UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7784
CENTURYTEL, INC.
(Exact name of Registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 CenturyTel Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (318) 388-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
Berlin Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Berlin Stock Exchange
Corporate Units issued May 2002 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Stock Options
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark if the Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes [X] No[ ]
The aggregate market value of voting stock held by non-affiliates (affiliates
being for these purposes only directors, executive officers and holders of more
than five percent of the Company's outstanding voting securities) was $4.0
billion as of June 30, 2004. As of February 28, 2005, there were 132,644,803
shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be furnished in connection with
the 2005 annual meeting of shareholders are incorporated by reference in Part
III of this Report.
PART I
Item 1. Business
General. CenturyTel, Inc. ("CenturyTel") and its subsidiaries (the
"Company") is an integrated communications company engaged primarily in
providing local exchange, long distance, Internet access and broadband services.
The Company strives to maintain its customer relationships by, among other
things, bundling its service offerings to provide its customers with a complete
offering of integrated communications services. All of the Company's operations
are conducted within the continental United States.
At December 31, 2004, the Company's local exchange telephone subsidiaries
operated approximately 2.3 million telephone access lines, primarily in rural
areas and small to mid-size cities in 22 states, with over 70% of these lines
located in Wisconsin, Missouri, Alabama, Arkansas and Washington. According to
published sources, the Company is the eighth largest local exchange telephone
company in the United States based on the number of access lines served.
The Company also provides competitive local exchange carrier, security
monitoring, and other communications and business information services in
certain local and regional markets.
The Company has recently entered into agreements to provide co-branded
satellite television service and to resell wireless service as part of its
bundled product and service offerings, but these arrangements are not expected
to contribute material revenues in the near term. The Company anticipates such
offerings will dilute its earnings for 2005 by approximately $.04 to $.07 per
share.
For information on the amount of revenue derived by the Company's various
lines of services, see "Operations-Services" below and Item 7 of this report.
Recent acquisitions. In June 2003, the Company acquired the assets of
Digital Teleport, Inc., a regional communications company providing wholesale
data transport services to other communications carriers over its fiber optic
network located in Missouri, Arkansas, Oklahoma and Kansas, for $39.4 million
cash. In addition, in December 2003, the Company acquired additional fiber
transport assets in Arkansas, Missouri and Illinois from Level 3 Communications,
Inc. for approximately $15.8 million cash. For additional information, see
"Operations - Services - Fiber Transport and CLEC."
On August 31, 2002, the Company purchased assets utilized in serving
approximately 350,000 telephone access lines in the state of Missouri from
Verizon Communications, Inc. ("Verizon") for approximately $1.179 billion cash.
On July 1, 2002, the Company purchased assets utilized in serving approximately
300,000 telephone access lines in the state of Alabama from Verizon for
approximately $1.022 billion cash. The assets purchased in these transactions
included (i) the franchises authorizing the provision of local telephone
service, (ii) related property and equipment comprising Verizon's local exchange
operations in predominantly rural markets throughout Alabama and Missouri and
(iii) Verizon's assets used to provide digital subscriber line ("DSL") and other
high speed data services within the purchased exchanges. The acquired assets did
not include Verizon's cellular, personal communications services ("PCS"), long
distance, dial-up Internet, or directory publishing operations in these areas.
On February 28, 2002, the Company purchased from KMC Telecom Holdings,
Inc. ("KMC") its fiber network and customer base operations in Monroe and
Shreveport, Louisiana, which allows the Company to offer broadband and
competitive local exchange services to customers in these markets.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired assets utilized to provide local exchange telephone service to over
490,000 telephone access lines from Verizon in four separate transactions for
approximately $1.5 billion in cash. Under these transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related assets in Arkansas for approximately $842
million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra")
purchased approximately 127,000 telephone access lines and related
assets in Missouri for approximately $297 million cash. At closing, the
Company made a preferred equity investment in Spectra of approximately
$55 million (which represented a 57.1% interest) and financed
substantially all of the remainder of the purchase price. In the first
quarter of 2001, the Company purchased an additional 18.6% interest in
Spectra for $47.1 million. In the fourth quarter of 2003 and the first
quarter of 2004, the Company purchased the remaining 24.3% interest in
Spectra for an aggregate of $34.0 million in cash.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related assets in Wisconsin for approximately
$197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related assets
in Wisconsin for approximately $172 million in cash. The Company owns
89% of TelUSA, which was organized to acquire and operate these
Wisconsin properties. At closing, the Company made an equity investment
in TelUSA of approximately $37.8 million and financed substantially all
of the remainder of the purchase price.
In August 2000, the Company acquired the assets of CSW Net, Inc., a
regional Internet service provider that offers dial-up and dedicated Internet
access, and web site and domain hosting to more than 18,000 customers in 28
communities in Arkansas.
In February 2005, the Company signed a definitive asset purchase agreement
to acquire metro fiber networks in 16 markets from KMC for $65 million cash,
subject to purchase price adjustments. The networks to be acquired include
almost 1,000 lit route miles of fiber optic cable located in small to medium
cities in 11 states. The Company expects to complete this purchase in mid-2005,
subject to the receipt of various consents, regulatory approvals and various
other closing conditions.
The Company continually evaluates the possibility of acquiring additional
communications assets in exchange for cash, securities or both, and at any given
time may be engaged in discussions or negotiations regarding additional
acquisitions. The Company generally does not announce its acquisitions or
dispositions until it has entered into a preliminary or definitive agreement.
Although the Company's primary focus will continue to be on acquiring interests
that are proximate to its properties or that serve a customer base large enough
for the Company to operate efficiently, other communications interests may also
be acquired and these acquisitions could have a material impact upon the
Company.
Recent Dispositions. On August 1, 2002, the Company sold substantially all
of its wireless operations principally to an affiliate of ALLTEL Corporation
("Alltel") for an aggregate of approximately $1.59 billion in cash. In
connection with this transaction, the Company divested its (i) interests in its
majority-owned and operated cellular systems, which at June 30, 2002 served
approximately 783,000 customers and had access to approximately 7.8 million pops
(the estimated population of licensed cellular telephone markets multiplied by
the Company's proportionate equity interest in the licensed operators thereof),
(ii) minority cellular equity interests representing approximately 1.8 million
pops at June 30, 2002, and (iii) licenses to provide PCS covering 1.3 million
pops in Wisconsin and Iowa. As a result, the Company's wireless operations are
reflected as discontinued operations in the Company's accompanying consolidated
financial statements.
In the second quarter of 2001, the Company sold to Leap Wireless
International, Inc. 30 PCS operating licenses for an aggregate of $205 million.
The Company received approximately $118 million of the purchase price in cash at
closing and collected the remainder in installments through the fourth quarter
of 2001.
Where to find additional information. The Company makes available free of
charge on its website (www.centurytel.com) filings made with the Securities and
Exchange Commission ("SEC") on Forms 10-K, 10-Q and 8-K as soon as reasonably
practicable after such filings are made with the SEC.
The Company also makes available free of charge on its website its
Corporate Governance Guidelines, its Corporate Compliance Program and the
charters of its audit, compensation, risk evaluation, and nominating and
corporate governance committees. The Company will furnish printed copies of
these materials upon the request of any shareholder.
Other. As of December 31, 2004, the Company had approximately 6,800
employees, of which approximately 1,800 were members of 13 different bargaining
units represented by the International Brotherhood of Electrical Workers and the
Communications Workers of America. In 2005, the contracts governing
approximately 71% of the union workforce lapse and are scheduled to be
renegotiated. The Company believes that relations with its employees continue to
be generally good.
CenturyTel was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous 15 to
20 years. CenturyTel's principal executive offices are located at 100 CenturyTel
Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.
OPERATIONS
According to published sources, the Company is the eighth largest local
exchange telephone company in the United States, based on the approximately 2.3
million access lines it served at December 31, 2004. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominantly rural areas and small to mid-sized
cities in 22 states. The following table sets forth certain information with
respect to the Company's access lines as of December 31, 2004 and 2003.
December 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
- --------------------------------------------------------------------------------
Wisconsin (1) 466,021 20% 478,134 20%
Missouri 458,724 20 472,884 20
Alabama 275,093 12 283,501 12
Arkansas 256,130 11 264,787 11
Washington 182,990 8 186,329 8
Michigan 108,030 5 111,104 5
Louisiana 101,353 4 103,726 4
Colorado 94,139 4 95,726 4
Ohio 80,287 3 82,995 3
Oregon 74,020 3 75,530 3
Montana 64,145 3 64,863 3
Texas 43,697 2 46,397 2
Minnesota 30,046 1 30,469 1
Tennessee 26,728 1 27,084 1
Mississippi 24,137 1 24,420 1
New Mexico 6,428 * 6,512 *
Wyoming 5,905 * 5,669 *
Idaho 5,807 * 5,974 *
Indiana 5,346 * 5,401 *
Iowa 2,053 * 2,082 *
Arizona 1,995 * 2,000 *
Nevada 552 * 531 *
- --------------------------------------------------------------------------------
2,313,626 100% 2,376,118 100%
================================================================================
* Represents less than 1%.
(1) As of December 31, 2004 and 2003, approximately 57,700 and 59,130,
respectively, of these lines were owned and operated by CenturyTel's
89%-owned affiliate.
As indicated in the following table, the Company has experienced growth in
its operations over the past five years, a substantial portion of which was
attributable to the third quarter 2002 and third quarter 2000 acquisitions of
telephone properties from Verizon and the internal growth of its long distance
and Internet access businesses.
Year ended or as of December 31,
- ------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Access lines 2,313,626 2,376,118 2,414,564 1,797,643 1,800,565
% Residential 75% 76 76 76 76
% Business 25% 24 24 24 24
Long distance lines 1,067,817 931,761 798,697 564,851 433,846
% Residential 81% 80 80 79 79
% Business 19% 20 20 21 21
Internet customers 262,085 215,548 179,440 144,817 108,700
% Dial-up service 49% 65 73 84 95
% Retail DSL service 51% 35 27 16 5
Operating revenues $ 2,407,372 2,367,610 1,971,996 1,679,504 1,402,357
Capital expenditures $ 385,316 377,939 386,267 435,515 391,069
- ------------------------------------------------------------------------------------------
As discussed further below, the Company's access lines (exclusive of
acquisitions) have declined in recent years, and are expected to continue to
decline. To offset these declines, the Company hopes to expand its telephone
operations by (i) acquiring additional telephone properties, (ii) providing
service to new customers, (iii) increasing network usage, (iv) further
penetrating its existing customer base with existing services and (v) providing
additional services which may be made possible by advances in technology,
improvements in the Company's infrastructure and the bundling of integrated
services. See "Services" and "Regulation and Competition."
Services
The Company derives revenue from providing (i) local exchange telephone
services, (ii) network access services, (iii) long distance services, (iv) data
services, which includes both dial-up and DSL Internet services, as well as
special access and private line services, (v) fiber transport, competitive local
exchange and security monitoring services and (vi) other related services. The
following table reflects the percentage of operating revenues derived from these
respective services:
2004 2003 2002
- ----------------------------------------------------------------------------
Local service 29.7% 30.1 29.0
Network access 40.1 42.3 44.9
Long distance 7.8 7.3 7.4
Data 11.5 10.4 9.1
Fiber transport and CLEC 3.1 1.8 1.1
Other 7.8 8.1 8.5
- ----------------------------------------------------------------------------
100.0% 100.0 100.0
============================================================================
Local service. Local service revenues are derived from providing local
exchange telephone services in the Company's service areas, including basic
dial-tone service through the Company's regular switched network. Access lines
declined 2.6% in 2004, 1.6% in 2003 and 1.1% in 2002 (exclusive of the 2002
Verizon acquisitions). The Company believes these declines in the number of
access lines were primarily due to the displacement of traditional wireline
telephone services by other competitive services, including the Company's DSL
product offering. Based on current conditions, the Company expects access lines
to decline between 2.5 and 3.5% for 2005.
The use of digital switches, high-speed data circuits and related software
has been an important component of the Company's growth strategy because it
allows the Company to offer enhanced voice services (such as call forwarding,
conference calling, caller identification, selective call ringing and call
waiting) and data services (such as data private line, digital subscriber line,
frame relay and local area/wide area networks) and to thereby increase
utilization of existing access lines. In 2004 the Company continued to expand
the availability of enhanced services offered in certain service areas.
Network access. Network access revenues primarily relate to (i) services
provided by the Company to long distance carriers, wireless carriers and other
carriers and customers in connection with the use of the Company's facilities to
originate and terminate their interstate and intrastate voice and data
transmissions and (ii) the receipt of universal support funds which allows the
Company to recover a portion of its costs under federal and state cost recovery
mechanisms (see - "Regulation and Competition - High-cost support funds, revenue
sharing arrangements and related matters" below). Certain of the Company's
interstate network access revenues are based on tariffed access charges
prescribed by the Federal Communications Commission ("FCC"); the remainder of
such revenues are derived under revenue sharing arrangements with other local
exchange carriers ("LECs") administered by the National Exchange Carrier
Association ("NECA"), a quasi-governmental non-profit organization formed by the
FCC in 1983 for such purposes.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on tariffed access charges, which are subject to state regulatory
commission approval. Additionally, certain of the Company's intrastate network
access revenues, along with intrastate and intra-LATA (Local Access and
Transport Areas) long distance revenues, are derived through revenue sharing
arrangements with other LECs.
The Telecommunications Act of 1996 allows local exchange carriers to file
access tariffs on a streamlined basis and, if certain criteria are met, deems
those tariffs lawful. Tariffs that have been "deemed lawful" in effect nullify
an interexchange carrier's ability to seek refunds should the earnings from the
tariffs ultimately result in earnings above the authorized rate of return
prescribed by the FCC. Certain of the Company's telephone subsidiaries file
interstate tariffs directly with the FCC using this streamlined filing approach.
As of December 31, 2004, the amount of the Company's earnings in excess of the
authorized rate of return reflected as a liability on the balance sheet for the
combined 2001/2002 and 2003/2004 monitoring periods aggregated approximately
$63 million. The settlement period related to (i) the 2001/2002 monitoring
period lapses on September 30, 2005 and (ii) the 2003/2004 monitoring period
lapses on September 30, 2007. The Company will continue to monitor the legal
status of any pending or future proceedings that could impact its entitlement to
these funds, and may recognize as revenue some or all of the over-earnings at
the end of the settlement period or as the legal status becomes more certain.
Long distance. Long distance revenues relate to the provision of retail
long distance services which the Company began marketing to its local exchange
customers in 1996. At December 31, 2004, the Company provided long distance
services to nearly 1.1 million lines. The Company anticipates that most of its
long distance service revenues will be provided as part of an integrated bundle
with the Company's other service offerings, including its local exchange
telephone service offering.
Data. Data revenues include revenues primarily related to the provision of
Internet access services (both dial-up and DSL services) and the provision of
data transmission services over special circuits and private lines. The Company
began offering traditional dial-up Internet access services to its telephone
customers in 1995. In late 1999, the Company began offering DSL Internet access
services, a high-speed premium-priced data service. As of December 31, 2004,
approximately 71% of the Company's access lines were DSL-enabled. At December
31, 2004, the Company provided Internet access services to over 262,000
customers, approximately 128,500 of which received traditional dial-up services
and approximately 133,500 of which received retail DSL services. During 2004,
the Company added over 57,000 retail DSL connections.
Fiber transport and CLEC. Fiber transport and CLEC revenues include
revenues from the Company's fiber transport, competitive local exchange carrier
("CLEC") and security monitoring businesses.
In late 2000, the Company began offering competitive local exchange
telephone services as part of a bundled service offering to small to
medium-sized businesses in Monroe and Shreveport, Louisiana. On February 28,
2002, the Company purchased the fiber network and customer base of KMC's
operations in Monroe and Shreveport, Louisiana, which allowed the Company to
offer broadband and competitive local exchange services to customers in these
markets.
During the second quarter of 2001, the Company began selling capacity to
other carriers and businesses over a 700-mile fiber optic ring that the Company
constructed in southern and central Michigan. In June 2003, the Company acquired
the assets of Digital Teleport, Inc., a regional communications company
providing wholesale data transport services to other communications carriers
over its fiber optic network located in Missouri, Arkansas, Oklahoma and Kansas,
for $39.4 million cash. The Company has used the network to sell services to new
and existing customers and to reduce the Company's reliance on third party
transport providers. In addition, in December 2003, the Company acquired
additional fiber transport assets in Arkansas, Missouri and Illinois from Level
3 Communications, Inc. for approximately $15.8 million cash to provide services
similar to those described above. The Company operates its fiber transport
assets under the name LightCore. As of December 31, 2004, LightCore's network
encompassed more than 8,700 route miles of lit fiber in the central United
States. For a description of a pending acquisition of additional network assets,
see "-Recent Acquisitions" above.
The Company offers 24-hour burglary and fire monitoring services to
approximately 8,700 customers in select markets in Louisiana, Arkansas,
Mississippi, Texas and Ohio.
Other. Other revenues include revenues related to (i) leasing, selling,
installing and maintaining customer premise telecommunications equipment and
wiring, (ii) providing billing and collection services for third parties and
(iii) participating in the publication of local directories. The Company also
provides printing, database management and direct mail services and cable
television services.
Certain large communications companies for which the Company currently
provides billing and collection services continue to indicate their desire to
reduce their billing and collection expenses, which has resulted and may
continue to result in reductions of the Company's billing and collection
revenues.
From time to time, the Company also makes investments in other domestic or
foreign communications companies, the most significant of which is an interest
in a start-up satellite service company.
For further information on regulatory, technological and competitive
changes that could impact the Company's revenues, see "-Regulation and
Competition" and "Special Considerations."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") or the Rural Telephone Bank
("RTB"), both of which are federal agencies that have historically provided
long-term financing to telephone companies at relatively attractive interest
rates. Approximately 23% of the Company's telephone plant is pledged to secure
obligations of the Company's telephone subsidiaries to the RUS and RTB. For
additional information regarding the Company's financing, see the Company's
consolidated financial statements included in Item 8 herein.
Regulation and Competition Relating to Incumbent Local Exchange Operations
Traditionally, LECs operated as regulated monopolies having the exclusive
right and responsibility to provide local telephone services. (These LECs are
sometimes referred to below as "incumbent LECs" or "ILECs"). Consequently, most
of the Company's intrastate telephone operations have traditionally been
regulated extensively by various state regulatory agencies (generally called
public service commissions or public utility commissions) and its interstate
operations have been regulated by the FCC. As discussed in greater detail below,
passage of the Telecommunications Act of 1996 (the "1996 Act"), coupled with
state legislative and regulatory initiatives and technological changes,
fundamentally altered the telephone industry by reducing the regulation of LECs
and attracting a substantial increase in the number of competitors and capital
invested in existing and new services. CenturyTel anticipates that these trends
towards reduced regulation and increased competition will continue.
State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions which typically have the power to grant and revoke
franchises authorizing companies to provide communications services. Most
commissions have traditionally regulated pricing through "rate of return"
regulation that focuses on authorized levels of earnings by LECs. Most of these
commissions also (i) regulate the purchase and sale of LECs, (ii) prescribe
depreciation rates and certain accounting procedures, (iii) oversee
implementation of several federal telecommunications laws and (iv) regulate
various other matters, including certain service standards and operating
procedures.
In recent years, state legislatures and regulatory commissions in most of
the 22 states in which the Company operates have either reduced the regulation
of LECs or have announced their intention to do so, and it is expected that this
trend will continue. Wisconsin, Missouri, Alabama, Arkansas and several other
states have implemented laws or rulings which require or permit LECs to opt out
of "rate of return" regulation in exchange for agreeing to alternative forms of
regulation which typically permit the LEC greater freedom to establish local
service rates in exchange for agreeing not to charge rates in excess of
specified caps. As discussed further below, subsidiaries operating over 60% of
the Company's access lines in various states have agreed to be governed by
alternative regulation plans, and the Company continues to explore its options
for similar treatment in other states. The Company believes that reduced
regulatory oversight of certain of the Company's telephone operations may allow
the Company to offer new and competitive services faster than under the
traditional regulatory process. For a discussion of legislative, regulatory and
technological changes that have introduced competition into the local exchange
industry, see "-Developments Affecting Competition."
Alternative regulation plans govern some or all of the access lines
operated by the Company in Wisconsin, Missouri, Alabama and Arkansas, which are
the Company's four largest state markets. The following summary describes the
alternative regulation plans applicable to the Company in these states.
o Approximately 70% of the Company's Wisconsin access lines are regulated
under various alternative regulation plans. Each of these alternative regulation
plans has a five-year term and permits the Company to adjust local rates within
specified parameters if it meets certain quality-of-service and
infrastructure-development commitments. These plans also include initiatives
designed to promote competition. The Company's Wisconsin access lines acquired
in mid-2000 continue to be regulated under "rate of return" regulation.
o All of the Company's Missouri LECs are regulated under a price-cap
regulation plan (effective in 2002) whereby basic service rates are adjusted
annually based on an inflation-based factor; non-basic services may be increased
up to 8% annually. The plan also allows LECs to rebalance local basic service
rates up to four times in the first four years of such regulation as a result of
access rate or toll reductions. Based on its annual filing effective September
2004, the Company estimates a $2.2 million annual reduction in revenues as a
result of recent declines in the inflation-based factor. If the inflation-based
factor continues to decline, the Company's revenues will continue to be
negatively impacted.
o Since 1995, the Company's Alabama telephone properties acquired from
Verizon in 2002 have been subject to an alternative regulation plan. Under this
plan, local rates were frozen initially for five years, after which time such
rates could be raised by an amount equal to consumer price index increases less
1%; non-basic service rates could be increased up to 10% per year. The Alabama
alternative regulation plan will be replaced in 2005 by the Alabama
Telecommunications Regulation Plan. Under this plan, residential and business
basic local service rates will remain at existing levels for two years, after
which time rates can be increased up to five percent per year up to a maximum
capped level. Rates for all other retail services may be adjusted depending on
the tier designation established under the plan.
o The Company's Arkansas LECs, excluding the properties acquired from
Verizon in 2000, are regulated under an alternative regulation plan adopted in
1997, which initially froze basic local and access rates for three years, after
which time such rates can be adjusted based on an inflation-based factor. Other
local rates can be adjusted without commission approval; however, such rates are
subject to commission review if certain petition criteria are met.
Notwithstanding the movement toward alternative regulation, LECs operating
approximately 38% of the Company's total access lines continue to be subject to
"rate of return" regulation for intrastate purposes. These LECs remain subject
to the powers of state regulatory commissions to conduct earnings reviews and
adjust service rates, either of which could lead to revenue reductions.
FCC regulation. The FCC regulates interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other communications
companies by the Company for use of its network in connection with the
origination and termination of interstate voice and data transmissions.
Additionally, the FCC has prescribed certain rules and regulations for telephone
companies, including a uniform system of accounts and rules regarding the
separation of costs between jurisdictions and, ultimately, between interstate
services. LECs must obtain FCC approval to use certain radio frequencies, or to
transfer control of any such licenses.
Effective January 1, 1991, the FCC adopted price-cap regulation
relating to interstate access rates for the Regional Bell Operating Companies.
All other LECs may elect to be subject to price-cap regulation. Under price-cap
regulation, limits imposed on a company's interstate rates are adjusted
periodically to reflect inflation, productivity improvement and changes in
certain non-controllable costs. The Company has not elected price-cap regulation
for its incumbent operations. However, the properties acquired from Verizon in
2002 have continued to operate under price-cap regulation based upon a waiver
from rules that historically required a purchaser of price-cap properties to
convert all of its properties to price-cap regulation. In February 2004, the FCC
amended its rules to permit purchasers of price-cap regulated properties to
either retain price-cap regulation for the acquired properties or migrate such
properties to rate-of-return regulation.
In 2001, the FCC modified its interstate access charge rules and
universal service support system for rate of return LECs. This order, among
other things, (i) increased the caps on the subscriber line charges ("SLC") to
the levels paid by most subscribers nationwide; (ii) allowed limited SLC
deaveraging, which enhanced the competitiveness of rate of return carriers by
giving them pricing flexibility; (iii) lowered per minute rates collected for
federal access charges; (iv) created a new explicit universal service support
mechanism that replaced other implicit support mechanisms in a manner designed
to ensure that rate structure changes do not affect the overall recovery of
interstate access costs by rate of return carriers serving high cost areas and
(v) preserved the historic 11.25% authorized interstate return rate for rate of
return LECs. The effect of this order on the Company was revenue neutral for
interstate purposes, but did result in a reduction in intrastate revenues in
Arkansas and Ohio (where intrastate access rates must mirror the interstate
access rates).
In 2003, the FCC opened a broad intercarrier compensation proceeding
with the ultimate goal of creating a uniform mechanism to be used by the entire
telecommunications industry for payments between carriers originating,
terminating, carrying or delivering telecommunications traffic. The FCC has
received intercarrier compensation proposals from several industry groups, and
on February 10, 2005 solicited comments on all proposals previously submitted to
it. The Company is involved in this proceeding and will continue to monitor the
implications of these plans to its operations.
As discussed further below, certain providers of competitive
communications services are currently not required to compensate ILECs for the
use of their networks.
All forms of federal support available to ILECs are currently available
to any local competitor that qualifies as an "eligible telecommunications
carrier." This support could encourage additional competitors to enter the
Company's high-cost service areas, and, as discussed further below, place
financial pressure on the FCC's support programs.
Universal service support funds, revenue sharing arrangements and related
matters. A significant number of the Company's telephone subsidiaries recover a
portion of their costs from programs administered by the federal Universal
Service Fund (the "USF") and from similar state "universal support" mechanisms.
Disbursements from these programs traditionally have allowed LECs serving small
communities and rural areas to provide communications services on terms and at
prices reasonably comparable to those available in urban areas. The aggregate
amount of revenues received from such support programs was $365.2 million in
2004 (or 15.2% of 2004 consolidated revenues) and $370.5 million in 2003 (or
15.6% of 2003 consolidated revenues). Included in such amounts are receipts from
(i) the High Cost Loop support program of $187.9 million for 2004 and $199.2
million for 2003 and (ii) various state support programs of $35.8 million for
2004 and $33.3 million for 2003.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that provides relatively predictable
levels of support to rural local exchange carriers, including substantially all
of the Company's local exchange carriers. Based on recent FCC filings, the
Company anticipates its 2005 revenues from the USF High Cost Loop support
program will be approximately $10-15 million lower than 2004 levels due to
increases in the nationwide average cost per loop factor used to allocate funds
among all recipients.
Wireless and other competitive service providers continue to seek
eligible telecommunications carrier ("ETC") status in order to be eligible to
receive USF support, which, coupled with changes in usage of telecommunications
services, have placed stresses on the USF's funding mechanism. These
developments have placed additional financial pressure on the amount of money
that is necessary and available to provide support to all eligible service
providers, including support payments the Company receives from the High Cost
Loop support program. As a result of the continued increases in the nationwide
average cost per loop factor (caused by limited growth in the size of the High
Cost Loop support program and increases in requests for support from the USF),
the Company believes the aggregate level of payments it receives from the USF
will continue to decline in the near term under the FCC's current rules.
Recent FCC-mandated changes in the administration of the universal service
support programs temporarily suspended the disbursement of funds under the
E-rate (Schools and Libraries Universal Service Support Mechanism) program, and,
more significantly, created questions that these administrative changes could
similarly delay the disbursement of funds to rural LECs from the Universal
Service High Cost Loop support program. In December 2004, Congress passed a bill
that granted the USF a one-year exemption from the federal law that impacted the
E-rate program. Congress has since introduced a bill to grant a permanent
exemption to the USF from such federal law.
In late 2002, the FCC requested that the Federal-State Joint Board
("FSJB") on Universal Service review various FCC rules governing high cost
universal service support, including rules regarding eligibility to receive
support payments in markets served by LECs and competitive carriers. On February
7, 2003, the FSJB issued a notice for public comment on whether present rules
fulfill their purpose and whether or not modifications are needed. On February
27, 2004, the FSJB sent the FCC a series of recommendations concerning the
process of designating ETCs and suggestions for gaining better control over the
disbursement of high-cost universal service support in markets where one or more
ETCs are present. The FSJB declined to recommend that the FCC modify the
methodology used to calculate support in study areas with multiple ETCs, instead
recommending an overall review of the high-cost support mechanism for rural and
non-rural carriers.
On August 16, 2004, the FSJB released a notice requesting comments on the
FCC's current rules for the provision of high-cost support for rural companies,
including comments on whether eligibility requirements should be amended in a
manner that would adversely affect larger rural LECs such as the Company. The
FCC has taken various other steps in anticipation of restructuring universal
service support mechanisms, including opening a docket that will change the
method of funding contributions. The FCC is expected to act before its current
rules are scheduled to expire on June 30, 2006. Congress is also exploring
various universal service issues ranging from targeted universal service
legislation to re-writing the 1996 Act. The Company has been and will continue
to be active in monitoring these developments.
In January 2003, the Louisiana Public Service Commission staff began
reviewing the feasibility of converting the $42 million Louisiana Local Optional
Service Fund ("LOS Fund") into a state universal service fund. Currently, the
LOS Fund is funded primarily by BellSouth, which proposes to expand the base of
contributors into the LOS Fund. The Company currently receives approximately $21
million from the LOS Fund each year. Although the Commission staff has
recommended to transfer the fund's $42 million to a state universal service
fund, there can be no assurance that the Commission will adopt this
recommendation or that funding will remain at current levels.
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "- State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
Substantially all of the Company's LECs (except for the properties
acquired from Verizon in 2002) concur with the common line tariff and certain of
the Company's LECs concur with the traffic sensitive tariffs filed by the NECA;
such LECs participate in the access revenue sharing arrangements administered by
the NECA for interstate services. All of the intrastate network access revenues
of the Company's LECs are based on access charges, cost separation studies or
special settlement arrangements. See "- Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. Long distance carriers
have also aggressively pursued regulatory or legislative changes that would
reduce access rates. See "-Services - Network Access" above for additional
information.
Developments affecting competition. The communications industry continues
to undergo fundamental changes which are likely to significantly impact the
future operations and financial performance of all communications companies.
Primarily as a result of regulatory and technological changes, competition has
been introduced and encouraged in each sector of the telephone industry in
recent years. As a result, the Company increasingly faces competition from
providers seeking to use the Company's network and from providers offering
competitive services.
The 1996 Act, which obligates LECs to permit competitors to interconnect
their facilities to the LEC's network and to take various other steps that are
designed to promote competition, imposes several duties on a LEC if it receives
a specific request from another entity which seeks to connect with or provide
services using the LEC's network. In addition, each incumbent LEC is obligated
to (i) negotiate interconnection agreements in good faith, (ii) provide
"unbundled" access to all aspects of the LEC's network, (iii) offer resale of
its telecommunications services at wholesale rates and (iv) permit competitors
to collocate their physical plant on the LEC's property, or provide virtual
collocation if physical collocation is not practicable. During 2003, the FCC
released new rules outlining the obligations of incumbent LECs to lease to
competitors elements of their circuit-switched networks on an unbundled basis at
prices that substantially limited the profitability of these arrangements to
incumbent LECs. On March 2, 2004, a federal appellate court vacated significant
portions of these rules, including the standards used to determine which
unbundled network elements must be made available to competitors. In response to
this court decision, on February 4, 2005, the FCC released rules (effective
March 11, 2005) that require incumbent LECs to lease a network element only in
those situations where competing carriers genuinely would be impaired without
access to such network element, and where the unbundling would not interfere
with the development of facilities-based competition. These rules are further
designed to remove unbundling obligations over time as competing carriers deploy
their own networks and local exchange competition increases.
Under the 1996 Act's rural telephone company exemption, approximately 50%
of the Company's telephone access lines are exempt from certain of the 1996
Act's interconnection requirements unless and until the appropriate state
regulatory commission overrides the exemption upon receipt from a competitor of
a bona fide request meeting certain criteria. States are permitted to adopt laws
or regulations that provide for greater competition than is mandated under the
1996 Act. Management believes that competition in its telephone service areas
has increased and will continue to increase as a result of the 1996 Act and the
FCC's interconnection rulings. While competition through use of the Company's
network is still limited in most of its markets, the Company expects to receive
additional interconnection requests in the future from a variety of resellers
and facilities-based service providers.
In addition to these changes in federal regulation, all of the 22 states
in which the Company provides telephone services have taken legislative or
regulatory steps to further introduce competition into the LEC business.
As a result of these regulatory developments, ILECs increasingly face
competition from competitive local exchange carriers ("CLECs"), particularly in
high population areas. CLECs provide competing services through reselling the
ILECs' local services, through use of the ILECs' unbundled network elements or
through their own facilities. The number of companies which have requested
authorization to provide local exchange service in the Company's service areas
has increased in recent years, especially in the Company's Verizon markets
acquired in 2002 and 2000. The Company anticipates that similar action may be
taken by other competitors in the future, especially if all forms of federal
support available to ILECs continue to remain available to these competitors.
Technological developments have led to the development of new services
that compete with traditional LEC services. Technological improvements have
enabled cable television companies to provide traditional circuit-switched
telephone service over their cable networks, and several national cable
companies have aggressively pursued this opportunity. Recent improvements in the
quality of "Voice-over-Internet Protocol" ("VoIP") service have led several
large cable television and telephone companies, as well as start-up companies,
to substantially increase their offerings of VoIP service to business and
residential customers. VoIP providers route calls over the Internet, without use
of ILEC's circuit switches and, in certain cases, without use of ILEC's networks
to carry their communications traffic. VoIP providers use existing broadband
networks to deliver flat-rate, all distance calling plans that may be priced
below those currently charged for traditional local and long distance telephone
services for several reasons, including lower network cost structures and the
current ability of VoIP providers to use ILECs' networks without paying access
charges. However, the service must be purchased in addition to the cost of the
broadband connection. In December 2003, the FCC initiated rulemaking that is
expected to address the effect of VoIP on intercarrier compensation, universal
service and emergency services. On March 10, 2004, the FCC released a notice of
proposed rulemaking seeking comment on the appropriate regulatory treatment of
VoIP service and related issues. Although the FCC's rulemaking regarding
VoIP-enabled services remains pending, the FCC has adopted orders establishing
broad guidelines for the regulation of such services, including an April 2004
order in which the FCC ruled that the IP-telephony service of AT&T, which
converts voice calls to IP format for routing over the public switched telephone
network, is a regulated telecommunications service subject to interstate access
charges. In addition, in November 2004, the FCC ruled that Internet-based
services provided by Vonage Holdings Corporation should be subject to federal
rather than state jurisdiction. Several state commissions have filed appeals of
this decision to various federal appellate courts. Also pending at the FCC is a
petition filed by Level 3 Communications, Inc. asking the FCC to forbear from
imposing interstate or intrastate access charges on Internet-based calls that
originate or terminate on the public switched telephone network. There can be no
assurance that future rulemaking will be on terms favorable to ILECs, or that
VoIP providers will not successfully compete for the Company's customers.
Wireless telephone services increasingly constitute a significant source
of competition with LEC services, especially as wireless carriers expand and
improve their network coverage and continue to lower their prices. As a result,
some customers have chosen to completely forego use of traditional wireline
phone service and instead rely solely on wireless service. The Company
anticipates this trend will continue, particularly if wireless service rates
continue to decline and the quality of wireless service improves. Technological
and regulatory developments in cellular telephone, personal communications
services, digital microwave, satellite, coaxial cable, fiber optics, local
multipoint distribution services and other wired and wireless technologies are
expected to further permit the development of alternatives to traditional
landline services. In September 2004, the Company announced it had entered into
a reseller arrangement with Cingular Wireless that will allow the Company to
provide wireless voice and text messaging services as part of its integrated
service offering. The Company currently offers such bundled service to select
markets and plans to expand its offering to the majority of its markets in
2005.
In addition to facing direct competition from those providers described
above, ILECs increasingly face competition from alternate communication systems
constructed by long distance carriers, large customers or alternative access
vendors. These systems, which have become more prevalent as a result of the 1996
Act, are capable of originating or terminating calls without use of the ILECs'
networks or switching services. Other potential sources of competition include
noncarrier systems that are capable of bypassing ILECs' local networks, either
partially or completely, through substitution of special access for switched
access or through concentration of telecommunications traffic on a few of the
ILECs' access lines. The Company anticipates that all these trends will continue
and lead to increased competition with the Company's LECs.
In November 2003, the FCC adopted rules requiring companies to allow their
customers to keep their wireline or wireless phone number when switching to
another service provider (generally referred to as "local number portability").
For several years, customers have been able to retain their numbers when
switching their local service between wireline carriers. The new rules now
require local number portability between wireline and wireless carriers. This
requirement went into effect November 24, 2003 for wireline carriers in the top
100 Metropolitan Statistical Areas ("MSAs"). The requirement went into effect
May 24, 2004 for wireline carriers operating in markets smaller than the top 100
MSAs. Local number portability may increase the number of customers who choose
to completely forego the use of traditional wireline phone service. To date, the
costs to comply with the requirements of local number portability, net of the
amount that is recoverable through the ratemaking process, have not had a
material impact on the Company's results of operations.
Significant competitive factors in the local telephone industry include
pricing, packaging of services and features, quality of service and meeting
customer needs such as simplified billing and timely response to service calls.
As the telephone industry increasingly experiences competition, the size
and resources of each respective competitor may increasingly influence its
prospects. Many companies currently providing or planning to provide competitive
communication services have substantially greater financial and marketing
resources than the Company, and several are not subject to the same regulatory
constraints as the Company.
The Company anticipates that the traditional operations of LECs will
continue to be impacted by continued regulatory and technological developments
affecting the ability of LECs to provide new services and the capability of long
distance companies, CLECs, wireless companies, cable television companies, VoIP
providers and others to provide competitive LEC services. Competition relating
to traditional LEC services has thus far affected large urban areas to a greater
extent than rural, suburban and small urban areas such as those in which the
Company operates. The Company intends to actively monitor these developments, to
observe the effect of emerging competitive trends in larger markets and to
continue to evaluate new business opportunities that may arise out of future
technological, legislative and regulatory developments.
As previously mentioned, the Company has recently entered into agreements
to provide co-branded satellite television service and to resell wireless
service as part of its bundled product and service offerings. The Company
anticipates that its diluted earnings will be negatively impacted in 2005 by
approximately $.04 to $.07 per share primarily due to expenses associated with
rolling out these new services.
While the Company expects its operating revenues in 2005 to continue to
experience downward pressure due to continued access line losses and reduced
network access revenues, the Company expects its consolidated revenues to
increase in 2005 primarily due to increased demand for its long distance, fiber
transport, DSL and other nonregulated product offerings (including its new video
and wireless initiatives mentioned above).
Regulation and Competition Relating to Other Operations
Long Distance Operations. The Company offers intraLATA, intrastate and
interstate long distance services. State public service commissions generally
regulate intraLATA toll calls within the same LATA and intraLATA toll calls
between different LATAs located in the same state. Federal regulators have
jurisdiction over interstate toll calls. Recent state regulatory changes have
increased competition to provide intra-LATA toll services in the Company's local
exchange markets. Competition for intrastate and interstate long distance
services has been intense for several years, and focuses primarily on price and
pricing plans, and secondarily on customer service, reliability and
communications quality. Traditionally, the Company's principal competitors for
providing long distance services were AT&T, MCI, Sprint, regional phone
companies and dial-around resellers. Increasingly, however, the Company has
experienced competition from newer sources, including wireless and high-speed
broadband providers, and as a result of technological substitutions, including
VoIP and electronic mail.
Data Operations. In connection with its data business, the Company
faces competition from Internet service providers, satellite companies and cable
companies which offer both dial-up Internet access services and high-speed
broadband services. Many of these providers are subject to less rigorous
regulatory scrutiny than the Company's subsidiaries. The FCC is currently
conducting several rulemakings considering the regulatory treatment of broadband
services, the outcomes of which could significantly impact the competitive
position of the Company and its competitors.
Fiber Transport Operations. When the Company's fiber transport
networks are used to provide intrastate telecommunications services, the Company
must comply with state requirements for telecommunications utilities, including
state tariffing requirements. To the extent the Company's facilities are used to
provide interstate communications, the Company is subject to federal regulation
as a non-dominant common carrier. Due largely to excess capacity, the fiber
transport industry is highly competitive. The Company's primary competitors are
from other communications companies, many of whom operate networks and have
resources much larger than those of the Company.
CLEC Operations. Competitive local exchange carriers are subject to
certain reporting and other regulatory requirements by the FCC and state public
service commissions, although the degree of regulation is much less substantial
than that imposed on ILECs operating in the same markets. Local governments also
frequently require competitive local exchange carriers to obtain licenses or
franchises regulating the use of rights-of-way necessary to install and operate
their networks. In each of its CLEC markets, the Company faces competition from
the ILEC, which traditionally has long-standing relationships with its
customers. Over time, the Company may also face competition from one or more
other CLECs, or from other communications providers who can provide comparable
services.
OTHER DEVELOPMENTS
The Company recently implemented a new integrated billing and customer
care system. The capitalized costs of the system aggregated $207 million (before
accumulated amortization) at December 31, 2004 and are being amortized over a
20-year period. Virtually all of the Company's customers were converted to the
new system in late 2004. In early 2005, the Company implemented software
upgrades and other changes to enhance the productivity and efficiency of the
system, the cost of which was not material.
In November 2004, the Company completed its previously announced $400
million share repurchase program. In February 2005, the Company's board of
directors approved an additional stock repurchase program, authorizing the
Company to repurchase up to an aggregate of $200 million of either its common
stock or convertible equity units through December 2005. In addition, the
Company currently expects, subject to market conditions and the availability
of other investment opportunities, to pursue transactions that could mitigate
the dilutive effect of the Company's $500 million in Equity Units that are
currently scheduled to settle in May 2005.
SPECIAL CONSIDERATIONS
Risk Factors
We face competition, which could adversely affect us.
As a result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive, and we expect
these trends to continue. The number of companies that have requested
authorization to provide traditional local exchange service in our markets has
increased in recent years, and we anticipate that others will take similar
action in the future. Recent technological developments have led several
competitors to substantially increase their service offerings, often at prices
substantially below those charged for traditional phone services. Wireless
telephone services increasingly constitute a significant source of competition
with LEC services, especially as wireless owners expand and improve their
network coverage and continue to lower their prices.
We expect competition to intensify as a result of new competitors and
the development of new technologies, products and services. We cannot predict
which future technologies, products or services will be important to maintain
our competitive position or what funding will be required to develop and provide
these technologies, products or services. Our ability to compete successfully
will depend on how well we market our products and services and on our ability
to anticipate and respond to various competitive and technological factors
affecting the industry, including changes in regulation (which may affect us
differently from our competitors), changes in consumer preferences or
demographics, and changes in the product offerings or pricing strategies of our
competitors.
Many of our current and potential competitors have market presence,
engineering, technical and marketing capabilities and financial, personnel and
other resources substantially greater than ours. In addition, some of our
competitors can conduct operations or raise capital at a lower cost than we can,
are subject to less regulation, or have substantially stronger brand names.
Consequently, some competitors may be able to charge lower prices for their
products and services, to develop and expand their communications and network
infrastructures more quickly, to adapt more swiftly to new or emerging
technologies and changes in customer requirements, and to devote greater
resources to the marketing and sale of their products and services than we can.
Competition could adversely impact us in several ways, including (i)
the loss of customers and market share, (ii) the possibility of customers
shifting to less profitable services, (iii) our need to lower prices or increase
marketing expenses to remain competitive and (iv) our inability to diversify by
offering new products or services.
We could be harmed by rapid changes in technology.
The communications industry is experiencing significant technological
changes, particularly in the areas of VoIP, data transmission and wireless
communications. Some of our competitors may enjoy network advantages that will
enable them to provide services more efficiently or at lower cost. Rapid changes
in technology could result in the development of products or services that
compete with or displace those offered by traditional LECs. If we cannot develop
new products to keep pace with technological advances, or if such products are
not widely embraced by our customers, we could be adversely impacted.
Our industry is highly regulated, and continues to undergo various
fundamental regulatory changes.
As a diversified full service incumbent local exchange carrier, or
ILEC, we have traditionally been subject to significant regulation from federal,
state and local authorities. This regulation imposes substantial compliance
costs on us and restricts our ability to raise rates, to compete and to respond
rapidly to changing industry conditions. In recent years, the communications
industry has undergone various fundamental regulatory changes that have
generally permitted competition in each segment of the telephone industry and
reduced the regulation of telephone companies, in particular by requiring or
permitting LECs to opt out of traditional "rate of return" regulation in
exchange for agreeing to alternative forms of regulation. These alternative
forms of regulation, which currently apply to over half our access lines,
typically permit the LEC greater freedom to establish local service rates in
exchange for agreeing not to charge rates in excess of specified caps. These and
subsequent changes could adversely affect us by reducing the fees that we are
permitted to charge, altering our tariff structures, or otherwise changing the
nature of our operations and competition in our industry. Recent rule changes
that permit customers to retain their wireline or wireless number when switching
to another service provider could increase the number of our customers who
choose to disconnect their wireline service. Other pending rulemakings could
have a substantial impact on our operations, including in particular rulemakings
on intercarrier compensation, universal service, and VoIP regulations.
Litigation and different objectives among federal and state regulators could
create uncertainty and delay our ability to respond to new regulations.
Moreover, changes in tax laws, regulations or policies could increase our tax
rate, particularly if state regulators continue to search for additional revenue
sources to address budget shortfalls. We are unable to predict the future
actions of the various regulatory bodies that govern us, but such actions could
materially affect our business.
We cannot assure you that our core businesses will grow or that our
diversification efforts will be successful.
Due to the above-cited changes, the telephone industry has recently
experienced a decline in access lines, intrastate minutes of use and long
distance minutes of use. While we have not suffered as much as a number of other
ILECs from recent industry challenges, the recent decline in access lines and
usage, coupled with the other changes resulting from competitive, technological
and regulatory developments, could materially adversely effect our core business
and future prospects. Our access lines declined 2.6% in 2004 and we expect our
access lines to decline between 2.5% and 3.5% in 2005. We also earned less
intrastate revenues in 2004 due to reductions in intrastate minutes of use
(partially due to the displacement of minutes of use by wireless, electronic
mail and other optional calling services). We believe our intrastate minutes of
use will continue to decline, although the magnitude of such decrease is
uncertain.
Until recently, we have traditionally sought growth largely through
acquisitions of properties similar to those currently operated by us. However,
we cannot assure you that properties will be available for purchase on terms
attractive to us, particularly if they are burdened by regulations, pricing
plans or competitive pressures that are new or different from those historically
applicable to our incumbent properties. Moreover, we cannot assure you that we
will be able to arrange additional financing on terms acceptable to us.
In recent years, we have attempted to broaden our service and product
offerings. During 2003, we expanded our fiber transport business through
selective asset purchases. During 2004, we entered into agreements to provide
co-branded satellite television services and to resell wireless services as part
of our bundled product and service offerings, which we anticipate will dilute
our earnings for 2005 by approximately $.04 to $.07 per share. We cannot assure
you that our recent diversification efforts will be successful.
We are reliant on support funds provided under federal and state laws.
We receive a substantial portion of our revenues from the federal
Universal Service Fund and, to a lesser extent, intrastate support funds. These
governmental programs are reviewed and amended from time to time, and we cannot
assure you that they will not be changed or impacted in a manner adverse to us.
In August 2004, a federal-state joint board requested comments on the FCC's
current rules for high-cost support payments to rural telephone companies,
including comments on whether eligibility requirements should be amended in a
manner that would adversely affect larger rural LECs such as the Company. The
FCC is expected to act upon this request for comments before its current rules
are scheduled to expire on June 30, 2006.
Recent changes in the nationwide average cost per loop factors used by
the FCC to allocate support funds have reduced our receipts from the main
support program administered by the federal Universal Service Fund. These
changes reduced our receipts from such program by $11.3 million in 2004 compared
to 2003, and we expect these changes will further reduce our receipts from such
program by approximately $10 to $15 million in 2005 compared to 2004. In
addition, the number of eligible telecommunications carriers receiving support
payments from this program continues to increase, which, coupled with other
factors, is placing additional financial pressure on the amount of money that is
necessary and available to provide support payments to all eligible recipients,
including us. As a result of the continued increases in the nationwide average
cost per loop factor (caused by limited growth in the size of the USF High Cost
Loop support program and increases in requests for support from the Universal
Service Fund), we believe the aggregate level of payments we receive from the
Universal Service Fund will continue to decline in the near term under the
FCC's current rules.
Our future results will suffer if we do not effectively manage our growth.
In the past few years, we have rapidly expanded our operations
primarily through acquisitions and new product and service offerings, and we may
pursue similar growth opportunities in the future. Our future success depends,
in part, upon our ability to manage our growth, including our ability to:
o upgrade our billing and other information systems
o retain and attract technological, managerial and other key personnel
o effectively manage our day to day operations while attempting to
execute our business strategy of expanding our wireline operations
and our emerging businesses
o realize the projected growth and revenue targets developed by
management for our newly acquired and emerging businesses, and
o continue to identify new acquisition or growth opportunities that
we can finance, consummate and operate on attractive terms.
Our rapid growth poses substantial challenges for us to integrate new
operations into our existing business in an efficient and timely manner, to
successfully monitor our operations, costs, regulatory compliance and service
quality, and to maintain other necessary internal controls. We cannot assure you
that these efforts will be successful, or that we will realize our expected
operating efficiencies, cost savings, revenue enhancements, synergies or other
benefits. If we are not able to meet these challenges effectively, our results
of operations may be harmed.
We could be affected by certain changes in labor matters.
At December 31, 2004, approximately 26% of our employees were members
of 13 separate bargaining units represented by two different unions. From time
to time, our labor agreements with these unions lapse, and we typically
negotiate the terms of new agreements. In 2005, the contracts governing
approximately 71% of the union workforce lapse and are scheduled to be
renegotiated. We cannot predict the outcome of these negotiations. We may be
unable to reach new agreements, and union employees may engage in strikes, work
slowdowns or other labor actions, which could materially disrupt our ability to
provide services. In addition, new labor agreements may impose significant new
costs on us, which could impair our financial condition or results of operations
in the future.
We have a substantial amount of indebtedness.
We have a substantial amount of indebtedness. This could hinder our
ability to adjust to changing market and economic conditions, as well as our
ability to access the capital markets to refinance maturing debt in the ordinary
course of business. In connection with executing our business strategies, we are
continuously evaluating the possibility of acquiring additional communications
assets, and we may elect to finance acquisitions by incurring additional
indebtedness. Moreover, to respond to the competitive challenges discussed
above, we may be required to raise substantial additional capital to finance new
product or service offerings. Our ability to arrange additional financing will
depend on, among other factors, our financial position and performance, as well
as prevailing market conditions and other factors beyond our control. We cannot
assure you that we will be able to obtain additional financing on terms
acceptable to us or at all. If we are able to obtain additional financing, our
credit ratings could be adversely affected. As a result, our borrowing costs
would likely increase, our access to capital may be adversely affected and our
ability to satisfy our obligations under our current indebtedness could be
adversely affected.
Our agreements and organizational documents and applicable law could
limit another party's ability to acquire us at a premium.
Under our articles of incorporation, each share of common stock that
has been beneficially owned by the same person or entity continually since May
30, 1987 generally entitles the holder to ten votes on all matters duly
submitted to a vote of shareholders. As of February 28, 2005, the holders of our
ten-vote shares held approximately 39% of our total voting power. In addition, a
number of other provisions in our agreements and organizational documents,
including our shareholder rights plan, and various provisions of applicable law
may delay, defer or prevent a future takeover of CenturyTel unless the takeover
is approved by our board of directors. This could deprive our shareholders of
any related takeover premium.
Forward-Looking Statements
This report on Form 10-K and other documents filed by us under the federal
securities laws include, and future oral or written statements or press releases
by us and our management may include, certain forward-looking statements,
including without limitation statements with respect to our anticipated future
operating and financial performance, financial position and liquidity, growth
opportunities and growth rates, business prospects, regulatory and competitive
outlook, investment and expenditure plans, investment results, financing
opportunities and sources (including the impact of financings on our financial
position, financial performance or credit ratings), pricing plans, strategic
alternatives, business strategies, and other similar statements of expectations
or objectives that are highlighted by words such as "expects," "anticipates,"
"intends," "plans," "believes," "projects," "seeks," "estimates," "hopes,"
"should," and "may," and variations thereof and similar expressions. Such
forward-looking statements are based upon our judgment and assumptions as of the
date of this report concerning future developments and events, many of which are
outside of our control. These forward-looking statements, and the assumptions
upon which such statements are based, are inherently speculative and are subject
to uncertainties that could cause our actual results to differ materially from
such statements. These uncertainties include but are not limited to those set
forth below:
o the extent, timing, success and overall effects of competition from
wireless carriers, VoIP providers, CLECs, cable television companies and
others, including without limitation the risks that these competitors may
offer less expensive or more innovative products and services.
o the risks inherent in rapid technological change, including without
limitation the risk that new technologies will displace our products and
services.
o the effects of ongoing changes in the regulation of the communications
industry, including without limitation (i) increased competition resulting
from the FCC's regulations relating to local number portability,
interconnection and other matters, (ii) the final outcome of various
federal, state and local regulatory initiatives and proceedings that could
impact our competitive position, compliance costs, capital expenditures or
prospects, and (iii) reductions in revenues received from the federal
Universal Service Fund or other current or future federal and state
support programs designed to compensate LECs operating in high-cost
markets.
o our ability to effectively manage our growth, including without limitation
our ability to (i) integrate newly-acquired operations into our
operations, (ii) attract and retain technological, managerial and other
key personnel, (iii) achieve projected growth, revenue and cost savings
targets, and (iv) otherwise monitor our operations, costs, regulatory
compliance, and service quality and maintain other necessary internal
controls.
o possible changes in the demand for, or pricing of, our products and
services, including without limitation (i) reduced demand for traditional
telephone services caused by greater use of wireless or Internet
communications or other factors, (ii) reduced demand for second lines and
(iii) reduced demand for our access services.
o our ability to successfully introduce new product or service offerings on
a timely and cost-effective basis, including without limitation our
ability to (i) successfully roll out our co-branded satellite television
service and our wireless reseller service, (ii) expand successfully our
long distance, Internet access and fiber transport service offerings to
new or acquired markets and (iii) offer bundled service packages on terms
attractive to our customers.
o our ability to successfully take steps to mitigate the dilutive impact of
the $500 million aggregate stated amount of equity units which currently
commit us to sell shares of our common stock upon settlement in mid-May
2005.
o our ability to collect receivables from financially troubled communications
companies.
o regulatory limits on our ability to change the prices for telephone
services in response to industry changes.
o impediments to our ability to expand through attractively priced
acquisitions, whether caused by regulatory limits, financing constraints,
a decrease in the pool of attractive target companies, or competition for
acquisitions from other interested buyers.
o the possible need to make abrupt and potentially disruptive changes in our
business strategies due to changes in competition, regulation, technology,
product acceptance or other factors.
o the lack of assurance that we can compete effectively against
better-capitalized competitors.
o the impact of terrorist attacks on our business.
o other risks referenced in this report and from time to time in our other
filings with the Securities and Exchange Commission.
o the effects of more general factors, including without limitation:
* changes in general industry and market conditions and growth rates
* changes in labor conditions, including workforce levels and labor
negotiations
* changes in interest rates or other general national, regional or
local economic conditions
* changes in legislation, regulation or public policy, including changes
in federal rural financing programs or changes that increase our tax rate
* increases in capital, operating, medical or administrative costs, or
the impact of new business opportunities requiring significant up-front
investments
* the continued availability of financing in amounts, and on terms and
conditions, necessary to support our operations
* changes in our relationships with vendors, or the failure of these
vendors to provide competitive products on a timely basis
* changes in our senior debt ratings
* unfavorable outcomes of regulatory or legal proceedings, including
rate proceedings
* losses or unfavorable returns on our investments in other
communications companies
* delays in the construction of our networks
* changes in accounting policies, assumptions, estimates or practices
adopted voluntarily or as required by generally accepted accounting
principles.
For additional information, see the description of our business included
above, as well as Item 7 of this report. Due to these uncertainties, there can
be no assurance that our anticipated results will occur, that our judgments or
assumptions will prove correct, or that unforeseen developments will not occur.
Accordingly, you are cautioned not to place undue reliance upon these
forward-looking statements, which speak only as of the date made. We undertake
no obligation to update or revise any of our forward-looking statements for any
reason, whether as a result of new information, future events or developments,
or otherwise.
OTHER MATTERS
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 2004
have not been material and the Company currently has no reason to believe that
such costs will become material.
For additional information concerning the business and properties of the
Company, see Item 7 elsewhere herein, and the Consolidated Financial Statements
and notes 2, 5, 6, and 17 thereto set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of telephone lines, central
office equipment, and land and buildings related to telephone operations. As of
December 31, 2004 and 2003, the Company's gross property, plant and equipment of
approximately $7.4 billion and $7.2 billion, respectively, consisted of the
following:
December 31,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
Cable and wire 53.1% 53.1
Central office 32.1 31.8
General support 10.6 11.3
Fiber transport and CLEC 2.0 1.8
Construction in progress 0.9 0.8
Other 1.3 1.2
- -------------------------------------------------------------------------------
100.0 100.0
===============================================================================
"Cable and wire" facilities consist primarily of buried cable and aerial
cable, poles, wire, conduit and drops used in providing local and long distance
services. "Central office" consists primarily of switching equipment, circuit
equipment and related facilities. "General support" consists primarily of land,
buildings, tools, furnishings, fixtures, motor vehicles and work equipment.
"Fiber transport and CLEC" consist of network assets and equipment to provide
fiber transport and competitive local exchange services. "Construction in
progress" includes property of the foregoing categories that has not been placed
in service because it is still under construction.
The properties of certain of the Company's telephone subsidiaries are
subject to mortgages securing the debt of such companies. The Company owns
substantially all of the central office buildings, local administrative
buildings, warehouses, and storage facilities used in its telephone operations.
For further information on the location and type of the Company's
properties, see the descriptions of the Company's operations in Item 1.
Item 3. Legal Proceedings.
In Barbrasue Beattie and James Sovis, on behalf of themselves and all
others similarly situated, v. CenturyTel, Inc., filed on October 29, 2002 in the
United States District Court for the Eastern District of Michigan (Case No.
02-10277), the plaintiffs allege that the Company unjustly and unreasonably
billed customers for inside wire maintenance services, and seek unspecified
money damages and injunctive relief under various legal theories on behalf of a
purported class of over two million customers in the Company's telephone
markets. The Court has not yet ruled on the plaintiffs' certification motion,
and has not yet set a date to resolve this issue. Given the current status of
this case, the Company cannot estimate the potential impact, if any, that this
case will have on its results of operations.
From time to time, the Company is involved in other proceedings incidental
to its business, including administrative hearings of state public utility
commissions relating primarily to rate making, actions relating to employee
claims, occasional grievance hearings before labor regulatory agencies and
miscellaneous third party tort actions. The outcome of these other proceedings
is not predictable. However, the Company does not believe that the ultimate
resolution of these other proceedings, after considering available insurance
coverage, will have a material adverse effect on its financial position, results
of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning the Company's Executive Officers, set forth at Item
10 in Part III hereof, is incorporated in Part I of this Report by reference.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchase of Equity Securities
CenturyTel's common stock is listed on the New York Stock Exchange and is
traded under the symbol CTL. The following table sets forth the high and low
sales prices, along with the quarterly dividends, for each of the quarters
indicated.
Sales prices
------------------- Dividend per
High Low common share
------ ----- ------------
2004:
First quarter $ 33.40 26.20 .0575
Second quarter $ 30.32 26.22 .0575
Third quarter $ 34.47 29.79 .0575
Fourth quarter $ 35.54 31.00 .0575
2003:
First quarter $ 31.79 25.25 .0550
Second quarter $ 35.90 27.33 .0550
Third quarter $ 35.85 32.45 .0550
Fourth quarter $ 36.76 30.09 .0550
Common stock dividends during 2004 and 2003 were paid each quarter. As of
February 28, 2005, there were approximately 4,700 stockholders of record of
CenturyTel's common stock. As of March 15, 2005, the closing stock price of
CenturyTel common stock was $33.77.
In early February 2004, the Company's board of directors approved a
repurchase program authorizing the Company to repurchase up to an aggregate of
$400 million of either its common stock or equity units prior to December 31,
2005. The following table reflects the Company's repurchases of its common stock
during the fourth quarter of 2004, all of which were effected in open-market
transactions in accordance with the above-described program. These fourth
quarter 2004 purchases completed the Company's $400 million stock repurchase
program.
Total Approximate
Number of Dollar Value
Shares of Shares (or
Purchased as Units) that
Part of Publicly May Yet Be
Total Number Announced Purchased
of Shares Average Price Plans or Under the Plans
Period Purchased Paid Per Share Programs or Programs
- -----------------------------------------------------------------------------------------------------
October 1 - October 31, 2004 265,200 $ 33.97 265,200 $ 72,882,412
November 1 - November 30, 2004 2,237,390 $ 32.88 2,237,390 $ -
December 1 - December 31, 2004 - $ - - $ -
--------- ---------
Total 2,502,590 $ 32.99 2,502,590 $ -
========= =========
The Company did not repurchase any of its equity units during the fourth
quarter of 2004.
For information regarding the Company's new share repurchase program and
shares of CenturyTel common stock authorized for issuance under CenturyTel's
equity compensation plans, see Items 7 and 12, respectively.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial data
(from continuing operations) as of and for each of the years ended in the
five-year period ended December 31, 2004:
Selected Income Statement Data
Year ended December 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------
(Dollars, except per share amounts, and shares expressed in thousands)
Operating revenues $ 2,407,372 2,367,610 1,971,996 1,679,504 1,402,357
==================================================================
Operating income $ 753,953 750,396 575,406 425,305 386,137
==================================================================
Nonrecurring gains and
losses, net (pre-tax) $ - - 3,709 33,043 -
==================================================================
Income from continuing operations $ 337,244 344,707 193,533 149,081 127,474
==================================================================
Basic earnings per share from
continuing operations $ 2.45 2.40 1.36 1.06 .91
==================================================================
Basic earnings per share from
continuing operations, as
adjusted for goodwill
amortization $ 2.45 2.40 1.36 1.39 1.17
==================================================================
Diluted earnings per share from
continuing operations $ 2.41 2.35 1.35 1.05 .90
==================================================================
Diluted earnings per share from
continuing operations, as
adjusted for goodwill
amortization $ 2.41 2.35 1.35 1.37 1.16
==================================================================
Dividends per common share $ .23 .22 .21 .20 .19
==================================================================
Average basic shares outstanding 137,215 143,583 141,613 140,743 140,069
==================================================================
Average diluted shares
outstanding 142,144 148,779 144,408 142,307 141,864
==================================================================
Diluted earnings per share and average diluted shares outstanding reflect
the application of Emerging Issues Task Force No. 04-8 (which was effective in
fourth quarter 2004) related to the effect of contingent convertible debt on the
diluted earnings per share calculation. Prior periods have been restated to
reflect this change. See Note 13 of Item 8 for additional information.
Selected Balance Sheet Data
December 31,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------
(Dollars in thousands)
Net property, plant and
equipment $ 3,341,401 3,455,481 3,531,645 2,736,142 2,698,010
Goodwill $ 3,433,864 3,425,001 3,427,281 2,087,158 2,108,344
Total assets $ 7,796,953 7,895,852 7,770,408 6,318,684 6,393,290
Long-term debt $ 2,762,019 3,109,302 3,578,132 2,087,500 3,050,292
Stockholders' equity $ 3,409,765 3,478,516 3,088,004 2,337,380 2,032,079
------------------------------------------------------------------------
See Items 7 and 8 for a discussion of the Company's discontinued wireless
operations.
The following table presents certain selected consolidated operating data
as of the end of each of the years in the five-year period ended December 31,
2004:
Year ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
Telephone access lines 2,313,626 2,376,118 2,414,564 1,797,643 1,800,565
Long distance lines 1,067,817 931,761 798,697 564,851 433,846
---------------------------------------------------------------------
See Items 1 and 2 in Part I and Items 7 and 8 elsewhere herein for
additional information.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Overview
CenturyTel, Inc. ("CenturyTel") and its subsidiaries (the "Company") is an
integrated communications company engaged primarily in providing local exchange,
long distance, Internet access and broadband services to customers in 22 states.
The Company currently derives its revenues from providing (i) local exchange
telephone services, (ii) network access services, (iii) long distance services,
(iv) data services, which includes both dial-up and digital subscriber line
("DSL") Internet services, as well as special access and private line services,
(v) fiber transport, competitive local exchange and security monitoring services
and (vi) other related services.
The Company strives to maintain its customer relationships by, among other
things, bundling its service offerings to provide its customers with a complete
offering of integrated communications services. Effective in the first quarter
of 2004, as a result of the Company's increased focus on integrated bundle
offerings and the varied discount structures associated with such offerings, the
Company determined that its results of operations would be more appropriately
reported as a single reportable segment under the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Therefore, the results of operations for
2004 reflect the presentation of a single reportable segment. Results of
operations for 2003 and 2002 have been conformed to the Company's 2004
presentation of a single reportable segment. In connection with the change in
segment reporting, the Company has, among other things, (i) eliminated certain
revenues arising out of previously-reported intersegment transactions (which
reduced operating expenses by a like amount and therefore had no impact on
operating income), (ii) reclassified certain revenues to conform to the new
revenue components and (iii) reclassified depreciation expense related to
certain service subsidiaries of the Company from operating expenses of its
regulated operations to depreciation expense.
On July 1, 2002, the Company acquired the local exchange telephone
operations of Verizon Communications, Inc. ("Verizon") in the state of Alabama
for approximately $1.022 billion cash. On August 31, 2002, the Company acquired
the local exchange telephone operations of Verizon in the state of Missouri for
approximately $1.179 billion cash. The results of operations for the Verizon
assets acquired are reflected in the Company's consolidated results of
operations subsequent to each respective acquisition. See "Acquisitions" below
and Note 2 of Notes to Consolidated Financial Statements for additional
information. During 2003, the Company also acquired fiber transport assets in
five central U.S. states (which the Company operates under the name LightCore)
for $55.2 million cash.
On August 1, 2002, the Company sold substantially all of its wireless
operations principally to an affiliate of ALLTEL Corporation ("Alltel") in
exchange for an aggregate of approximately $1.59 billion in cash. As a result,
the Company's wireless operations for the year ended December 31, 2002 has been
reflected as discontinued operations on the Company's consolidated statements of
income and cash flows. For further information, see "Discontinued Operations"
below.
During the three years ended December 31, 2004, the Company has acquired
and sold various other operations, the impact of which has not been material to
the financial position or results of operations of the Company.
The net income of the Company for 2004 was $337.2 million, compared to
$344.7 million during 2003 and $801.6 million during 2002. Diluted earnings per
share for 2004 was $2.41 compared to $2.35 in 2003 and $5.56 in 2002. Income
from continuing operations (and diluted earnings per share from continuing
operations) was $337.2 million ($2.41), $344.7 million ($2.35) and $193.5
million ($1.35) for 2004, 2003 and 2002, respectively. The diluted earnings per
share calculation reflects the application of Emerging Issues Task Force No.
04-8 to all periods presented. See Note 13 for additional information.
Year ended December 31, 2004 2003 2002
- ----------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income $ 753,953 750,396 575,406
Interest expense (211,051) (226,751) (221,845)
Income from unconsolidated cellular entity 7,067 6,160 5,582
Nonrecurring gains and losses, net - - 3,709
Other income (expense) (2,597) 2,154 (63,814)
Income tax expense (210,128) (187,252) (105,505)
- ----------------------------------------------------------------------------------------------
Income from continuing operations 337,244 344,707 193,533
Discontinued operations, net of tax - - 608,091
- ----------------------------------------------------------------------------------------------
Net income $ 337,244 344,707 801,624
==============================================================================================
Basic earnings per share
From continuing operations $ 2.45 2.40 1.36
From discontinued operations $ - - 4.29
Basic earnings per share $ 2.45 2.40 5.66
Diluted earnings per share
From continuing operations $ 2.41 2.35 1.35
From discontinued operations $ - - 4.21
Diluted earnings per share $ 2.41 2.35 5.56
Average basic shares outstanding 137,215 143,583 141,613
==============================================================================================
Average diluted shares outstanding 142,144 148,779 144,408
==============================================================================================
Operating income increased $3.6 million in 2004 as a $39.8 million
increase in operating revenues was substantially offset by a $36.2 million
increase in operating expenses. Operating income increased $175.0 million in
2003 as a $395.6 million increase in operating revenues was partially offset by
a $220.6 million increase in operating expenses.
In addition to historical information, this management's discussion and
analysis includes certain forward-looking statements that are based on current
expectations only, and are subject to a number of risks, uncertainties and
assumptions, many of which are beyond the control of the Company. Actual events
and results may differ materially from those anticipated, estimated or projected
if one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect. Factors that could affect actual results include
but are not limited to: the timing, success and overall effects of competition
from a wide variety of competitive providers; the risks inherent in rapid
technological change; the effects of ongoing changes in the regulation of the
communications industry; the Company's ability to effectively manage its growth,
including integrating newly-acquired businesses into the Company's operations
and hiring adequate numbers of qualified staff; possible changes in the demand
for, or pricing of, the Company's products and services; the Company's ability
to successfully introduce new product or service offerings on a timely and
cost-effective basis; the Company's ability to successfully take steps to
mitigate the dilutive effect of the $500 million of equity units currently
scheduled to settle in May 2005; other risks referenced from time to time in
this report or other of the Company's filings with the Securities and Exchange
Commission; and the effects of more general factors such as changes in interest
rates, in tax rates, in accounting policies or practices, in operating, medical
or administrative costs, in general market, labor or economic conditions, or in
legislation, regulation or public policy. These and other uncertainties related
to the business are described in greater detail in Item 1 included herein. You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. The Company undertakes no
obligation to update any of its forward-looking statements for any reason.
OPERATING REVENUES
Year ended December 31, 2004 2003 2002
- ------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 716,028 712,565 570,871
Network access 966,011 1,001,462 884,982
Long distance 186,997 173,884 146,536
Data 275,777 244,998 179,695
Fiber transport and CLEC 74,409 43,041 21,666
Other 188,150 191,660 168,246
- ------------------------------------------------------------------------------
Operating revenues $ 2,407,372 2,367,610 1,971,996
==============================================================================
Local service revenues. Local service revenues are derived from the
provision of local exchange telephone services in the Company's service areas.
Of the $3.5 million (.5%) increase in local service revenues in 2004, $12.6
million was due to the provision of custom calling features to more customers,
which was partially offset by an $8.4 million decrease due to the decline in
access lines. Of the $141.7 million (24.8%) increase in local service revenues
in 2003, $121.2 million was due to the properties acquired from Verizon in the
third quarter of 2002. Of the remaining $20.5 million increase, $8.4 million was
due to the provision of custom calling features to more customers and $5.9
million was due to increased rates in certain jurisdictions. Access lines
declined 62,500 (2.6%) during 2004 compared to a decline of 38,400 (1.6%) in
2003. The Company believes the decline in the number of access lines during 2004
and 2003 is primarily due to the displacement of traditional wireline telephone
services by other competitive services, including the Company's DSL product
offering. Based on current conditions, the Company expects access lines to
decline between 2.5 and 3.5% for 2005.
Network access revenues. Network access revenues primarily relate to
(i) services provided by the Company to long distance carriers, wireless
carriers and other carriers and customers in connection with the use of the
Company's facilities to originate and terminate their interstate and intrastate
voice and data transmissions and (ii) the receipt of universal support funds
which allows the Company to recover a portion of its costs under federal and
state cost recovery mechanisms. Certain of the Company's interstate network
access revenues are based on tariffed access charges filed directly with the
Federal Communications Commission ("FCC"); the remainder of such revenues are
derived under revenue sharing arrangements with other local exchange carriers
("LECs") administered by the National Exchange Carrier Association. Intrastate
network access revenues are based on tariffed access charges filed with state
regulatory agencies or are derived under revenue sharing arrangements with
other LECs.
Network access revenues decreased $35.5 million (3.5%) in 2004 and
increased $116.5 million (13.2%) in 2003 due to the following factors:
2004 2003
increase increase
(decrease) (decrease)
- ------------------------------------------------------------------------------
(Dollars in thousands)
Acquisitions of Verizon properties in
third quarter 2002 $ - 107,319
Recovery from the federal Universal
Service High Cost Loop support program (11,311) 250
One-time refund of access charges to
interexchange carriers in 2002 - 7,645
Intrastate revenues due to decreased
minutes of use and decreased
access rates in certain states (25,916) (6,798)
Partial recovery of increased operating
costs through revenue sharing arrangements
with other telephone companies, interstate
access revenues, increased recovery from
state support funds and return on rate base 3,980 3,513
Rate changes in certain jurisdictions 5,052 2,472
Revision of prior year revenue
settlement agreements (3,690) 7,368
Other, net (3,566) (5,289)
- ------------------------------------------------------------------------------
$ (35,451) 116,480
==============================================================================
As indicated in the chart above, in 2004 the Company experienced a
reduction in its intrastate revenues of approximately $25.9 million primarily
due to (i) a reduction in intrastate minutes (partially due to the displacement
of minutes by wireless, electronic mail and other optional calling services) and
(ii) decreased access rates in certain states. The corresponding decrease in
2003 compared to 2002 was $6.8 million. The Company believes intrastate minutes
will continue to decline in 2005, although the magnitude of such decrease cannot
be precisely estimated.
The Company anticipates its 2005 revenues from the federal Universal
Service High Cost Loop support program will be approximately $10-15 million
lower than 2004 levels due to increases in the nationwide average cost per loop
factor used to allocate funds among all recipients.
Long distance revenues. The Company's long distance revenues relate to
the provision of retail long distance services to its customers. Long distance
revenues increased $13.1 million (7.5%) and $27.3 million (18.7%) in 2004 and
2003, respectively. The $13.1 million increase in 2004 was primarily
attributable to a 14.9% increase in the average number of long distance lines
served and a 15.3% increase in minutes of use (aggregating $21.7 million),
partially offset by a decrease in the average rate charged by the Company ($9.2
million). The $27.3 million increase in 2003 was primarily attributable to the
28.3% increase in the average number of long distance lines served and increased
minutes of use ($32.6 million), primarily due to penetration of the markets
acquired from Verizon in 2002. Such increase was partially offset by a decrease
in the average rate charged by the Company ($5.3 million). The Company
anticipates that increased competition and its current level of customer
penetration will continue to place downward pressure on rates and slow the
growth rate of the number of long distance lines served.
Data revenues. Data revenues include revenues primarily related to the
provision of Internet access services (both dial-up and DSL services) and the
provision of data transmission services over special circuits and private lines.
Data revenues increased $30.8 million (12.6%) in 2004 and $65.3 million (36.3%)
in 2003. The $30.8 million increase in 2004 was primarily due to a $20.3 million
increase in Internet revenues due primarily to growth in the number of
customers, principally due to expansion of the Company's DSL product offering,
and an $11.3 million increase in special access revenues due to an increase in
the number of special circuits provided and an increase in the partial recovery
of increased operating expenses through revenue sharing arrangements with other
telephone companies. The $65.3 million increase in 2003 was primarily due to (i)
a $38.4 million increase due to the acquisition of the Verizon properties in
2002 and (ii) a $21.3 million increase in Internet revenues due primarily to
growth in the number of customers in the Company's incumbent markets,
principally due to expansion of the Company's DSL product offering.
Fiber transport and CLEC. Fiber transport and CLEC revenues include
revenues from the Company's fiber transport, competitive local exchange carrier
("CLEC") and security monitoring businesses. Fiber transport and CLEC revenues
increased $31.4 million (72.9%) in 2004 substantially all of which is
attributable to the Company's acquisitions of fiber transport assets (which are
operated under the name LightCore) in June and December 2003. Fiber transport
and CLEC revenues increased $21.4 million (98.7%) in 2003 primarily due to (i)
$16.7 million of revenues associated with the acquisition of the Company's
LightCore operations and (ii) a $4.3 million increase in revenues in the
Company's CLEC business primarily due to an increased number of customers,
including those acquired in connection with the purchase of certain CLEC
operations on February 28, 2002.
Other revenues. Other revenues include revenues related to (i)leasing,
selling, installing and maintaining customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for long
distance carriers and (iii) participating in the publication of local
directories. Other revenues decreased $3.5 million (1.8%) during 2004 primarily
due to a $3.4 million decrease in directory revenues due to the expiration of
the Company's rights to share in the revenues of yellow page directories
published in certain markets acquired from Verizon in 2002. Other revenues
increased $23.4 million (13.9%) in 2003, substantially all of which is due to
the properties acquired from Verizon in 2002.
OPERATING EXPENSES
Year ended December 31, 2004 2003 2002
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Cost of services and products (exclusive
of depreciation and amortization) $ 755,413 739,210 635,164
Selling, general and administrative 397,102 374,352 301,681
Corporate overhead costs allocated to
discontinued operations - - 9,548
Depreciation and amortization