, including without limitation (i) changes as a result of the
1996 Act and other similar federal and state legislation and federal
and state regulations enacted thereunder, (ii) greater than
anticipated interconnection requests or competition in our
predominately rural local exchange telephone markets resulting
therefrom, (iii) greater than anticipated reductions in revenues
received from the federal Universal Service Fund or other current or
future federal and state support funds designed to compensate LECs that
provide services in high-cost markets, (iv) our failure to successfully
transition from "rate of return" regulation to alternative regulation
plans, (v) the final outcome of regulatory and judicial proceedings with
respect to interconnection agreements and (vi) future judicial or
regulatory actions taken in response to the 1996 Act.
o the effects of greater than anticipated competition, including competition
from wireless carriers, competitive local exchange companies or cable
television companies in our local exchange markets.
o possible changes in the demand for, or pricing of, our products and
services, including without limitation (i) reduced demand for
traditional telephone services caused by greater use of wireless or
Internet communications or other factors, (ii) reduced demand for
second lines, (iii) lower than anticipated demand for premium
telephone services, (iv) lower than anticipated demand for our DSL
Internet access services, CLEC services or broadband services and (v)
reduced demand for our access or billing and collection services.
o our ability to successfully introduce new product or service offerings
on a timely and cost-effective basis, including without limitation our
ability to (i) expand successfully our long distance and Internet
offerings to new or acquired markets, (ii) offer bundled service
packages on terms attractive to our customers and (iii) successfully
initiate competitive local exchange and data services in our targeted
markets.
o our ability to collect receivables from financially troubled
communications companies.
o regulatory limits on our ability to change the prices for telephone
services in response to competitive pressures.
o any difficulties in our ability to expand through attractively priced
acquisitions, whether caused by regulatory impediments, financing
constraints, a decrease in the pool of attractive target companies, or
competition for acquisitions from other interested buyers.
o the possibility of the need to make abrupt and potentially disruptive
changes in our business strategies due to changes in competition,
regulation, technology, product acceptance or other factors.
o the lack of assurance that we can compete effectively against better-
capitalized competitors.
o the impact of terrorist attacks on our business.
o other risks referenced from time to time in our filings with the
Securities and Exchange Commission.
o the effects of more general factors, including without limitation:
* changes in general industry and market conditions and growth rates
* changes in interest rates or other general national, regional or local
economic conditions
* changes in legislation, regulation or public policy, including
changes in federal rural financing programs
* unanticipated increases in capital, operating or administrative
costs, or the impact of new business opportunities requiring significant
up-front investments
* the continued availability of financing in amounts, and on terms
and conditions, necessary to support our operations
* changes in our relationships with vendors, or the failure of these
vendors to provide competitive products on a timely basis
* changes in our senior debt ratings
* unfavorable outcomes of regulatory or legal proceedings, including
rate proceedings and environmental proceedings
* losses or unfavorable returns on our investments in other
communications companies
* delays in the construction of our networks
* changes in accounting policies or practices adopted voluntarily or as
required by generally accepted accounting principles.
For additional information, see the description of our business included
above, as well as Item 7 of this report. Due to these uncertainties, you are
cautioned not to place undue reliance upon these forward-looking statements,
which speak only as of the date made. We undertake no obligation to update or
revise any of our forward-looking statements for any reason, whether as a result
of new information, future events or developments, or otherwise.
OTHER MATTERS
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 2002
have not been material and the Company currently has no reason to believe that
such costs will become material.
For additional information concerning the business and properties of the
Company, see Item 7 elsewhere herein, and the Consolidated Financial Statements
and notes 2, 5, 6, 13, and 18 thereto set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of telephone lines, central
office equipment, and land and buildings related to telephone operations. As of
December 31, 2002 and 2001, the Company's gross property, plant and equipment of
approximately $6.9 billion and $5.7 billion, respectively, consisted of the
following:
December 31,
2002 2001
- -------------------------------------------------------------------------------
Telephone operations
Cable and wire 53.0% 52.5
Central office 31.3 31.9
General support 6.9 5.9
Information origination/termination equipment 0.6 0.7
Construction in progress 0.5 1.1
Other 0.1 0.1
- -------------------------------------------------------------------------------
92.4 92.2
- -------------------------------------------------------------------------------
Other operations 7.6 7.8
- -------------------------------------------------------------------------------
100.0% 100.0
===============================================================================
"Cable and wire" facilities consist primarily of buried cable and aerial
cable, poles, wire, conduit and drops. "Central office equipment" 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. "Information
origination/termination equipment" consists primarily of premise equipment
(private branch exchanges and telephones) for official company use.
"Construction in progress" includes property of the foregoing categories that
has not been placed in service because it is still under construction.
The properties of certain of the Company's telephone subsidiaries are
subject to mortgages securing the debt of such companies. The Company owns
substantially all of the central office buildings, local administrative
buildings, warehouses, and storage facilities used in its telephone operations.
The Company's property in its Other Operations consist primarily of (i)
corporate general support assets, (ii) the fiber network in Michigan and (iii)
equipment to provide competitive local exchange and Internet access services.
For further information on the location and type of the Company's properties,
see the descriptions of the Company's operations in Item 1.
Item 3. Legal Proceedings.
Following the Company's rejection of an acquisition proposal publicly
disclosed by Alltel Corporation on August 15, 2001, the Company and its
directors were named as defendants in Hannahs v. CenturyTel, Inc., et al., a
case filed August 20, 2001 in the Fourth Judicial District Court, State of
Louisiana, which asserted breach of fiduciary duty and related claims and sought
injunctive relief pertaining to the Company's rejection of the acquisition
proposal, as well as unspecified monetary damages. This case was dismissed
without prejudice on March 24, 2003. Two other similar shareholder suits were
previously either voluntarily dismissed or stayed and administratively closed.
On December 26, 2001, AT&T Corp. and one of its subsidiaries filed a
complaint in the U.S. District Court for the Western District of Washington
(Case No. CV0121512) seeking money damages against CenturyTel of the Northwest,
Inc. The plaintiffs claim, among other things, that CenturyTel of the Northwest,
Inc. has breached its obligations under a 1994 stock purchase agreement to
indemnify the plaintiffs for various environmental costs and damages relating to
properties sold to the plaintiffs under such 1994 agreement. The Company has
investigated this claim and believes it has numerous defenses available. If the
plaintiffs are successful in recovering any sums under this litigation, the
Company believes it is entitled to indemnification under agreements with third
parties.
On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued
by the Arkansas Public Service Commission ("APSC") in connection with the
Company's acquisition of its Arkansas LECs from Verizon in July 2000, and
remanded the case back to the APSC for further hearings. The Court took these
actions in response to challenges to the rates the Company has charged other
LECs for intrastate switched access service. On December 20, 2002, the APSC
approved the access rates established by the Company at the time of acquisition.
On January 29, 2003, AT&T filed with the APSC a petition for rehearing
related to this ruling.
From time to time, the Company is involved in other litigation incidental
to its business, including administrative hearings of state public utility
commissions relating primarily to rate making, actions relating to employee
claims, occasional grievance hearings before labor regulatory agencies and
miscellaneous third party tort actions. Currently, there are no material legal
proceedings of this nature.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning the Company's Executive Officers, set forth at Item
10 in Part III hereof, is incorporated in Part I of this Report by reference.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
CenturyTel's common stock is listed on the New York Stock Exchange and is
traded under the symbol CTL. The following table sets forth the high and low
sales prices, along with the quarterly dividends, for each of the quarters
indicated.
Sales prices
------------ Dividend per
High Low common share
---- --- ------------
2002:
First quarter $ 35.50 28.80 .0525
Second quarter $ 34.45 27.00 .0525
Third quarter $ 30.60 21.13 .0525
Fourth quarter $ 31.65 22.35 .0525
2001:
First quarter $ 39.88 25.45 .0500
Second quarter $ 30.42 26.90 .0500
Third quarter $ 36.50 28.30 .0500
Fourth quarter $ 35.79 30.25 .0500
Common stock dividends during 2002 and 2001 were paid each quarter. As of
February 28, 2003, there were approximately 4,890 stockholders of record of
CenturyTel's common stock.
For information regarding shares of CenturyTel common stock authorized
for issuance under CenturyTel's equity compensation plans, see Item 12.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial data
(from continuing operations) as of and for each of the years ended in the
five-year period ended December 31, 2002:
Selected Income Statement Data
Year ended December 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------
(Dollars, except per share amounts, and shares expressed in thousands)
Operating revenues
Telephone $ 1,733,592 1,505,733 1,253,969 1,126,112 1,077,343
Other 238,404 173,771 148,388 128,288 91,915
------------------------------------------------------------------
Total operating revenues $ 1,971,996 1,679,504 1,402,357 1,254,400 1,169,258
==================================================================
Operating income
Telephone $ 543,113 423,420 376,290 351,559 334,604
Other 43,568 22,098 31,258 22,580 16,083
Corporate overhead costs
allocable to discontinued
operations (11,275) (20,213) (21,411) (19,416) (14,957)
------------------------------------------------------------------
Total operating income $ 575,406 425,305 386,137 354,723 335,730
==================================================================
Nonrecurring gains and
losses (pre-tax) $ 3,709 33,043 - 11,284 28,085
==================================================================
Income from continuing operations $ 189,919 144,146 124,229 135,520 117,128
==================================================================
Basic earnings per share from
continuing operations $ 1.34 1.02 .88 .97 .85
==================================================================
Basic earnings per share from
continuing operations, as adjusted
for goodwill amortization $ 1.34 1.35 1.15 1.20 1.08
==================================================================
Diluted earnings per share from
continuing operations $ 1.33 1.01 .88 .96 .84
==================================================================
Diluted earnings per share from
continuing operations, as adjusted
for goodwill amortization $ 1.33 1.34 1.13 1.18 1.06
==================================================================
Dividends per common share $ .210 .200 .190 .180 .173
==================================================================
Average basic shares outstanding 141,613 140,743 140,069 138,848 137,010
==================================================================
Average diluted shares
outstanding 142,879 142,307 141,864 141,432 140,105
==================================================================
Selected Balance Sheet Data
December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(Dollars in thousands)
Net property, plant and
equipment $ 3,531,645 2,736,142 2,698,010 2,000,789 2,093,526
Goodwill $ 3,427,281 2,087,158 2,108,344 1,267,908 1,500,532
Total assets $ 7,770,408 6,318,684 6,393,290 4,705,407 4,935,455
Long-term debt $ 3,578,132 2,087,500 3,050,292 2,075,212 2,551,963
Stockholders' equity $ 3,088,004 2,337,380 2,032,079 1,847,992 1,531,482
------------------------------------------------------------------------
See Items 7 and 8 for a discussion of the Company's discontinued wireless
operations.
The following table presents certain selected consolidated operating data
as of the end of each of the years in the five-year period ended December 31,
2002:
Year ended December 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------
Telephone access lines 2,414,564 1,797,643 1,800,565 1,272,867 1,346,567
Long distance customers 648,797 465,872 363,307 303,722 226,730
---------------------------------------------------------------------
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. and its subsidiaries (the "Company") is a regional
integrated communications company engaged primarily in providing local exchange,
long distance, Internet access and data services to customers in 22 states.
On July 1, 2002, the Company acquired the local exchange telephone
operations of Verizon Communications, Inc. ("Verizon") in the state of Alabama
for approximately $1.022 billion cash. On August 31, 2002, the Company acquired
the local exchange telephone operations of Verizon in the state of Missouri for
approximately $1.179 billion cash. The results of operations for the Verizon
assets acquired are reflected in the Company's consolidated results of
operations subsequent to each respective acquisition. See "Acquisitions" below
and Note 2 of Notes to Consolidated Financial Statements for additional
information.
On August 1, 2002, the Company sold substantially all of its wireless
operations to an affiliate of ALLTEL Corporation ("Alltel") and certain other
purchasers in exchange for an aggregate of approximately $1.59 billion in cash.
As a result, the Company's wireless operations for the years ended December 31,
2002, 2001 and 2000 have been reflected as discontinued operations on the
Company's consolidated statements of income and cash flows. For further
information, see "Discontinued Operations" below.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related local exchange assets
in Arkansas, Missouri and Wisconsin from affiliates of Verizon for an aggregate
of approximately $1.5 billion cash. The operations of these acquired properties
are included in the Company's results of operations beginning on the respective
dates of acquisition. See "Acquisitions" below and Note 2 of Notes to
Consolidated Financial Statements for additional information.
During the three years ended December 31, 2002, the Company has acquired
and sold various other operations, the impact of which has not been material to
the financial position or results of operations of the Company.
The net income of the Company for 2002 was $801.6 million, compared to
$343.0 million during 2001 and $231.5 million during 2000. Diluted earnings per
share for 2002 was $5.61 compared to $2.41 in 2001 and $1.63 in 2000. Income
from continuing operations (and diluted earnings per share from continuing
operations) was $189.9 million ($1.33), $144.1 million ($1.01) and $124.2
million ($.88) for 2002, 2001 and 2000, respectively. In accordance with the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), amortization of goodwill ceased effective
January 1, 2002. Had the results of operations for the years ended December 31,
2001 and 2000 been subject to the provisions of SFAS 142, income from continuing
operations (and diluted earnings per share) would have been $190.5 million
($1.34) for 2001 and $160.8 million ($1.13) for 2000 and net income (and diluted
earnings per share) would have been $399.3 million ($2.81) for 2001 and $278.0
million ($1.96) for 2000.
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 543,113 423,420 376,290
Other 43,568 22,098 31,258
Corporate overhead costs allocable to discontinued
operations (11,275) (20,213) (21,411)
- ----------------------------------------------------------------------------------------------------------
575,406 425,305 386,137
Nonrecurring gains and losses, net 3,709 33,043 -
Interest expense (221,845) (225,523) (183,302)
Other income and expense (63,814) 32 4,936
Income tax expense (103,537) (88,711) (83,542)
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations 189,919 144,146 124,229
Discontinued operations, net of tax 611,705 198,885 107,245
- ---------------------------------------------------------------------------------------------------------
Net income $ 801,624 343,031 231,474
=========================================================================================================
Net income, as adjusted for goodwill amortization $ 801,624 399,297 278,029
=========================================================================================================
Basic earnings per share
From continuing operations $ 1.34 1.02 .88
From continuing operations, as adjusted for
goodwill amortization $ 1.34 1.35 1.15
From discontinued operations $ 4.32 1.41 .77
From discontinued operations, as adjusted for
goodwill amortization $ 4.32 1.48 .84
Basic earnings per share $ 5.66 2.43 1.65
Basic earnings per share, as adjusted for
goodwill amortization $ 5.66 2.83 1.98
Diluted earnings per share
From continuing operations $ 1.33 1.01 .88
From continuing operations, as adjusted for
goodwill amortization $ 1.33 1.34 1.13
From discontinued operations $ 4.28 1.40 .76
From discontinued operations, as adjusted for
goodwill amortization $ 4.28 1.47 .83
Diluted earnings per share $ 5.61 2.41 1.63
Diluted earnings per share, as adjusted for
goodwill amortization $ 5.61 2.81 1.96
Average basic shares outstanding 141,613 140,743 140,069
=========================================================================================================
Average diluted shares outstanding 142,879 142,307 141,864
=========================================================================================================
During the three years ended December 31, 2002, the Company has recorded
certain nonrecurring items. Net income (and diluted earnings per share)
excluding nonrecurring items for 2002, 2001 and 2000 was $325.0 million ($2.27),
$225.7 million ($1.59; $1.98, as adjusted), and $228.8 million ($1.61; $1.94, as
adjusted), respectively. The Company believes this presentation of results of
operations excluding nonrecurring items is useful to investors because it (i)
reflects management's view of recurring operations upon which management bases
financial, operational, compensation and planning decisions and (ii) prevents
investors from misconstruing the significance of financial data impacted by
nonrecurring events. The following reconciliation table shows how the amounts
of various line items reported under generally accepted accounting principles
were impacted by these nonrecurring items.
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, in thousands)
Operating income, as reported $ 575,406 425,305 386,137
Less nonrecurring items:
Reserve for uncollectible receivables,
primarily WorldCom (15,000) - -
Refund of access charges to interexchange carriers (7,645) - -
Other (1,929) (2,000) (504)
- ---------------------------------------------------------------------------------------------------------
Operating income, excluding nonrecurring items $ 599,980 427,305 386,641
=========================================================================================================
Nonrecurring gains and losses, net, as reported $ 3,709 33,043 -
Less nonrecurring items:
Gain on sale of assets 3,709 58,523 -
Write down of non-operating assets - (25,480) -
- ---------------------------------------------------------------------------------------------------------
Nonrecurring gains and losses, net, excluding
nonrecurring items $ - - -
=========================================================================================================
Other income and expense, as reported $ (63,814) 32 4,936
Less nonrecurring items:
Redemption premium on remarketable notes,
net of unamortized premium (59,949) - -
Write-off of nonoperating investment (781) - -
Costs associated with unsolicited takeover proposal (3,000) (6,000) -
Settlement of interest rate hedge contracts - - (7,947)
- ----------------------------------------------------------------------------------------------------------
Other income and expense, excluding nonrecurring items $ (84) 6,032 12,883
=========================================================================================================
Income tax expense, as reported $ (103,537) (88,711) (83,542)
Less: Tax effect of nonrecurring items 29,608 (8,666) 2,957
- ---------------------------------------------------------------------------------------------------------
Income tax expense, excluding nonrecurring items $ (133,145) (80,045) (86,499)
=========================================================================================================
Discontinued operations, net of tax, as reported $ 611,705 198,885 107,245
Less nonrecurring items:
Gain on sale of assets 805,628 185,133 20,593
Write down of wireless portion of billing system (30,491) - -
Write down of non-operating assets (1,702) (18,205) -
Proportionate share of nonrecurring charges
recorded by entities in which the Company
owns a minority interest - (10,054) (5,330)
Company's share of gain on sale of assets - 2,164 -
Minority interest effect of gain on sale of assets - (13) -
Tax effect of nonrecurring items (241,810) (58,032) (7,123)
- ----------------------------------------------------------------------------------------------------------
Income from discontinued operations, net of tax,
excluding nonrecurring items $ 80,080 97,892 99,105
=========================================================================================================
Net income, as reported $ 801,624 343,031 231,474
Less: Effect of nonrecurring items 476,638 117,370 2,646
- ---------------------------------------------------------------------------------------------------------
Net income, excluding nonrecurring items $ 324,986 225,661 228,828
=========================================================================================================
Basic earnings per share, as reported $ 5.66 2.43 1.65
Less: Effect of nonrecurring items 3.37 .83 .02
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share, excluding nonrecurring items $ 2.29 1.60 1.63
=========================================================================================================
Basic earnings per share, excluding nonrecurring items,
as adjusted $ 2.29 2.00 1.96
=========================================================================================================
Diluted earnings per share, as reported $ 5.61 2.41 1.63
Less: Effect of nonrecurring items 3.34 .82 .02
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share, excluding nonrecurring items $ 2.27 1.59 1.61
=========================================================================================================
Diluted earnings per share, excluding nonrecurring items,
as adjusted $ 2.27 1.98 1.94
=========================================================================================================
For additional information concerning the nonrecurring items described in
the above table, see "Telephone Operations", "Nonrecurring Gains and Losses,
Net", "Other Income and Expense", and "Discontinued Operations".
Contributions to operating revenues and operating income by the Company's
telephone and other operations for each of the years in the three-year period
ended December 31, 2002 were as follows:
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------
Operating revenues
Telephone operations 87.9 % 89.7 89.4
Other operations 12.1 % 10.3 10.6
Operating income
Telephone operations 94.4 % 99.6 97.4
Other operations 7.6 % 5.2 8.1
Corporate overhead costs allocable
to discontinued operations (2.0)% (4.8) (5.5)
- ------------------------------------------------------------------------------
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. Such forward-looking statements are subject to uncertainties
that could cause the Company's actual results to differ materially from such
statements. Such uncertainties include but are not limited to: the Company's
ability to effectively manage its growth, including integrating newly-acquired
businesses into the Company's operations, hiring adequate numbers of qualified
staff and successfully upgrading its billing and other information systems; the
risks inherent in rapid technological change; the effects of ongoing changes in
the regulation of the communications industry; the effects of greater than
anticipated competition in the Company's markets; possible changes in the demand
for, or pricing of, the Company's products and services; the Company's ability
to successfully introduce new product or service offerings on a timely and
cost-effective basis; the Company's ability to collect its receivables from
financially troubled communications companies; and the effects of more general
factors such as changes in interest rates, in general market or economic
conditions or in legislation, regulation or public policy. These and other
uncertainties related to the business are described in greater detail in Item 1
included herein. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to update any of its forward-looking statements
for any reason.
TELEPHONE OPERATIONS
The Company conducts its telephone operations in rural, suburban and small
urban communities in 22 states. As of December 31, 2002, approximately 91% of
the Company's 2.4 million access lines were in Wisconsin, Missouri, Alabama,
Arkansas, Washington, Michigan, Louisiana, Colorado, Ohio and Oregon. The
operating revenues, expenses and income of the Company's telephone operations
for 2002, 2001 and 2000 are summarized below.
Year ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 604,580 491,529 408,538
Network access 972,303 874,458 727,797
Other 156,709 139,746 117,634
- -------------------------------------------------------------------------------
1,733,592 1,505,733 1,253,969
- -------------------------------------------------------------------------------
Operating expenses
Plant operations 433,187 380,466 290,062
Customer operations 148,502 117,080 105,950
Corporate and other 211,924 186,483 163,761
Depreciation and amortization 396,866 398,284 317,906
- -------------------------------------------------------------------------------
1,190,479 1,082,313 877,679
- -------------------------------------------------------------------------------
Operating income $ 543,113 423,420 376,290
===============================================================================
Local service revenues. Local service revenues are derived from the
monthly provision of local exchange telephone services in the Company's service
areas. Of the $113.1 million (23.0%) increase in local service revenues in 2002,
$102.8 million was due to the acquisition of the Verizon properties in 2002. The
remaining $10.3 million increase was primarily due to a $7.6 million increase
resulting from the provision of custom calling features to more customers and a
$1.8 million increase due to increased rates in certain jurisdictions. Of the
$83.0 million (20.3%) increase in local service revenues in 2001, $73.7 million
was due to the acquisition of the Verizon properties in 2000. The remaining $9.3
million increase was due to a $6.9 million increase due to increased rates in
certain jurisdictions and an increase in the number of customer access lines in
incumbent markets during most of 2001 and a $3.9 million increase due to the
increased provision of custom calling features. Internal access lines declined
1.1% and 0.2% during 2002 and 2001, respectively. Internal access line growth
during 2000 was 2.8%. The Company believes the decline in the number of access
lines during 2002 and 2001 is primarily due to declines in second lines, soft
general economic conditions in the Company's markets and the displacement of
traditional wireline telephone services by other competitive service providers.
Even when the economy recovers, the Company believes that any rebound in access
lines will be limited by continued declines in second lines caused primarily by
digital subscriber line substitution and the impact of competitive services.
Based on current conditions, the Company expects to incur a decline in access
lines of 1 to 2% for 2003.
Network access revenues. Network access revenues are primarily derived
from charges to long distance companies and other customers for access to the
Company's local exchange carrier ("LEC") networks in connection with the
completion of interstate or intrastate long distance telephone calls. Certain of
the Company's interstate network access revenues are based on tariffed access
charges filed directly with the Federal Communications Commission ("FCC"); the
remainder of such revenues are derived under revenue sharing arrangements with
other 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 increased $97.8 million (11.2%) in 2002 and $146.7
million (20.2%) in 2001 due to the following factors:
2002 2001
increase increase
(decrease) (decrease)
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Acquisitions of Verizon properties in third quarter 2002 $ 98,014 -
Acquisitions of Verizon properties in third quarter 2000 - 139,866
Increased recovery from the federal Universal Service Fund ("USF") 13,832 8,507
One-time refund of access charges to interexchange carriers (7,645) -
Intrastate revenues due to decreased minutes of use and decreased
access rates in certain states (27,740) (3,048)
Partial recovery of increased operating costs through
revenue sharing arrangements with other telephone companies,
increased recovery from state support funds and return on rate base 9,756 16,252
Rate changes in certain jurisdictions 5,600 (916)
Revision of prior year revenue settlement agreements 1,912 (16,876)
Other, net 4,116 2,876
- --------------------------------------------------------------------------------------------------
$ 97,845 146,661
==================================================================================================
In 2002 the Company incurred a reduction in its intrastate revenues
(exclusive of the properties acquired from Verizon in 2002) of approximately
$27.7 million compared to 2001 primarily due to (i) a reduction in intrastate
minutes (partially due to the displacement of minutes by wireless and instant
messaging services) and (ii) decreased access rates in certain states. The
Company believes such trend of decreased intrastate minutes will continue in
2003. Although the magnitude of such decrease cannot be precisely estimated, the
Company believes such decrease will be less than that incurred in 2002.
Other revenues. Other revenues include revenues related to (i) leasing,
selling, installing, maintaining and repairing customer premise
telecommunications equipment and wiring ("CPE services"), (ii) providing billing
and collection services for long distance carriers and (iii) participating in
the publication of local directories. Other revenues increased $17.0 million
(12.1%) in 2002, of which $18.2 million was due to the properties acquired from
Verizon in 2002. Other revenues increased $22.1 million in 2001, primarily due
to a $20.5 million increase attributable to revenues contributed by the
properties acquired from Verizon in 2000. The remainder of the increase in 2001
was due primarily to a $7.0 million increase in revenues from CPE services
(primarily due to an increase in rates) which was partially offset by a $5.0
million decrease in billing and collection revenues.
Operating expenses. Plant operations expenses during 2002 and 2001
increased $52.7 million (13.9%) and $90.4 million (31.2%), respectively. Of the
$52.7 million increase in 2002, $58.4 million was attributable to the properties
acquired from Verizon in 2002 and $13.8 million related to increases in salaries
and benefits. Such increases were partially offset by a $16.4 million decrease
in access expenses primarily as a result of changes in certain optional calling
plans in Arkansas approved in late 2001 and a $3.0 million decrease in repairs
and maintenance expense. Of the $90.4 million increase in 2001, $87.3 million
was attributable to the properties acquired from Verizon in 2000. The remaining
$3.1 million increase was primarily due to a $6.1 million increase in salaries
and benefits, a $2.7 million increase in network operations expenses and a $2.6
million increase in digital subscriber line ("DSL") expenses. Such increases
were substantially offset by a $9.9 million decrease in engineering expenses.
Customer operations, corporate and other expenses increased $56.9 million
(18.7%) in 2002 and $33.9 million (12.6%) in 2001. Of the $56.9 million increase
in 2002, $47.2 million related to the Verizon acquisitions in 2002. The
remaining increase of $9.7 million was due primarily to a $7.7 million increase
in salaries and benefits, a $4.6 million increase in customer service expenses
and a $3.9 million increase in the provision for doubtful accounts. Such
increases were partially offset by a $5.0 million decrease in operating taxes
and a $1.4 million decrease in expenses related to the provision of CPE
services. The Company recorded a provision for uncollectible receivables for
telecommunications carriers, primarily related to the bankruptcy of WorldCom,
Inc., in the amount of $15.0 million during 2002. Such increase was partially
offset by an $11.1 million reduction in the provision for uncollectible
receivables for non-carrier customers. Of the $33.9 million increase in customer
operations, corporate and other expenses in 2001, $42.5 million related to the
Verizon properties acquired in 2000. The remaining $8.6 million decrease in 2001
was primarily due to a $4.3 million decrease in the provision for uncollectible
receivables and a $3.1 million decrease in operating taxes.
Depreciation and amortization decreased $1.4 million (0.4%) in 2002 and
increased $80.4 million (25.3%) in 2001. Of the $1.4 million decrease in 2002,
$58.0 million related to ceasing amortization of goodwill effective January 1,
2002 in accordance with the provisions of SFAS 142. Such decrease was
substantially offset by $38.0 million of depreciation and amortization related
to the properties acquired from Verizon in 2002 and a $21.8 m