Attached files
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, 2009
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)
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Louisiana
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72-0651161
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(State or other jurisdiction
of
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(IRS
Employer
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incorporation
or organization)
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Identification
No.)
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100
CenturyLink Drive, Monroe, Louisiana
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71203
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code - (318) 388-9000
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, par value $1.00
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New
York Stock Exchange
Berlin
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
Stock
Options
(Title
of class)
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
[X] No
[ ]
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
[ ] No
[X]
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes
[X] No
[ ]
1
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
[ ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
[X] Accelerated
filer
[ ] Non-accelerated
filer
[ ]
Smaller reporting company [ ]
Indicate
by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of
the Act).
Yes
[ ]
No [X]
The
aggregate market value of voting stock held by non-affiliates (affiliates being
for these purposes only directors, executive officers and holders of more than
five percent of our outstanding voting securities) was $2.4 billion as of June
30, 2009. As of February 26, 2010, there were 299,570,335 shares
of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Registrant’s Proxy Statement to be furnished in connection with the 2010
annual meeting of shareholders are incorporated by reference in Part III of this
Annual Report.
2
Table
of Contents
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Page
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Part
I.
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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26
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Item
1B.
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Unresolved
Staff Comments
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44
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Item
2.
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Properties
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44
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Item
3.
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Legal
Proceedings
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45
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Item
4.
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[Reserved]
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46
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Part
II.
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder
Matters
and Issuer Purchases of Equity Securities
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47
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Item
6.
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Selected
Financial Data
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48
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations
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50
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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77
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Item
8.
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Financial
Statements and Supplementary Data
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78
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting
and
Financial Disclosure
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125
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Item
9A.
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Controls
and Procedures
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125
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Item
9B.
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Other
Information
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126
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Part
III.
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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126
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Item
11.
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Executive
Compensation
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128
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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128
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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128
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Item
14.
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Principal
Accountant Fees and Services
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128
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Part
IV.
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Item
15.
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Exhibits
and Financial Statement Schedules
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129
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Signatures
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139
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All
references herein to “we”, “us”, “our” or “CenturyTel” refer to CenturyTel, Inc.
and its consolidated subsidiaries, including, for all references to dates or
periods on or after July 1, 2009 (except as otherwise stated herein), Embarq
Corporation and its subsidiaries, which we acquired on July 1,
2009. All references to “Notes” herein refer to the Notes to the
Financial Statements included in Item 8 of this Annual Report on
Form 10-K.
3
PART
I
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Item
1.
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Business
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On
July 1, 2009, CenturyTel, Inc. acquired Embarq Corporation (“Embarq”) in a
transaction that substantially expanded the size and scope of our
business. Any references to results of operations, financial
condition or subscriber data in this Annual Report on Form 10-K include Embarq’s
results or subscriber information after July 1, 2009 only. Due to the
significant size of Embarq, direct comparisons of our results of operations or
subscriber data with prior periods are less meaningful. For
additional information on our Embarq acquisition, see “Embarq acquisition”
below.
General. CenturyTel,
Inc., together with its subsidiaries, is an integrated communications company
engaged primarily in providing an array of communications services, including
local and long distance voice, wholesale local network access, high-speed
Internet access, other data services and video services. We strive to
maintain our customer relationships by, among other things, bundling our service
offerings to provide a complete offering of integrated communications
services. We primarily conduct our operations in 33 states located
within the continental United States.
At
December 31, 2009, our incumbent local exchange telephone subsidiaries operated
approximately 7.0 million telephone access lines in 33 states, with over 75% of
these lines located in Florida, North Carolina, Missouri, Nevada, Ohio,
Wisconsin, Texas, Pennsylvania, Virginia and Alabama. According to
published sources, we are currently the fourth largest local exchange telephone
company in the United States based on the number of access lines
served.
We also
provide fiber transport, competitive local exchange carrier service, security
monitoring, pay telephone and other communications, professional and business
information services in certain local and regional markets.
In recent
years, we have expanded our product offerings to include satellite television
services and wireless broadband services. For additional
information, see “Operations - Recent Product Developments” below.
For
information on the amount of revenue derived by our various lines of services,
see “Operations - Services” below and Item 7 of this annual report.
Embarq
acquisition. On July 1, 2009, pursuant to the terms and
conditions of the Agreement and Plan of Merger, dated as of October 26, 2008
(the “Merger Agreement”), we acquired Embarq through a merger
transaction. Embarq, which was spun-off from Sprint Nextel
Corporation in 2006, became a wholly-owned subsidiary of
CenturyTel. As a result of the transaction, each outstanding share of
Embarq common stock was converted into 1.37 shares of CenturyTel common stock,
with cash paid in lieu of fractional shares. We also assumed
approximately $5.1 billion of Embarq’s indebtedness upon the consummation of the
transaction. As of the acquisition date, Embarq served approximately
5.4 million access lines and 1.5 million high-speed Internet customers located
in 18 states.
4
See Item
1A, Risk Factors, for additional information concerning the acquisition of
Embarq. Additional information about Embarq is included elsewhere
herein and in documents that it previously filed with the U.S. Securities and
Exchange Commission (the “SEC”). See “Where to find additional
information” below.
Other recently completed
acquisitions. On April 30, 2007, we acquired all
of the outstanding stock of Madison River Communications Corp. (“Madison River”)
for approximately $322 million cash (including the effect of post-closing
adjustments). In connection with the acquisition, we also paid all of
Madison River’s existing indebtedness (including accrued interest), which
approximated $522 million. At the time of this acquisition, Madison
River operated approximately 164,000 predominantly rural access lines in four
states.
In June
2005, we acquired fiber assets in 16 metropolitan markets from KMC Telecom
Holdings, Inc. (“KMC”) for approximately $75.5 million cash, which has enabled
us to offer broadband and competitive local exchange services to customers in
these markets. During 2008, we sold the assets in six of these
markets in two separate transactions.
In June
2003, we purchased a regional communications company providing wholesale data
transport services to other communications carriers over its fiber optic network
located in Missouri, Arkansas, Oklahoma and Kansas. In a separate
transaction, in December 2003 we acquired additional fiber transport
assets in Arkansas, Missouri and Illinois. For additional
information, see “Operations - Services - Fiber Transport and
CLEC.”
We also
acquired approximately 660,000, 490,000 and 650,000 telephone access lines in
transactions completed in 1997, 2000 and 2002, respectively, each of which
substantially expanded our operations. The 2002 acquisition of
telephone access lines was funded primarily from proceeds received from the sale
of substantially all of our wireless operations in August 2002.
We
continually evaluate the possibility of acquiring additional communications
assets in exchange for cash, securities or other properties, and at any given
time may be engaged in discussions or negotiations regarding additional
acquisitions. We generally do not announce our acquisitions or
dispositions until we have entered into a preliminary or definitive
agreement. Although our primary focus will continue to be on
acquiring interests that are proximate to our properties or that serve a
customer base large enough for us to operate efficiently, we may also acquire
other communications interests and these acquisitions could have a material
impact upon us.
Where to find additional
information. We make available all of our filings with
the SEC (including Forms 10-K, 10-Q and 8-K) on our website (www.centurylink.com)
as soon as reasonably practicable after we complete such filings with the
SEC. These documents may also be obtained from the SEC’s website at
www.sec.gov. You
may obtain copies of Embarq’s previous filings with the SEC from our website or
the SEC’s website.
5
We also
make available on our website our Corporate Governance Guidelines, our corporate
ethics and compliance program and the charters of our audit, compensation, risk
evaluation, and nominating and corporate governance committees. We
will furnish printed copies of these materials free of charge upon the request
of any shareholder. If a provision of our corporate ethics and
compliance program is amended, other than by a technical, administrative or
other non-substantive amendment, or a waiver under this program is granted to a
director or executive officer, we will post notice of such amendment or waiver
on our website or disclose the amendment or waiver in a report on Form 8-K filed
with the SEC. Only our board of directors, or an authorized committee
of the board, may consider a waiver of our corporate ethics and compliance
program for a director or executive officer.
In
connection with filing this annual report, our chief executive officer and chief
financial officer made the certifications regarding our financial disclosures
required under the Sarbanes-Oxley Act of 2002, and the Act’s related
regulations. In addition, during 2009 our chief executive officer
certified to the New York Stock Exchange that he was unaware of any violation by
us of the New York Stock Exchange’s corporate governance listing
standards.
Industry
information. Unless otherwise indicated, information contained
in this annual report and other documents filed by us under the federal
securities laws concerning our views and expectations regarding the
communications industry are based on estimates made by us using data from
industry sources, and on assumptions made by us based on our management’s
knowledge and experience in the markets in which we operate and the
communications industry generally. We believe these estimates and
assumptions are accurate as of the date made; however, this information may
prove to be inaccurate because it cannot always be verified with
certainty. You should be aware that we have not independently
verified data from industry or other third-party sources and cannot guarantee
its accuracy or completeness. Our estimates and assumptions involve
risks and uncertainties and are subject to change based on various factors,
including those discussed in Item 1A of this annual report.
Other. As of
December 31, 2009, we had approximately 20,200 employees, of which approximately
6,700 were members of 46 different bargaining units represented by the
International Brotherhood of Electrical Workers and the Communications Workers
of America. We believe that relations with our employees
continue to be generally good. Over the last several years, we
announced reductions of our workforce primarily due to (i) progress made on our
integration efforts from recent acquisitions (including the recently completed
Embarq acquisition); (ii) increased competitive pressures and the loss of access
lines over the last several years, and (iii) the elimination of certain customer
service personnel due to reduced call volumes.
6
We were
incorporated under Louisiana law in 1968 to serve as a holding company for
several telephone companies acquired over the previous 15 to 20 years. Our
principal executive offices are located at 100 CenturyLink Drive, Monroe,
Louisiana 71203 and our telephone number is (318) 388-9000.
OPERATIONS
According
to published sources, our acquisition of Embarq on July 1, 2009 positioned us as
the fourth largest local exchange telephone company in the United States, based
on the approximately 7.0 million access lines we served at December 31, 2009,
all of which are digitally switched. “Access lines” are telephone
lines that connect homes or businesses to the public switched telephone
network.
Before
the Embarq acquisition, (i) CenturyTel provided local exchange telephone
services to predominantly rural areas and small to mid-size cities in 25 states
and (ii) Embarq provided local exchange telephone services to a wide variety of
markets in 18 states, including Las Vegas, Nevada, and surrounding areas of
Orlando, Florida as well as the suburbs of several other large U.S.
cities. At the time of the acquisition, the average population
density of CenturyTel’s and Embarq’s local exchange markets was 25 and 94
persons per square mile, respectively. Although the services provided
by each company prior to the acquisition were substantially similar, the merger
resulted in several important changes to our operations,
including:
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●
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providing
services to an expanded number of densely-populated markets, which tend to
afford consumers access to a greater range of competitive communications
products than less dense markets and exposes the incumbent telephone
service provider to higher levels of service
terminations;
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●
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reducing
the percentage of our total revenue derived from governmental support
programs, which typically focus on disbursing payments to companies
operating in less densely populated
areas;
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●
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structuring
our operations into five newly-configured operating regions in order to
provide day-to-day decision making at the regional level as opposed to
Embarq’s prior operating model which operated under a more centralized
structure; and
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●
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offering certain
services, such as inmate payphone services, that CenturyTel did not
historically provide.
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The
following table lists additional information (rounded to the nearest thousand
lines) regarding our access lines as of (i) December 31, 2009, which reflects
the Embarq acquisition, and (ii) December 31, 2008, which pre-dates the Embarq
acquisition.
7
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December
31, 2009
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December
31, 2008 (1)
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Number
of
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Percent
of
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Number
of
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Percent
of
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State
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access lines
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access lines
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access lines
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access lines
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Florida
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1,352,000 | 19 | % | - | - | % | ||||||||||
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North
Carolina
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1,071,000 | 15 | 13,000 | * | ||||||||||||
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Missouri
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548,000 | 8 | 392,000 | 19 | ||||||||||||
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Nevada
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523,000 | 7 | - | * | ||||||||||||
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Ohio
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388,000 | 5 | 59,000 | 3 | ||||||||||||
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Wisconsin
(2)
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343,000 | 5 | 368,000 | 18 | ||||||||||||
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Texas
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303,000 | 4 | 32,000 | 2 | ||||||||||||
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Pennsylvania
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271,000 | 4 | - | - | ||||||||||||
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Virginia
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260,000 | 4 | - | - | ||||||||||||
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Alabama
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254,000 | 4 | 274,000 | 13 | ||||||||||||
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Washington
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200,000 | 3 | 147,000 | 7 | ||||||||||||
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Indiana
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186,000 | 3 | 4,000 | * | ||||||||||||
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Arkansas
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182,000 | 3 | 199,000 | 10 | ||||||||||||
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Tennessee
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176,000 | 2 | 22,000 | 1 | ||||||||||||
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New
Jersey
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145,000 | 2 | - | - | ||||||||||||
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Minnesota
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144,000 | 2 | 25,000 | 1 | ||||||||||||
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Oregon
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109,000 | 2 | 62,000 | 3 | ||||||||||||
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All other states (3)
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584,000 | 8 | 428,000 | 21 | ||||||||||||
| 7,039,000 | 100 | % | 2,025,000 | 100 | % | |||||||||||
* Represents less than 1% of access
lines.
(1) Access line counts for 2008 reflect line count
methodology adjustments to standardize legacy CenturyTel and Embarq line counts.
(2) As of December 31, 2009 and 2008, approximately
45,000 and 48,000, respectively, of these lines were owned and operated by our
89%-owned affiliate.
(3) Includes all of the remaining 16 states in
which we operate, each of which has less than 100,000 access lines served.
The
following table summarizes certain information related to our customer base,
operating revenues and capital expenditures for the past five
years. The 2009 information includes the Embarq operations we
acquired on July 1, 2009. The 2009, 2008 and 2007 information
includes the Madison River properties we acquired on April 30,
2007. All periods reflect access line count methodology adjustments
to standardize legacy CenturyTel and Embarq line counts.
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Year
ended or as of December 31,
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||||||||||||||||||||
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2009
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2008
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2007
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2006
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2005
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(Dollars
in thousands)
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Access
lines
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7,039,000 | 2,025,000 | 2,135,000 | 2,094,000 | 2,214,000 | |||||||||||||||
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%
Residential
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68 | % | 73 | 73 | 74 | 75 | ||||||||||||||
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%
Business
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32 | % | 27 | 27 | 26 | 25 | ||||||||||||||
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Internet
customers
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2,259,000 | 683,000 | 623,000 | 459,000 | 357,000 | |||||||||||||||
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%
High-speed Internet service
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99 | % | 94 | 89 | 80 | 70 | ||||||||||||||
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%
Dial-up service
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1 | % | 6 | 11 | 20 | 30 | ||||||||||||||
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Operating
revenues
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$ | 4,974,239 | 2,599,747 | 2,656,241 | 2,447,730 | 2,479,252 | ||||||||||||||
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Capital
expenditures
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$ | 754,544 | 286,817 | 326,045 | 314,071 | 414,872 | ||||||||||||||
As
discussed further below, during the last several years (exclusive of
acquisitions and certain non-recurring favorable adjustments), we have
experienced revenue declines in our voice and network access revenues primarily
due to declines in access lines, intrastate access rates, minutes of use, and
federal support fund payments. To mitigate these declines, we plan
to, among other things, (i) promote long-term relationships with our customers
through bundling of integrated services, (ii) provide new services, such as
video and wireless broadband, and other additional services that may become
available in the future due to advances in technology, wireless spectrum sales
by the Federal Communications Commission (“FCC”) or improvements in our
infrastructure, (iii) provide our broadband and premium services to a higher
percentage of our customers, (iv) pursue acquisitions of additional
communications properties if available at attractive prices, (v) increase usage
of our networks and (vi) market our products to new customers. See
“Services” and “Regulation and Competition” for additional
information.
8
Services
We derive
revenue from providing (i) local exchange and long distance voice telephone
services, (ii) wholesale local network access services, (iii) data services,
including high-speed Internet services, as well as special access and private
line services, (iv) fiber transport, competitive local exchange and security
monitoring services and (v) other related services. The following table reflects
the percentage of operating revenues derived from each of
these services:
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2009
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2008
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2007
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Voice
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36.7 | % | 33.6 | 33.5 | ||||||||
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Network
access
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25.5 | 31.6 | 35.4 | |||||||||
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Data
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24.2 | 20.2 | 17.4 | |||||||||
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Fiber
transport and CLEC
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3.5 | 6.2 | 6.0 | |||||||||
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Other
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10.1 | 8.4 | 7.7 | |||||||||
| 100.0 | % | 100.0 | 100.0 | |||||||||
Voice. We offer
local calling service to residential and business customers within our local
service areas, generally for a fixed monthly charge. While we have
achieved significant pricing deregulation over time, the maximum amount that we
can charge a customer for local calling services is still largely governed by
state and federal regulatory authorities and by our competitors. We
offer a number of enhanced voice services (such as call forwarding, caller
identification, conference calling, voicemail, selective call ringing and call
waiting) to our local exchange customers for an additional monthly
fee. At December 31, 2009, over 65% of both our business and
residential customers subscribed to one or more enhanced services. We
also offer long distance services to our customers based on either usage or
pursuant to flat-rate calling plans. Several Embarq markets currently
offer long distance voice services through a wholesale arrangement with Sprint
Nextel. We expect to transition such services to our owned networks
during the next few years. We anticipate that most of our long
distance service will continue to be provided as part of an integrated bundle
with our other service offerings, including our local exchange telephone service
offering.
Total
access lines declined 380,000 during 2009 (excluding access lines we acquired
from Embarq on July 1, 2009 but including access lines lost in Embarq’s markets
following such acquisition) compared to a decline of 136,800 during
2008. We believe these declines in the number of access lines were
primarily due to the displacement of traditional wireline telephone services by
other competitive services and recent economic conditions. Over the
last few years, our recently-acquired Embarq markets have experienced higher
rates of access line losses than our incumbent markets due principally to such
markets being more densely-populated and competitive. Our legacy
CenturyTel access lines declined 6.6% in 2009 and 5.9% in 2008 while the legacy
Embarq access lines declined 9.5% in 2009 and 9.7% in 2008. Based on
our current retention initiatives, we estimate that our combined access line
loss will be between 7.5% and 8.5% in 2010.
Network access. We
derive our network access revenues primarily from (i) providing wholesale
services to various carriers and customers in connection with the use of our
facilities to originate and terminate their interstate and intrastate voice
transmissions; (ii) receiving universal support funds which allows us to recover
a portion of our costs under federal and state cost recovery mechanisms (see
“Regulation and Competition Relating to Incumbent Local Exchange Operations”
below), (iii) receiving reciprocal compensation from competitive local exchange
carriers (“CLECs”) and wireless service providers for terminating their calls on
our networks and (iv) offering certain network facilities and related services
to CLECs. Our revenues for switched access services depend primarily
on the level of call volumes.
Substantially
all of our interstate network access revenues are based on tariffed access
charges prescribed by the FCC. Certain of our intrastate network
access revenues are derived through access charges that we bill to intrastate
long distance carriers and other LEC customers. Such intrastate network access
charges are based on tariffed access charges, which are subject to state
regulatory commission approval. Additionally, certain of our intrastate network
access revenues, along with intrastate and intra-LATA (Local Access and
Transport Areas) long distance revenues, are derived through revenue sharing
arrangements with other LECs.
Pursuant
to the Telecommunications Act of 1996, we offer certain network facilities to
CLEC’s on a resale or unbundled basis and allow them to collocate certain of
their equipment in our central offices. The FCC sets general
guidelines for pricing of resale, unbundled network elements and collocation
agreements, while the state regulatory authorities approve the actual prices
charged.
Data. We
derive our data
revenues primarily from monthly recurring charges for providing high-speed
Internet access services and data transmission services over special circuits
and private lines. CenturyTel began offering traditional
dial-up Internet access services to its telephone customers in
1995. In late 1999, CenturyTel began offering high-speed Internet
access services, a broadband data service. At December 31, 2009,
approximately 89% of our access lines were broadband-enabled and we provided
high-speed Internet access services to over 2.2 million
customers. During 2009, we added approximately 1.591 million
high-speed Internet customers, which includes approximately 1.465 million we
acquired in connection with our acquisition of Embarq.
We offer
a range of data services to businesses, long distance carriers, wireless
carriers and CLECs. Our most significant data service is special
access, which consists of providing dedicated circuits connecting other
carriers’ networks to their customers’ locations, wireless carriers’ cell towers
to mobile switching centers or business customers to our
network. Although the traffic handled through special access
facilities may include voice as well as data, we report revenues associated with
special access as data revenue.
10
Fiber transport and
CLEC. Our fiber transport and CLEC revenues include revenues
from our fiber transport, competitive local exchange carrier and security
monitoring businesses.
In late
2000, CenturyTel began offering competitive local exchange telephone services as
part of a bundled service offering to small to medium-sized businesses in Monroe
and Shreveport, Louisiana. In February 2002, we purchased the fiber
network and customer base of KMC’s operations in Monroe and Shreveport,
Louisiana and in June 2005, we purchased the fiber assets in 16 metropolitan
markets from KMC. As part of our plan to focus our efforts on the
CLEC markets with the most promise, in mid-2008 we sold the assets in six of our
CLEC markets to other communications companies in two separate
transactions. At December 31, 2009, our competitive local exchange
operations provided service over 800 miles of fiber.
Under the
name “LightCore”, we sell fiber capacity to other carriers and businesses over a
network that encompassed, at December 31, 2009, nearly 10,300 miles of fiber in
the central United States. CenturyTel began its fiber transport
business during 2001, when we began selling capacity over a 700-mile fiber optic
ring that we constructed in southern and central Michigan. In June
2003, we acquired the assets of Digital Teleport, Inc., a regional
communications company providing wholesale data transport services to other
communications carriers over its fiber optic network located in Missouri,
Arkansas, Oklahoma and Kansas. We have used the network to sell
services to new and existing customers and to reduce our reliance on third party
transport providers. In addition, in December 2003, we acquired
additional fiber transport assets in Arkansas, Missouri and Illinois from Level
3 Communications, Inc. to provide services similar to those described
above.
In
addition to the above-described fiber network, in connection with our 2007
acquisition of Madison River, we acquired ownership in a 2,100 route mile fiber
network located in six states which has enabled us to expand our fiber network
business and further reduce our reliance on third-party transport
providers.
We offer
24-hour security and fire monitoring services to approximately 10,900
customers in select markets in Louisiana, Arkansas, Mississippi, Texas and
Ohio.
Other. We derive
our “other revenues” principally by (i) leasing, selling, installing and
maintaining customer premise telecommunications equipment and wiring to our
business customers, (ii) providing payphone services primarily within our local
service territories and at various state and county correctional facilities
around the country, (iii) participating in the publication of local telephone
directories, which allows us to share in revenues generated by the sale of
yellow page and related advertising to businesses, (iv) providing network
database services and (v) offering our new services described below under the
heading “Recent Product Developments”. We also provide printing,
direct mail services and cable television services.
11
During
2008, we paid an aggregate of approximately $149 million for 69 licenses in the
FCC’s auction of 700 megahertz (“MHz”) wireless spectrum. We expect
to complete our planning regarding the use of this spectrum in the first half of
2010 and to begin our trial phase in late 2010 or early
2011. Based on our planning, we are considering developing wireless
voice and data service capabilities based on equipment using LTE (Long-Term
Evolution) technology. Given that simple data devices are not expected to
be commercially available until later this year and more complex, integrated
voice and data devices such as smartphones are not expected to be available
until 2012, we do not expect to deploy network equipment, other than trial
equipment, in 2010.
From time
to time, we also make investments in other communications
companies.
For
further information on regulatory, technological and competitive changes that
could impact our revenues, see “Regulation and Competition” under this Item 1
below and “Risk Factors and Cautionary Statements” under Item 1A
below. For more information on the financial contributions of our
various services, see Item 7 of this annual report.
Recent
Product Developments
Since
2005, CenturyTel, in conjunction with DISH Network Corporation (“DISH”), has
offered satellite television service to households in substantially all of its
local exchange service areas. Effective January 1, 2007, we changed
our relationship with DISH from a revenue sharing arrangement to an agency
relationship. Embarq also has an existing sales agency relationship
with DirecTV for certain business customers and with DISH for residential
customers. In late 2005, we initiated our switched digital television
service in the LaCrosse, Wisconsin market and, in October 2007, we commenced a
second switched digital video service offering in our Columbia, Missouri
market. We also recently launched switched digital video service in
Jefferson City, Missouri, a legacy Embarq market.
We also
offer wireless broadband Internet services in select locations in certain
markets in 14 states.
Federal
Financing Programs
Some of
our telephone subsidiaries receive long-term financing from the Rural Utilities
Service (“RUS”), a federal agency that has historically provided long-term
financing to telephone companies at relatively attractive interest
rates. For additional information regarding our financing, see our
consolidated financial statements included in Item 8 herein.
12
Sales
and Marketing
Subsequent
to our acquisition of Embarq on July 1, 2009, we changed our trade name to
“CenturyLink” and have used this name in our recent marketing and advertising
efforts. We plan to change the legal name of the corporation to
“CenturyLink, Inc.” in May 2010 upon approval of the name change by our
shareholders. In addition, we currently sell fiber capacity on our
networks under the brand name “LightCore” and our satellite television service
is offered on a co-branded basis under the “DISH Network” or “DirecTV”
name. We expect to discontinue the LightCore brand name in the near future
and transition that brand name to CenturyLink.
We
maintain local offices in most of the larger population centers within our
service territories. These offices provide sales and customer support
services in the community. We also rely on our call center personnel
to promote sales of services that meet the needs of our
customers. Our strategy is to enhance our communications services by
offering comprehensive bundling of services and deploying new technologies to
build upon the strong reputation we enjoy in our markets and to further enhance
customer loyalty.
Our
consumer marketing approach emphasizes customer-oriented sales, marketing and
service with a local presence. We market our products and services
primarily through direct sales representatives, local retail stores,
telemarketing and third parties. We support our distribution with
direct mail, bill inserts, newspaper advertising, website promotions, public
relations activities and sponsorship of community events. Our
business marketing approach includes a commitment to deliver communications
solutions that meet existing and future business customer needs through bundles
of services and integrated service offerings, focusing on end-to-end customers’
communications solutions from small businesses to large enterprise
customers.
Network
Architecture
Our local
exchange carrier networks consist of central office hosts and remote sites, all
with advanced digital switches (primarily manufactured by Nortel and Siemens)
and operating with licensed software. Our outside plant consists of
transport and distribution delivery networks connecting each of our host central
offices to our remote central offices, and ultimately to our
customers. As of December 31, 2009, we maintained over 594,000 miles
of copper plant and approximately 67,000 miles of fiber optic plant in our local
exchange networks. Our fiber optic cable is the primary transport
technology between our host and remote central offices and interconnection
points with other incumbent carriers. Most of our long distance
service is provided through reselling arrangements with other long distance
carriers, with the balance being provided directly through CenturyTel’s own
switches and network equipment. We are currently transitioning
Embarq’s legacy long distance traffic to our owned networks.
13
In our
markets, high-speed Internet-enabled technologies are being deployed to provide
significant broadband capacity to our customers. We continue to
remove network impediments to offer high-speed Internet service to more
customers. At the end of 2009, approximately 89% of our access lines
were capable of providing high-speed Internet service to our
customers.
We also
maintain networks in connection with providing fiber transport and CLEC
services. For additional information on these networks, see “Services
- Fiber Transport and CLEC.”
Rapid and
significant changes in technology are expected in the communications
industry. Our future success will depend, in part, on our ability to
anticipate and adapt to technological changes.
Regulation
and Competition Relating to Incumbent Local Exchange Operations
Traditionally,
LECs operated as regulated monopolies having the exclusive right and
responsibility to provide local telephone services in their franchised service
territories. (These LECs are sometimes referred to below as
“incumbent LECs” or “ILECs”). Consequently, most of our intrastate
telephone operations have been regulated extensively by various state regulatory
agencies (generally called public service commissions or public utility
commissions) and our interstate operations have been regulated by the FCC under
the Communications Act of 1934. As we discuss in greater detail
below, passage of the 1996 Act, coupled with state legislative and regulatory
initiatives and technological changes, fundamentally altered the telephone
industry by generally reducing the regulation of ILECs and creating a
substantial increase in the number of competitors. We anticipate that these
trends toward reduced regulation and increased competition will
continue.
The
following description discusses some of the major industry regulations that
affect our traditional telephone operations, but numerous other regulations not
discussed below could also impact us. Some legislation and
regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proceedings which could substantially change the
manner in which the communications industry operates. Neither the
outcome of these proceedings, nor their potential impact on us, can be predicted
at this time. The impact of regulatory changes in the communications
industry could have a substantial impact on our operations. See Item
1A of this annual report below.
State
regulation. The local service rates and intrastate access
charges of substantially all of our telephone subsidiaries are regulated by
state regulatory commissions which typically have the power to grant and revoke
certifications authorizing companies to provide communications
services. State commissions traditionally regulated pricing through
“rate of return” regulation that focused on authorized levels of earnings by
LECs. Only a few states (representing a small portion of our access
lines) continue to regulate us in this manner. In recent years, state
legislatures and regulatory commissions in most of the 33 states in which our
telephone subsidiaries operate have either reduced the regulation of ILECs or
have announced their intention to do so, and we expect this trend will
continue. In most of our states, we are generally regulated under
various forms of alternative regulation that typically limit our ability to
increase rates for local services, but relieve us from the requirement to meet
certain earnings tests. Moreover, in a few states, we have recently
gained pricing freedom for the majority of retail services except for the most
basic of services, such as stand alone basic residential service.
Additionally, in most of the states in which we operate, we have gained
pricing flexibility for certain enhanced calling services, such as caller
identification, and for bundled services that include local voice
service.
14
For a
discussion of legislative, regulatory and technological changes that have
introduced competition into the local exchange industry, see “Developments
Affecting Competition.”
As an
ILEC, we generally face carrier of last resort obligations which include an
ongoing requirement to provide service to all prospective and current customers
in our service territories who request service and are willing to pay rates
prescribed in our tariffs. In competitively-bid situations, such as
newly constructed housing developments or multi-tenant dwellings, this may
constitute a competitive disadvantage to us if competitors can choose to
exclusively tie service to homeowners’ association fees or choose not to provide
service to customers who are poor credit risks or whom they believe would be
uneconomic to serve. Strict adherence to carrier of last resort
requirements may force us to construct facilities with a low likelihood of
positive economic return. A few of our states provide relief from such
obligations under certain circumstances, relieving us of the duty to build
facilities, typically in developments served by alternative providers with
exclusive service arrangements. Additionally, we are seeking regulatory approval
in targeted circumstances to deploy service using less costly alternative
technologies, such as fixed wireless, and seeking to share the cost of
constructing networks with those customers. Currently, in certain areas our
costs to build and maintain network infrastructure are partially offset by
payments from universal service programs.
At the
state level, we are responding to carrier complaints, legislation or generic
investigations regarding our intrastate switched access rate levels in
Minnesota, Missouri, Ohio, Pennsylvania, North Carolina, Wisconsin, and
Virginia. Although outcomes cannot be determined at this time, we believe our
intrastate switched access rate levels are appropriate and we plan to vigorously
defend them. If we are required to reduce our intrastate switched access rates
as a result of any of these complaints, we will seek to recover displaced
switched access revenues from state universal service funds or other services;
however, the amount of such recovery, if any, is not assured.
Under
state law, our telephone operating subsidiaries are typically governed by laws
and regulations that (i) regulate the purchase and sale of LECs, (ii) prescribe
depreciation rates and certain accounting procedures, (iii) require LECs to
provide service under publicly-filed tariffs setting forth the terms, conditions
and prices of regulated services, (iv) limit LECs’ ability to borrow and
establish asset liens and (v) impose various other service
standards.
Federal regulation. Our
telephone subsidiaries are required to comply with the Communications Act of
1934, which requires us to offer services at just and reasonable rates and on
non-discriminatory terms, as well as the 1996 Act, which amended the
Communications Act to promote competition.
15
The FCC
regulates interstate services provided by our telephone subsidiaries primarily
by regulating the interstate access charges that we bill to long distance
companies and other communications companies for use of our network in
connection with the origination and termination of interstate voice and data
transmissions. Additionally, the FCC has prescribed certain rules and
regulations for telephone companies, including a uniform system of accounts and
rules regarding the separation of costs between jurisdictions and, ultimately,
between interstate services. In addition, the FCC has responsibility
for maintaining and administering the federal Universal Service
Fund. LECs must obtain FCC approval to use certain radio frequencies,
or to transfer control of any such licenses. The FCC retains the
right to revoke these licenses if a carrier materially violates relevant legal
requirements.
The FCC
requires price-cap regulation of interstate access rates for the Regional Bell
Operating Companies, and permits it for all other LECs. Under price-cap
regulation, limits imposed on a company’s interstate rates are adjusted
periodically to reflect inflation, productivity improvement and changes in
certain non-controllable costs. On July 1, 2009, we converted
substantially all of our remaining rate-of-return study areas to price cap
regulation. In addition, all of the properties we acquired from
Embarq operate under price cap regulation.
The FCC
has a proceeding underway that would review the state of the special access
market and current pricing flexibility and price cap policies applicable to
ILECs’ marketing of special access services. The FCC is also
reviewing requests by some other carriers to order reductions in some or all
ILECs’ rates for special access services. It is uncertain whether or
how the FCC might order changes in how special access services are regulated, or
in the rates ILECs are able to charge for them. If the FCC were to
adopt significant changes in regulations affecting special access services, the
proceeding could have a significant impact on our provision and pricing of
special access services.
Beginning
in 2003, the FCC initiated broad intercarrier compensation proceedings designed
to create a uniform mechanism to be used by the entire telecommunications
industry for payments between carriers originating, terminating, or transiting
telecommunications traffic. In connection therewith, the FCC has
received intercarrier compensation proposals from several industry groups, and
solicited public comments on a variety of topics related to access charges and
intercarrier compensation. Broad industry negotiations have taken
place with the goal of developing a consensus plan that addresses the concerns
of carriers from all industry segments. The ultimate outcome of the
FCC’s intercarrier compensation proceedings could change the way we receive
compensation from, and remit compensation to, other carriers, our end user
customers and the federal Universal Service Fund (the “USF”).
The
American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) was signed
into law in February 2009. As part of the Recovery Act, the FCC is
required to present a National Broadband Plan (the “Plan”) to Congress. We
expect issues such as universal service and intercarrier compensation reform
will be incorporated into the Plan. The FCC is expected to deliver a Plan
recommendation to Congress by the end of the first quarter of
2010. We anticipate that the FCC’s Plan will propose significant
changes while also seeking additional comment on a variety of issues ranging
from universal service funding for broadband to open network requirements for
providers. Until the FCC’s proceedings conclude and the changes, if
any, to the existing rules, including rules applicable to intercarrier
compensation and USF, are established, we cannot estimate the impact these
proceedings will have on our results of operations. The impact
of regulatory change, including those involving intercarrier compensation and
USF, could have a substantial impact on our operations.
16
The
Recovery Act also includes certain broadband initiatives that are intended to
accelerate broadband deployment across the United States. The Recovery Act
approved $7.2 billion in funding for broadband stimulus projects across the
United States to be administered by two governmental agencies. The
programs implemented by the two agencies are expected to provide grants and
loans to applicants for construction of certain broadband infrastructure,
provision of certain broadband services, and support of certain broadband
adoption initiatives. This program has attracted a wide range of
applicants including states, municipalities, start-up companies and
consortiums. To date we have not applied for funding under the
Recovery Act programs; however, we continue to evaluate all opportunities for
our business. The participation of other parties could lead to some
overbuilding of our networks by competitors in selected areas which may increase
our marketing costs and decrease our revenues in those areas. We
cannot estimate the impact these programs may have on our
operations.
We have
been working with other midsize carriers to develop proposals that would advance
universal broadband deployment while reforming intercarrier compensation and
universal service funding at the same time. In December 2009, we and
other midsize carriers submitted a proposal to the FCC designed to significantly
expand high-speed Internet access in rural America, in support of the FCC’s
broadband deployment goals, while paving the way for more fundamental reforms in
the future. The proposal includes reducing terminating switched
access and reciprocal compensation rates while eliminating loopholes and
regulatory arbitrage opportunities. Under this plan, a significant
portion of displaced revenue would be replaced with explicit, predictable
support funding to increase carriers’ ability to attract private investment
capital needed for increased broadband deployment. We plan to
continue to work with other like-minded carriers to advocate for regulatory
outcomes that promote broadband deployment while also reforming intercarrier
compensation and universal service fund support. We cannot predict
what part, if any, of such proposals and advocacy will ultimately be
adopted.
Our
operations and those of all communications carriers also may be impacted by
legislation and regulation imposing new or greater obligations on
us. The most likely areas of impact include regulations or laws
related to bolstering homeland security, increasing disaster recovery
requirements, minimizing environmental impacts, enhancing privacy, or addressing
other issues that impact our business, including the Communications Assistance
for Law Enforcement Act, and laws governing local number portability and
customer proprietary network information requirements. These laws and
regulations may cause us to incur additional costs and could impact our ability
to compete effectively.
17
Universal service support funds,
revenue sharing arrangements and related matters. A significant number of
our telephone subsidiaries recover a portion of their costs from the federal USF
and from similar state “universal support” mechanisms, which receive their
funding from fees charged to interexchange carriers and
LECs. Disbursements from these programs traditionally have focused
principally on allowing LECs serving small communities and rural areas to
provide communications services on terms and at prices reasonably comparable to
those available in urban areas. However, use of universal service
funding for other social policy goals continues to grow and to exert pressure on
the size of the fund and the contribution rate.
The table
below sets forth the amounts received by our telephone subsidiaries in 2009 and
2008 from federal and state universal service programs. We anticipate
that the percentage of our total 2010 operating revenues attributable to these
programs will be lower than the percentages reflected below since it will
reflect a full year of the combined operations of CenturyTel and Embarq (due to
Embarq having historically received a substantially lower percentage of its
revenues from these programs than has CenturyTel).
|
Year
ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
%
of Total
|
%
of Total
|
|||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Amount
|
Operating
|
Amount
|
Operating
|
|||||||||||||
|
Universal
Service Program
|
Received
|
Revenues
|
Received
|
Revenues
|
||||||||||||
|
(amounts
in millions)
|
||||||||||||||||
|
USF
High Cost Loop Program
|
$ | 145.3 | 2.9 | % | $ | 151.7 | 5.8 | % | ||||||||
|
Other
Federal Programs
|
163.0 | 3.3 | % | 128.5 | 5.0 | % | ||||||||||
|
Total Federal Receipts
|
308.3 | 6.2 | % | 280.2 | 10.8 | % | ||||||||||
|
State
Programs
|
76.6 | 1.5 | % | 39.7 | 1.5 | % | ||||||||||
|
TOTAL
|
$ | 384.9 | 7.7 | % | $ | 319.9 | 12.3 | % | ||||||||
A
significant portion of our payments have varied over time based on our average
cost to serve customers compared to national cost averages. Under the
USF High Cost Loop program, which is the USF’s principal program, our payments
from the USF will decrease if national average costs per loop increase at a rate
greater than our average cost per loop. Increases in the nationwide
average cost per loop factor used to allocate funds among all USF recipients
caused our revenues from the USF High Cost Loop program (exclusive of USF
revenues recognized during the last half of 2009 in connection with our Embarq
acquisition) to decrease in 2009 when compared to 2008 payments to the same
subsidiaries. We anticipate that this trend will continue in
2010. See Item 7 of Part II of this annual report for more
information.
Federal
USF programs have undergone substantial changes since 1997, and are expected to
experience more changes in the coming years. As mandated by the 1996
Act, in May 2001 the FCC modified its existing universal service support
mechanism for rural telephone companies by adopting an interim mechanism for a
five-year period based on embedded, or historical, costs that provide relatively
predictable levels of support to many LECs, including substantially all of our
LECs. In May 2006, the FCC extended this interim mechanism
until such time that new high-cost support rules are adopted for rural telephone
companies.
18
Universal
service funds available to ILECs are currently available to local competitors
that (i) certify they will serve all customers in a study area, (ii) offer nine
core services, and (iii) qualify as an “eligible telecommunications
carrier.” Wireless and other competitive service providers continue
to seek to qualify to receive USF funds. This trend, coupled with
changes in usage of telecommunications services, has placed stress on the
funding mechanism of the USF, which is subject to annual caps on
disbursements. As a result of these developments, there is no
assurance that sufficient funds will be available to provide funding to all
eligible service providers.
Over the
past few years, each of the FCC, Universal Service Administrative Company and
certain Congressional committees has initiated wide-ranging reviews of the
administration of the federal USF. As part of this process, we, along
with a number of other USF recipients, have undergone a number of USF audits and
have also received requests for information from the FCC’s Office of Inspector
General (“OIG”) and Congressional committees. In addition, in July
2008 we received a subpoena from the OIG requesting a broad range of information
regarding our depreciation rates and methodologies since 2000, and in July 2009
we received a second subpoena requesting information about our participation in
the E-rate program for Wisconsin schools and libraries since
2004. The OIG has not identified to us any specific issues with
respect to our participation in the USF program and none of the audits completed
to date has identified any material issues regarding our participation in the
USF program. While we believe our participation is in compliance with
FCC rules and in accordance with accepted industry practices, we cannot predict
with certainty the timing or outcome of these various reviews. We
have complied with and are continuing to respond to all requests for
information.
In late
2002, the FCC requested that the Federal-State Joint Board on Universal Service
(“FSJB”) review various FCC rules governing high cost universal service,
including rules regarding eligibility to receive payments in markets served by
LECs and competitive carriers. Since then, the FSJB recommended
a comprehensive general review of the high-cost support mechanisms for rural and
non-rural carriers and requested comments on the FCC’s current rules for the
provision of high-cost support for rural companies, including comments on
whether eligibility requirements should be amended in a manner that would
adversely affect larger rural LECs such as us.
In 2004,
the FCC mandated changes in the administration of the universal service programs
that temporarily suspended the disbursement of funds under the USF’s E-rate
program (for service to Schools and Libraries), and, more significantly, created
questions that these administrative changes could similarly delay the
disbursement of funds to ILECs from the Universal Service High Cost Loop support
program. Congress has passed bills in recent years granting
successive one-year exemptions from the federal law that impacted the E-rate
program, including a bill extending the exemption through September 30,
2010. Although we expect funding from this program to continue, we
cannot assure you that the lack of a definitive resolution of this issue will
not delay or impede the disbursement of funds in the future.
19
Several
states in which we operate have established their own universal service
programs. In 2009, we received support totaling approximately $76.6
million from state universal service programs in 13 states, with the largest
amounts received in Texas, Louisiana and Kansas. Several states are
currently reviewing their state universal service fund programs, which could
change the support we receive.
Some of
our telephone subsidiaries operate in states where traditional cost recovery
mechanisms, including rate structures, are under evaluation or have been
modified. See “ State Regulation.” There can be no assurance that
these states will continue to provide for cost recovery at current
levels.
Developments affecting
competition. Over the past decade, fundamental technological,
regulatory and legislative changes have significantly impacted the
communications industry, and we expect these changes will
continue. Primarily as a result of regulatory and technological
changes, competition has been introduced and encouraged in each sector of the
communications industry in recent years. As a result, we increasingly
face competition from other communication service providers, as further
described below.
Wireless
telephone services increasingly constitute a significant source of competition
with ILEC services, especially since wireless carriers have begun to compete
effectively on the basis of price with more traditional telephone
services. As a result, some customers have chosen to completely
forego use of traditional wireline phone service and instead rely solely on
wireless service for voice services. This trend is more pronounced
among residential customers, which comprise 68% of our access line
customers. We anticipate this trend will continue, particularly if
wireless service providers continue to expand their coverage areas, reduce their
rates, improve the quality of their services, and offer enhanced new
services. A vast majority of our access line customers are currently
capable of receiving wireless services from at least one competitive service
provider. Technological and regulatory developments in wireless
services, personal communications services, digital microwave, satellite,
coaxial cable, fiber optics, local multipoint distribution services, WiFi, and
other wired and wireless technologies are expected to further permit the
development of alternatives to traditional landline
services. Moreover, the growing prevalence of electronic mail, text
messaging, and similar digital communications continues to reduce the demand for
traditional landline voice services.
The 1996
Act, which obligates ILECs to permit competitors to interconnect their
facilities to the ILEC’s network and to take various other steps that are
designed to promote competition, imposes several duties on an ILEC if it
receives a specific request from another entity which seeks to connect with or
provide services using the ILEC’s network. In addition, each
incumbent LEC is obligated to (i) negotiate interconnection agreements in good
faith, (ii) provide nondiscriminatory “unbundled” access to all aspects of the
ILEC’s network, (iii) offer resale of its telecommunications services at
wholesale rates and (iv) permit competitors, on terms and conditions (including
rates) that are just, reasonable and nondiscriminatory, to collocate their
physical plant on the ILEC’s property, or provide virtual collocation if
physical collocation is not practicable. During 2003, the FCC
released new rules outlining the obligations of incumbent LECs to lease to
competitors elements of their circuit-switched networks on an unbundled basis at
prices that substantially limited the profitability of these arrangements to
incumbent LECs. In response to successful judicial challenges to
these rules, in 2005 the FCC released rules that required incumbent LECs to
lease a network element only in those situations where competing carriers
genuinely would be impaired without access to such network elements, and where
the unbundling would not interfere with the development of facilities-based
competition. These rules are further designed to remove ILECs’ unbundling
obligations over time as competing carriers deploy their own networks and local
exchange competition increases.
20
As a
result of these regulatory, consumer and technological developments, ILECs also
face competition from CLECs, particularly in densely populated
areas. CLECs provide competing services through reselling the ILECs’
local services, through use of the ILECs’ unbundled network elements or through
their own facilities. The number of companies which have requested
authorization to provide local exchange service in our service areas has
increased in recent years, particularly in Embarq’s legacy
markets. We anticipate that similar action may be taken by other
competitors in the future, especially if all forms of federal support available
to ILECs continue to remain available to these competitors.
As noted
above, wireless and other competitive services providers have been increasingly
aggressive in seeking and obtaining USF support funds. This support
is likely to encourage additional competitors to enter our high-cost service
areas.
Technological
developments have led to the development of new services that compete with
traditional ILEC services. Technological improvements have enabled
cable television companies to provide traditional circuit-switched telephone
service over their cable networks, and several national cable companies have
aggressively pursued this opportunity. As of December 31, 2009, we
believe that approximately 60% of our access lines faced competition from cable
voice offerings. Additionally, several large electric utilities have
announced plans to offer communications services that compete with some
ILECs.
Improvements
in the quality of Voice over Internet Protocol (“VoIP”) service have led several
cable, Internet, data and other communications companies, as well as start-up
companies, to substantially increase their offerings of VoIP service to business
and residential customers. VoIP providers route calls partially or
wholly over the Internet, without use of ILEC's circuit
switches. VoIP providers frequently use existing broadband networks
to deliver flat-rate, all distance calling plans that may offer features that
cannot readily be provided by traditional ILECs. These plans may also
be priced competitively or below those prices currently charged for traditional
local and long distance telephone services for several reasons, including lower
operating costs and regulatory advantages. In December 2003,
the FCC initiated a rulemaking intended to address the effect of VoIP on
intercarrier compensation, universal service and emergency
services. The FCC has not completed the rulemaking, but could address
the treatment of VoIP traffic and services by concluding this proceeding or in
combination with intercarrier compensation reform proceedings already
underway. To date, the FCC has adopted orders establishing broad
guidelines for the regulation of such services, including (i) an April 2004
order that found a type of IP-telephony service using the public switched
telephone network to be a regulated telecommunications service subject to
interstate access charges, (ii) a November 2004 order that nomadic
Internet-based services provided by Vonage Holdings Corporation should be
subject to federal rather than state regulation and (iii) a June 2005 order
requiring all VoIP service providers whose services are interconnected to the
public switched telephone network to provide E-911 services to their
customers. There can be no assurance that the FCC will adopt an order
addressing the treatment of VoIP, or that any such future order will be on terms
favorable to ILECs, or that VoIP providers will not successfully compete for our
customers.
21
Our
industry has witnessed an increase in disputes about the intercarrier
compensation rules applicable to various categories of traffic exchanged between
carriers. These disputes are subject to review by the FCC, state
commissions and federal courts. Rulings in such proceedings, whether
or not we are a party, may influence our exposure to disputes about our
wholesale charges or to claims against us for prior wholesale
billings. We cannot assure you that regulatory or court rulings on
such issues will not have a material adverse effect on us or our
industry.
Similar
to us, many cable, technology or other communications companies that previously
offered a limited range of services are now offering diversified bundles of
services, either through their own networks, reselling arrangements or joint
ventures. As such, a growing number of companies are competing to
serve the communications needs of the same customer
base. Several of these companies started offering full service
bundles before us, which could give them an advantage in building customer
loyalty. Such activities will continue to place downward pressure on
the demand for our access lines and/or pricing of our services.
In
addition to facing direct competition from those providers described above,
ILECs increasingly face competition from alternate communication systems
constructed by long distance carriers, large customers or alternative access
vendors. These systems, which have become more prevalent as a result
of the 1996 Act, are capable of originating or terminating calls without use of
the ILECs’ networks or switching services. Other potential sources of
competition include non-carrier systems that are capable of bypassing ILECs’
local networks, either partially or completely, through various means, including
the provision of special access or independent switching services and the
concentration of telecommunications traffic on a few of the ILECs’ access
lines. We anticipate that all these trends will continue and lead to
decreased use of our networks.
Significant
competitive factors in the local telephone industry include pricing, packaging
of services and features, quality and convenience of service and meeting
customer needs such as simplified billing and timely response to service
calls.
As the
telephone industry increasingly experiences competition, the size and resources
of each respective competitor may increasingly influence its
prospects. Some companies currently providing or planning to provide
competitive communication services have substantially greater financial and
marketing resources than we do or own larger or more diverse networks than
ours. In addition, many of them are not subject to the same
regulatory constraints we are. Consequently, some competitors may be
able to charge lower prices for their products and services, develop and expand
their communications and network infrastructure more quickly, adapt more swiftly
to new or emerging technologies and changes in customer requirements and devote
greater resources to the marketing and sale of their products and services than
we can.
22
Competition
can harm us by causing us to lose customers, or by causing us to lower prices or
increase our capital or operating expenses to retain
customers. Competing communications services, such as wireless, VoIP,
electronic mail, text messaging and optional calling services, can also reduce
usage of our network and thereby decrease our network access
revenues. Competition can also cause customers to reduce either usage
of our services or switch to less profitable services, and could impede our
ability to diversify into new lines of business dominated by incumbent
providers.
We
anticipate that the traditional operations of LECs will continue to be impacted
by changes in regulation, technology, and consumer preferences affecting the
ability of LECs to attract and retain customers and the capability of wireless
companies, CLECs, cable television companies, VoIP providers, electric utilities
and others to provide competitive LEC services. Competition relating to
traditional LEC services has thus far affected large urban areas to a greater
extent than less dense areas.
Exclusive
of acquisitions, we expect our operating revenues in 2010 to decline as we
continue to experience downward pressure primarily due to continued access line
losses, reduced universal service funding and lower network access
revenues. We expect such declines to be partially offset
primarily due to increased demand for our high-speed Internet service
offering.
Regulation
and Competition Relating to Other Operations
Long Distance
Operations. We offer intra-LATA, intrastate and interstate
long distance services. State public service commissions generally
regulate intra-LATA toll calls within the same LATA and inter-LATA toll calls
between different LATAs located in the same state. Federal regulators
have jurisdiction over interstate toll calls. Recent state regulatory
changes have increased competition to provide intra-LATA toll services in our
local exchange markets. Competition for intrastate and interstate
long distance services has been intense for several years, and focuses primarily
on price and pricing plans, and secondarily on customer service, reliability and
communications quality. Traditionally, our principal competitors for
providing long distance services were large national carriers, regional phone
companies and dial-around resellers. Increasingly, however, we have
experienced competition from newer sources, including wireless companies
offering attractively-priced calling plans. Technological
substitutions, including VoIP, text messaging and electronic mail, have
further reduced demand for traditional long distance services. To
counter such competition, we now offer unlimited long distance calling
plans.
23
Data
Operations. In connection with our data business, we face
competition from Internet service providers, satellite companies and cable
companies which use wired or wireless technologies to offer high-speed broadband
services. As of December 31, 2009, we believe approximately 80% of
our local exchange markets are overlapped by cable systems offering data
services competitive with ours. Many of these competitors offer
content or other features that we cannot match. Moreover, many
of these providers have traditionally been subject to less rigorous regulatory
scrutiny than our subsidiaries, although recent FCC rule changes classifying our
high-speed offering as an “information service” has helped reduce regulatory
disparities. Additionally, the federal broadband stimulus programs
could result in greater competition in some of our markets. These recent
rule changes further provide companies the option to deregulate or detariff
high-speed Internet services. During 2006, all of CenturyTel’s and
Embarq’s operating companies elected to either deregulate or detariff their
high-speed Internet services, which decreased regulatory oversight and increased
our retail pricing flexibility.
Fiber Transport
Operations. When our fiber transport networks are used to
provide intrastate telecommunications services, we must comply with state
requirements for telecommunications utilities, including state tariffing
requirements. To the extent our facilities are used to provide
interstate communications, we are subject to federal regulation as a
non-dominant common carrier. Our primary competitors in the fiber
transport industry are from other communications companies, some of whom operate
networks and have resources much larger than ours. Over the
last few years, several large communications companies have merged and have
implemented strategies to transfer a significant portion of their voice and data
traffic from our fiber network to their networks. We expect this
trend to continue as companies seek opportunities to reduce their
transport-related costs. In addition, new IP-based services may
enable new entrants to transport data at prices lower than we currently
offer.
CLEC
Operations. Competitive local exchange carriers are subject to
certain reporting and other regulatory requirements by the FCC and state public
service commissions, although the degree of regulation is much less substantial
than that imposed on ILECs operating in the same markets. Local
governments also frequently require competitive local exchange carriers to
obtain licenses or franchises regulating the use of rights-of-way necessary to
install and operate their networks. In each of our CLEC markets, we
face competition from the ILEC, which traditionally has long-standing
relationships with its customers. Over time, we may also face
competition from one or more other CLECs, or from other communications providers
who can provide comparable services.
Other
Operations. Similar to our CLEC business, we may be required
to obtain licenses or franchises to enter new markets for our switched digital
television and wireless broadband services, which could delay our rollout of
these offerings. The television and wireless communications markets
we have recently entered are highly competitive, which could limit our ability
to compete effectively.
24
Environmental
Compliance
As
discussed in greater detail in Item 3 of this Annual Report on Form 10-K,
several decades ago one of our subsidiaries acquired entities that may have
owned or operated seven former “manufactured gas” plant sites that may require
environmental remediation. From time to time we may incur other
environmental compliance and remediation expenses, mainly resulting from the
ownership of other prior industrial sites or the operation of vehicle fleets or
power supplies for our communications equipment. Although
we cannot assess with certainty the impact of any future compliance and
remediation obligations, we do not believe that future environmental compliance
and remediation expenditures will have a material adverse effect on our
financial condition or results of operations.
Patents,
Trademarks and Licenses
We own
several patents, patent applications, trade names, service marks and trademarks
in the U.S., including our “CenturyLink” brand trademark. Our
services often use the intellectual property of others, including licensed
software. We occasionally license our intellectual property to
others.
We have
incurred claims in the past, and may in the future incur claims alleging that we
infringe on the intellectual property of others. These claims can be
time-consuming and costly to defend and divert management
resources. If these claims are successful, we could be forced to pay
significant damages or stop selling certain products or services.
Seasonality
Overall,
our business is not significantly impacted by seasonality. However,
in our Florida markets, we typically experience increased demand for new service
orders in the late fall months and a decline in access lines in the early spring
months due to seasonal population trends. In certain of our other
markets servicing colleges or universities, we experience increased demand for
our services while school is in session. Additionally, from time to
time weather-related problems have resulted in increased costs to repair our
network and respond to service calls in some of our markets. The
amount and timing of the costs are subject to the weather patterns of any given
year, but have generally been highest during the third quarter and have been
related to damage from severe storms, including hurricanes, tropical storms and
tornadoes in our markets along the lower Atlantic and Gulf of Mexico
coastlines.
25
OTHER
DEVELOPMENTS OR MATTERS
In recent
years, our board of directors has approved various stock repurchase programs
under which we have repurchased approximately $401.0 million, $186.7 million,
$437.5 million, $1.028 billion and $503.9 million of our shares under separate
repurchase programs approved in February 2004, February 2005, May 2005, February
2006 and August 2007, respectively. For additional information, see
Liquidity and Capital Resources included in Item 7 of this annual
report.
In June
2008, our board of directors increased our quarterly cash dividend rate from
$.0675 to $.70 per share and in February 2010 our quarterly dividend was further
increased to $.725 per share. See “Risk Factors” below for additional
information regarding our current dividend practice.
For
additional information concerning our business and properties, see Items 2 and 7
elsewhere herein, and the Consolidated Financial Statements and Notes 2, 4, 5,
and 17 thereto set forth in Item 8 elsewhere herein.
Item
1A. Risk
Factors
RISK
FACTORS AND CAUTIONARY STATEMENTS
Risk
Factors
Any of
the following risks could materially and adversely affect our business,
financial condition, results of operations, liquidity or
prospects. The risks described below are not the only risks facing
us. Please be aware that additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial could also
materially and adversely affect our business operations.
Risks
Related to Our Business
If we continue to experience access
line losses similar to the past several years, our revenues, earnings and cash
flows may be adversely impacted.
Our
business generates a substantial portion of its revenues by delivering voice and
data services over access lines. We have experienced substantial
access line losses over the past several years due to a number of factors,
including increased competition and wireless and broadband
substitution. We expect to continue to experience access line losses
in our markets for an unforeseen period of time. Our inability to
retain access lines could adversely impact our revenues, earnings and cash flow
from operations.
26
Weakness
in the economy and credit markets may adversely affect our future results of
operations.
To date,
our operations and liquidity have not been materially impacted by recent
weaknesses in the credit markets; however, these weaknesses may negatively
impact our operations in the future if overall borrowing rates
increase. In addition, if the economy and credit markets continue to
remain weak, it may impact our ability to collect receivables from our customers
and other communications companies. This weakness may also cause our
customers to reduce or terminate their receipt of service offerings from
us. Economic weakness could also negatively affect our
vendors. Such events would negatively impact our results of
operations. We cannot predict with certainty the impact to us of any
further deterioration or weakness in the overall economy and credit
markets.
We are
also exposed to market risk from changes in the fair value of our pension plan
assets. Should our actual return on plan assets be significantly
lower than our anticipated return, our net periodic pension expense and our
required cash contribution to our pension plan will increase in future
periods. Such events would negatively impact our results of
operations and cash flow.
We
face competition, which we expect to intensify and which may reduce market share
and lower profits.
As a
result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive. We
face competition from wireless service providers, cable television
operators, competitive local exchange carriers and voice-over-Internet protocol,
or VoIP, providers. Over time, we expect to face additional local
exchange competition from electric utility and satellite communications
providers, municipalities and alternative networks or non-carrier systems
designed to reduce demand for our switching or access services. The
recent proliferation of companies offering integrated service offerings has
intensified competition in Internet, long distance and data services markets,
and we expect that competition will further intensify in these
markets.
Our
competitive position could be weakened in the future by strategic alliances or
consolidation within the communications industry or the development of new
technologies. Our ability to compete successfully will depend on how well we
market our products and services and on our ability to anticipate and respond to
various competitive and technological factors affecting the industry, including
changes in regulation (which may affect us differently from our competitors),
changes in consumer preferences or demographics, and changes in the product
offerings or pricing strategies of our competitors.
Some of
our current and potential competitors (i) have market presence, engineering,
technical and marketing capabilities and financial, personnel and other
resources substantially greater than ours, (ii) own larger and more diverse
networks, (iii) conduct operations or raise capital at a lower cost than us,
(iv) are subject to less regulation, (v) offer greater online content services
or (vi) have substantially stronger brand names. Consequently, these competitors
may be better equipped to charge lower prices for their products and services,
to provide more attractive offerings, to develop and expand their communications
and network infrastructures more quickly, to adapt more swiftly to new or
emerging technologies and changes in customer requirements, and to devote
greater resources to the marketing and sale of their products and
services.
27
Competition
could adversely impact us in several ways, including (i) the loss of customers
and market share, (ii) the possibility of customers reducing their usage of our
services or shifting to less profitable services, (iii) reduced traffic on our
networks, (iv) our need to expend substantial time or money on new capital
improvement projects, (v) our need to lower prices or increase marketing
expenses to remain competitive and (vi) our inability to diversify by
successfully offering new products or services.
Changes
in technology could harm us.
The
communications industry is experiencing significant technological changes,
particularly in the areas of VoIP, data transmission and electronic and wireless
communications. The growing prevalence of electronic mail and similar
digital communications continues to reduce demand for our traditional landline
voice services. Other changes in technology could result in the
development of additional products or services that compete with or displace
those offered by traditional ILECs, or that enable current customers to reduce
or bypass use of our networks. Several large electric utilities have
announced plans to offer communications services that will compete with local
exchange companies, or ILECs. Some of our competitors may enjoy
network advantages that will enable them to provide services more efficiently or
at lower cost. We cannot predict with certainty which technological
changes will provide the greatest threat to our competitive
position. We may not be able to obtain timely access to new
technology on satisfactory terms or incorporate new technology into our systems
in a cost effective manner, or at all. If we cannot develop new
products to keep pace with technological advances, or if such products are not
widely embraced by our customers, we could be adversely impacted.
We
cannot assure you that our diversification efforts will be
successful.
The
telephone industry has recently experienced a decline in access lines and
intrastate minutes of use, which, coupled with the other changes resulting from
competitive, technological and regulatory developments, could materially
adversely affect our core business and future prospects. As explained
elsewhere in greater detail in this Annual Report on Form 10-K, our access lines
(excluding the effect of acquisitions) have decreased over the last several
years, and we expect this trend to continue. We have also earned less
intrastate revenues in recent years due to reductions in intrastate minutes of
use (partially due to the displacement of minutes of use by wireless, electronic
mail, text messaging, arbitrage and other optional calling
services). We believe that our intrastate minutes of use will
continue to decline, although the magnitude of such decrease is uncertain.
Likewise, similar reductions are occurring for interstate minutes of
use.
We have
traditionally sought growth largely through acquisitions of properties similar
to those currently operated by us. However, no assurance can be given
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, no assurance can be given that we
will be able to arrange additional financing on terms acceptable to us or to
obtain timely federal and state governmental approvals on terms acceptable to
us, or at all.
28
Recently,
we broadened our services and products by offering satellite television as part
of our bundled product and service offerings. Our reliance on other
companies and their networks to provide these services could constrain our
flexibility and limit the profitability of these new offerings. We
provide facilities-based digital video services to select markets and may
initiate other new service or product offerings in the future, including new
offerings exploiting the 700 MHz spectrum that we purchased in
2008. We anticipate that these new offerings will generate lower
profit margins than many of our traditional services. Moreover, our
new product or service offerings could be constrained by intellectual property
rights held by others, or could subject us to the risk of infringement claims
brought against us by others. For these and other reasons, we cannot
assure you that our recent or future diversification efforts will be
successful.
Future
deterioration in our financial performance could adversely impact our credit
ratings, our cost of capital and our access to the capital markets.
Our
future results will suffer if we do not effectively adjust to changes in our
industry.
The
above-described changes in our industry have placed a higher premium on
marketing, technological, engineering and provisioning skills. Our
future success depends, in part, on our ability to retrain our staff to acquire
or strengthen these skills, and, where necessary, to attract and retain new
personnel that possess these skills.
Our
future results will suffer if we do not effectively manage our expanded
operations.
Following
our acquisition of Embarq, we may continue to expand our operations through
additional acquisitions and new product and service offerings, some of which
involve complex technical, engineering, and operational challenges. Our future
success depends, in part, upon our ability to manage our expansion
opportunities, which pose substantial challenges for us to integrate new
operations into our existing business in an efficient and timely manner, to
successfully monitor our operations, costs, regulatory compliance and service
quality, and to maintain other necessary internal controls. We cannot
assure you that our expansion or acquisition opportunities will be successful,
or that we will realize our expected operating efficiencies, cost savings,
revenue enhancements, synergies or other benefits.
Network
disruptions or system failures could adversely affect our operating results and
financial condition.
To
be successful, we will need to continue providing our customers with a high
capacity, reliable and secure network. Some of the risks to our
network and infrastructure include:
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power
losses or physical damage to our access lines, whether caused by fire,
adverse weather conditions (including those described immediately below),
terrorism or otherwise
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capacity
limitations
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software
and hardware defects or
malfunctions
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29
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breaches
of security, including sabotage, tampering, computer viruses and
break-ins, and
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other
disruptions that are beyond our
control.
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Disruptions
or system failures may cause interruptions in service or reduced capacity for
customers. If service is not restored in a timely manner, agreements
with our customers or service standards set by state regulatory commissions
could obligate us to provide credits or other remedies. If network
security is breached, confidential information of our customers or others could
be lost or misappropriated, and we may be required to expend additional
resources modifying network security to remediate
vulnerabilities. The occurrence of any disruption or system failure
may result in a loss of business, increase expenses, damage our reputation,
subject us to additional regulatory scrutiny or expose us to civil litigation
and possible financial losses that may not be fully covered through insurance,
any of which could have a material adverse effect on our results of operations
and financial condition.
We
face hurricane and other natural disaster risks, which can disrupt our
operations and cause us to incur substantial additional capital
costs.
A
substantial number of our access lines are located in Florida, Alabama,
Louisiana, Texas, North Carolina, and South Carolina, and our operations there
are subject to the risks associated with severe tropical storms, hurricanes and
tornadoes, including downed telephone lines, power-outages, damaged or destroyed
property and equipment, and work interruptions.
Although
we maintain property and casualty insurance on our plant (excluding our
outside plant) and may under certain circumstances be able to seek recovery
of some additional costs through increased rates, only a portion of our
additional costs directly related to such hurricanes and natural disasters have
historically been recoverable. We cannot predict whether we will continue to be
able to obtain insurance for hazard-related damages or, if obtainable and
carried, whether this insurance will be adequate to cover our losses. In
addition, we expect any insurance of this nature to be subject to substantial
deductibles and to provide for premium adjustments based on claims. Any future
hazard-related costs and work interruptions could adversely affect our
operations and our financial condition.
Any
failure or inadequacy of our information technology infrastructure could harm
our business.
The
capacity, reliability and security of our information technology hardware and
software infrastructure (including our billing systems) are important to
the operation of our current business, which would suffer in the event of system
failures. Likewise, our ability to expand and update our information
technology infrastructure in response to our growth and changing needs is
important to the continued implementation of our new service offering
initiatives. Our inability to expand or upgrade our technology
infrastructure could have adverse consequences, which could include the delayed
implementation of new service offerings, service or billing interruptions, and
the diversion of development resources.
30
We
rely on a limited number of key suppliers and vendors to operate our
business.
We
depend on a limited number of suppliers and vendors for equipment and services
relating to our network infrastructure. Our local exchange carrier
networks consist of central office and remote sites, all with advanced digital
switches. Some of the digital switches were manufactured by Nortel,
which is currently restructuring its operations under the bankruptcy laws of
Canada, the United States and the United Kingdom. If any of these
suppliers experience interruptions or other problems delivering or servicing
these network components on a timely basis, our operations could suffer
significantly. To the extent that proprietary technology of a
supplier is an integral component of our network, we may have limited
flexibility to purchase key network components from alternative
suppliers. We also rely on a limited number of other communications
companies in connection with reselling long distance, wireless and satellite
entertainment services to our customers. In addition, we rely on a
limited number of software vendors to support our business management
systems. In the event it becomes necessary to seek alternative
suppliers and vendors, we may be unable to obtain satisfactory replacement
supplies or services on economically attractive terms, on a timely basis, or at
all, which could increase costs or cause disruptions in our
services.
We
may not own or have a license to use all technology that may be necessary to
expand our product offerings, either of which could adversely affect our
business and profitability.
We
may need to obtain the right to use certain patents or other intellectual
property from third parties to be able to offer new products and
services. If we cannot license or otherwise obtain rights to use any
required technology from a third party on reasonable terms, our ability to offer
new IP-based products and services, including VoIP, or other new offerings may
be restricted, made more costly or delayed. Our inability to
implement IP-based or other new offerings on a cost-effective basis could impair
our ability to successfully meet increasing competition from companies offering
voice or integrated communications services. Our inability to deploy
new technologies could also prevent us from successfully diversifying, modifying
or bundling our service offerings and result in accelerated loss of access lines
and revenues or otherwise adversely affect our business and
profitability.
Portions
of our property, plant and equipment are located on property owned by third
parties.
Over
the past few years, certain utilities, cooperatives and municipalities in
certain of the states in which we operate have requested significant rate
increases for attaching our plant to their facilities. To the
extent that these entities are successful in increasing the amount we pay for
these attachments, our future operating costs will increase.
In
addition, we rely on rights-of-way, co-location agreements and other
authorizations granted by governmental bodies and other third parties to locate
our cable, conduit and other network equipment on their respective
properties. If any of these authorizations terminate or lapse, our
operations could be adversely affected.
31
Our
relationships with other communications companies are material to our operations
and their financial difficulties may adversely affect us.
We
originate and terminate calls for long distance carriers and other interexchange
carriers over our network in exchange for access charges that represent a
significant portion of our revenues. Should these carriers experience
substantial financial difficulties, our inability to timely collect access
charges from them could have a negative effect on our business and results of
operations.
In
addition, certain of our operations carry a significant amount of voice and data
traffic for larger communications companies. As these larger
communications companies consolidate or expand their networks, it is possible
that they could transfer a portion of this traffic from our network to their
networks or some other networks, which could negatively impact our business and
results of operations.
We
depend on key members of our senior management team.
Our
success depends largely on the skills, experience and performance of a limited
number of senior officers. Competition for senior management in our
industry is intense and we may have difficulty retaining our current senior
managers or attracting new ones in the event of terminations or
resignations. For a discussion of similar concerns relating to the
Embarq merger, see below “Risks Related to our Acquisition of Embarq on
July 1, 2009 – Following the merger, we may be unable to retain key
employees.”
We
could be affected by certain changes in labor matters.
As
of December 31, 2009, over 30% of our employees were members of 46 separate
bargaining units represented by two different unions. From time to
time, our labor agreements with these unions lapse, and we typically negotiate
the terms of new agreements. We cannot predict the outcome of
these negotiations. We may be unable to reach new agreements, and
union employees may engage in strikes, work slowdowns or other labor actions,
which could materially disrupt our ability to provide services. In
addition, new labor agreements may impose significant new costs on us, which
could impair our financial condition or results of operations in the
future. Moreover, our post-employment benefit offerings cause us to
incur costs not faced by many of our competitors, which could ultimately hinder
our competitive position.
Risks
Related to our Acquisition of Embarq on July 1, 2009
We
expect to continue to incur substantial expenses related to the integration of
Embarq.
We
expect to continue to incur substantial expenses in connection with integrating
the business, policies, procedures, operations, technologies and systems of
Embarq with ours. There are a number of systems that still must be
integrated, including management information, sales, billing, and
benefits. In addition, we expect to continue to incur integration
costs related to employee severance programs and branding initiatives associated
with changing the trade name to CenturyLink. As explained in our
other recent reports filed with the Securities and Exchange Commission, there
are a number of factors beyond our control that could affect the total amount or
timing of our expected integration expenses. Moreover, many of the
expenses that will be incurred, by their nature, are difficult to estimate
accurately at the present time. These expenses could, particularly in
the near term, exceed the savings that we expect to achieve from the elimination
of duplicative expenses and the realization of economies of scale and cost
savings and revenue enhancements related to the integration of the
businesses. These integration expenses likely will result in us
continuing to take significant charges against earnings in future quarters, but
the amount and timing of such charges are uncertain at present.
32
We
may be unable to successfully integrate our legacy business and Embarq’s
business and realize the anticipated benefits of the merger.
The
merger combined two companies which previously operated as independent public
companies. As a result of the merger, we will be required to devote
significant management attention and resources to integrating the business
practices and operations of the two companies. Potential difficulties
that we may encounter in the integration process include the
following:
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the
inability to successfully combine our legacy business and Embarq’s
business in a manner that permits us to achieve the cost savings and
operating synergies anticipated to result from the merger, which would
result in the anticipated benefits of the merger not being realized partly
or wholly in the time frame currently anticipated or at
all;
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lost
revenues or opportunities as a result of current or potential customers or
strategic partners of either of the two companies deciding to delay or
forego business with the combined
company;
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complexities
associated with managing the combined
businesses;
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integrating
personnel from the two predecessor companies while maintaining focus on
providing consistent, high quality products and customer
service;
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potential
unknown liabilities and unforeseen increased expenses, delays or
regulatory conditions associated with the merger;
and
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performance
shortfalls as a result of the diversion of management’s attention caused
by integrating the companies’
operations.
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It
is possible that the integration process could result in the diversion of
management’s attention, disruptions in our ongoing businesses, or
inconsistencies in standards, controls, procedures and policies, any of which
could adversely affect our ability to maintain relationships with customers,
vendors and employees or our ability to achieve the anticipated benefits of the
merger, or could reduce the earnings or otherwise adversely affect our business
and financial results.
33
Following
the merger, we may be unable to retain key employees.
Our
success will depend in part upon our ability to retain key
employees. Key employees may depart because of issues relating to the
uncertainty and difficulty of integration or a desire not to remain with us
following the merger. Accordingly, no assurance can be given that we
will be able to retain key employees to the same extent as in the
past.
In
connection with completing the merger, we have launched branding initiatives
that are likely to involve substantial costs and may not be favorably received
by customers.
Upon
completion of the merger, we changed our brand name to CenturyLink, although we
will not formally change our name until we receive shareholder approval in
2010. We have incurred, and will continue to incur, substantial
capital and operating costs in re-branding our products and
services. There is no assurance that we will be able to achieve name
recognition or status under our new brand that is comparable to the recognition
and status previously enjoyed. The failure of these initiatives could
adversely affect our ability to attract and retain customers after the merger,
resulting in reduced revenues.
In
connection with approving the merger, the Federal Communications Commission has
imposed conditions that could increase our future capital costs and limit our
operating flexibility.
In
connection with approving the merger, the FCC issued a publicly-available order
that imposed a comprehensive set of conditions on our operations over periods
ranging from one to three years following the closing date. Among
other things, these conditions commit us (i) to make broadband service available
to all of our residential and single line business customers within three years
of the closing, (ii) to meet various targets regarding the speed of our
broadband services, (iii) to enhance the wholesale service levels in our legacy
markets to match the service levels in Embarq’s markets and (iv) to forbear for
one year from altering the current status of any facility providing “unbundled”
access to our network or to request any new pricing flexibility for special
access services in our markets. Although most of these commitments
largely correspond to our business strategies, they could increase our overall
future capital or operating costs or limit our flexibility to deploy capital in
response to changing market conditions. Moreover, if for any reason
we fail to meet any of these commitments, the FCC could assess penalties or
fines or impose additional orders regulating our operations.
In
connection with completing the merger, we assumed various contingent liabilities
and a sizable underfunded pension plan of Embarq, which could negatively impact
our future financial position or performance.
Upon
consummating the merger, Embarq became our wholly-owned subsidiary and remains
responsible for all of its pre-closing contingent liabilities, including
Embarq’s previously-disclosed risks arising under its tax sharing agreement with
Sprint Nextel Corporation, its retiree benefit litigation, and various
environmental claims. Embarq also remains responsible for benefits
under its existing qualified defined benefit pension plan, which as of December
31, 2009 was in an underfunded position. If any of these matters give
rise to material liabilities, our consolidated operating results or financial
position will be negatively affected. Additional information
regarding these risks is available in (i) Item 3 of this Annual Report on Form
10-K, (ii) the periodic reports filed by Embarq with the Securities and Exchange
Commission through the date of the merger, and (iii) Note 11.
34
Risks
Related to Our Regulatory Environment
Our
revenues could be materially reduced or our expenses materially increased by
changes in state or federal regulations.
The
majority of our revenues are substantially dependent upon regulations which, if
changed, could result in material revenue reductions. Laws and
regulations applicable to us and our competitors have been and are likely to
continue to be subject to ongoing changes and court challenges, which could also
affect our revenues.
Risk of loss or reduction of network
access charge revenues or support fund payments. A significant
portion of our revenues is derived from access charge revenues that are paid to
us by long distance carriers based largely on rates set by federal and state
regulatory bodies. Interexchange carriers have filed complaints in
several of our operating states requesting lower intrastate access rates.
Several state public service commissions are investigating intrastate access
rates and the ultimate outcome and impact of such investigations are
uncertain.
The FCC
regulates tariffs for interstate access and subscriber line charges, both of
which are components of our revenue. The FCC has been considering
comprehensive reform of its intercarrier compensation rules for several
years. Any reform eventually adopted by the FCC will likely involve
significant changes in the access charge system and could potentially result in
a significant decrease or elimination of access charges
altogether. In addition, our financial results could be harmed if
carriers that use our access services become financially distressed or bypass
our networks, either due to changes in regulation or other
factors. Furthermore, access charges currently paid to us could be
diverted to competitors who enter our markets or expand their operations, either
due to changes in regulation or otherwise.
The FCC
and Congress may take actions that would impact our access to video programming
and pricing, which could impact our ability to continue to expand our video
business and impact our competitive position in our existing video
markets.
We
receive revenues from the federal Universal Service Fund (“USF”), and, to a
lesser extent, intrastate support funds. These governmental programs
are reviewed and amended from time to time, and we cannot provide assurance that
they will not be changed or impacted in a manner adverse to us. For
several years, the FCC and the federal-state joint board considered
comprehensive reforms of the federal USF contribution and distribution
rules. During this period, various parties have objected to the size
of the USF or questioned the continued need to maintain the program in its
current form. Over the past few years, high cost support fund
payments to our operating subsidiaries have decreased due to increases in the
nationwide average cost per loop factor used to determine payments to program
participants, as well as declines in the overall size of the high cost support
fund. In addition, the number of eligible telecommunications carriers
receiving support payments from this program has increased substantially in
recent years, which, coupled with other factors, has placed additional financial
pressure on the amount of money that is available to provide support payments to
all eligible recipients, including us.
35
Risks posed by state regulations.
We are also subject to the authority of state regulatory commissions
which have the power to regulate intrastate rates and services, including local,
in-state long-distance and network access services. The limited
number of our ILECs that continue to be subject to “rate of return” regulation
for intrastate purposes remain subject to the powers of state regulatory
commissions to conduct earnings reviews and reduce our service
rates. ILECs governed by alternative regulatory plans could also
under certain circumstances be ordered to reduce rates or could experience rate
reductions following the lapse of plans currently in effect. Our business could
also be materially adversely affected by the adoption of new laws, policies and
regulations or changes to existing state regulations. In particular, we cannot
assure you that we will succeed in obtaining or maintaining all requisite state
regulatory approvals for our operations without the imposition of conditions on
our business, which could have the effect of imposing material additional costs
on us or limiting our revenues.
Risks posed by costs of regulatory
compliance. Regulations continue to create significant
compliance costs for us. Challenges to our tariffs by regulators or
third parties or delays in obtaining certifications and regulatory approvals
could cause us to incur substantial legal and administrative expenses, and, if
successful, such challenges could adversely affect the rates that we are able to
charge our customers. Our business also may be impacted by
legislation and regulation imposing new or greater obligations related to
regulations or laws related to bolstering homeland security, increasing disaster
recovery requirements, minimizing environmental impacts, enhancing privacy, or
addressing other issues that impact our business, including the Communications
Assistance for Law Enforcement Act (which requires communications carriers to
ensure that their equipment, facilities, and services are able to facilitate
authorized electronic surveillance), and laws governing local number portability
and customer proprietary network information requirements. We expect
our compliance costs to increase if future laws or regulations continue to
increase our obligations to assist other governmental agencies.
Regulatory
changes in the communications industry could adversely affect our business by
facilitating greater competition against us.
The 1996
Act provides for significant changes and increased competition in the
communications industry, including the local communications and long distance
industries. This Act and the FCC’s implementing regulations remain
subject to judicial review and additional rulemakings, thus making it difficult
to predict what effect the legislation will ultimately have on us and our
competitors. Several regulatory and judicial proceedings addressing
communications issues have recently concluded, are underway or may soon be
commenced. Moreover, certain communities nationwide have expressed an
interest in establishing municipal telephone utilities that would compete for
customers. Finally, recently-enacted federal broadband stimulus
projects and the soon to be announced National Broadband Plan may adversely
impact us. We cannot predict the outcome of these developments, nor
can we assure that these changes will not have a material adverse effect on us
or our industry.
36
We
are subject to significant regulations that limit our flexibility.
As a
diversified full service incumbent local exchange carrier, or ILEC, we have
traditionally been subject to significant regulation that does not apply to many
of our competitors. For instance, unlike many of our competitors, we
are subject to federal mandates to share facilities, file and justify tariffs,
maintain certain accounts and file reports, and state requirements that obligate
us to maintain service standards and limit our ability to change tariffs in a
timely manner. This regulation imposes substantial compliance costs
on us and restricts our ability to change rates, to compete and to respond
rapidly to changing industry conditions. Although newer alternative
forms of regulation permit us greater freedoms in several states in which we
operate, they nonetheless typically impose caps on the rates that we can charge
our customers. As our business becomes increasingly competitive,
regulatory disparities between us and our competitors could impede our ability
to compete. Litigation and different objectives among federal and
state regulators could create uncertainty and impede our ability to respond to
new regulations. Moreover, changes in tax laws, regulations or
policies could increase our tax rate, particularly if state regulators continue
to search for additional revenue sources to address budget
shortfalls. We are unable to predict the future actions of the
various regulatory bodies that govern us, but such actions could materially
affect our business.
We
are subject to franchising requirements that could impede our expansion
opportunities.
We may be
required to obtain from municipal authorities operating franchises to install or
expand facilities. Some of these franchises may require us to pay
franchise fees. These franchising requirements generally apply to our
fiber transport and CLEC operations, and to our emerging switched digital
television and wireless broadband businesses. These requirements
could delay us in expanding our operations or increase the costs of providing
these services.
We
will be exposed to risks relating to evaluations of controls required by Section
404 of the Sarbanes-Oxley Act.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act and related regulations implemented
by the SEC, the New York Stock Exchange and the Public Company Accounting
Oversight Board, are increasing legal and financial compliance costs and making
some activities more time consuming. Any future failure to
successfully or timely complete annual assessments of our internal controls
required by Section 404 of the Sarbanes-Oxley Act could subject us to sanctions
or investigation by regulatory authorities. Any such action could
adversely affect our financial results or investors’ confidence in us, and could
cause our stock price to fall. If we fail to maintain effective
controls and procedures, we may be unable to provide financial information in a
timely and reliable manner, which could in certain instances limit our ability
to borrow or raise capital.
37
For a
more thorough discussion of the regulatory issues that may affect our business,
see Item 1 of this Annual Report on Form 10-K.
Other
Risks
We
have a substantial amount of indebtedness and may need to incur more in the
future.
We
have a substantial amount of indebtedness, which could have material adverse
consequences for us, including (i) hindering our ability to adjust to changing
market, industry or economic conditions, (ii) limiting our ability to
access the capital markets to refinance maturing debt or to fund acquisitions or
emerging businesses, (iii) limiting the amount of free cash flow available for
future operations, acquisitions, dividends, stock repurchases or other uses,
(iv) making us more vulnerable to economic or industry downturns, including
interest rate increases, and (v) placing us at a competitive disadvantage to
those of our competitors that have less indebtedness.
In
connection with executing our business strategies, we expect to continue to
evaluate the possibility of acquiring additional communications assets, and we
may elect to finance future acquisitions by incurring additional
indebtedness. Moreover, to respond to competitive challenges, we may
be required to raise substantial additional capital to finance new product or
service offerings, including capital necessary to finance any new offerings
exploiting the 700 MHz spectrum that we purchased in 2008. Our
ability to arrange additional financing will depend on, among other factors, our
financial position and performance, as well as prevailing market conditions and
other factors beyond our control. We cannot assure you that we will
be able to obtain additional financing on terms acceptable to us or at
all. If we are able to obtain additional financing, our credit
ratings could be adversely affected. As a result, our borrowing costs
would likely increase, our access to capital may be adversely affected and our
ability to satisfy our obligations under our indebtedness could be adversely
affected.
We
have a significant amount of goodwill on our balance sheet. If our
goodwill becomes impaired, we may be required to record a significant charge to
earnings and reduce our stockholders’ equity.
Under
generally accepted accounting principles, goodwill is not amortized but instead
is reviewed for impairment on an annual basis or more frequently whenever events
or circumstances indicate that its carrying value may not be
recoverable. If our goodwill is determined to be impaired in the
future, we may be required to record a significant, non-cash charge to earnings
during the period in which the impairment is determined.
38
We
cannot assure you that we will be able to continue paying dividends at the
current rate.
We
plan to continue our current dividend practices. However, you should
be aware that these practices are subject to change for reasons that may include
any of the following factors:
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●
|
we
may not have enough cash to pay such dividends due to changes in our cash
requirements, capital spending plans, cash flow or financial
position;
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●
|
while
our dividend practices involve the distribution of a substantial portion
of our cash available to pay dividends, our Board of Directors could
change its practices at any time;
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●
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the
actual amounts of dividends distributed and the decision to make any
distribution will remain at all times entirely at the discretion of our
Board of Directors;
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|
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●
|
the
effects of regulatory reform, including any changes to intercarrier
compensation and the Universal Service Fund
rules;
|
|
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●
|
our
ability to maintain investment grade credit ratings on our senior
debt;
|
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●
|
the
amount of dividends that we may distribute is limited by restricted
payment and leverage covenants in our credit facilities and, potentially,
the terms of any future indebtedness that we may incur;
and
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●
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the
amount of dividends that we may distribute is subject to restrictions
under Louisiana law.
|
Our
Board of Directors is free to change or suspend our dividend practices at any
time. Our common shareholders should be aware that they have no
contractual or other legal right to dividends.
Our current dividend practices could
limit our ability to pursue growth opportunities.
The
current practice of our Board of Directors to pay an annual $2.90 per common
share dividend reflects an intention to distribute to our shareholders a
substantial portion of our free cash flow. As a result, we may not
retain a sufficient amount of cash to finance a material expansion of our
business in the future. In addition, our ability to pursue any
material expansion of our business, through acquisitions or increased capital
spending, will depend more than it otherwise would on our ability to obtain
third party financing. We cannot assure you that such financing will
be available to us at all, or at an acceptable cost.
As
a holding company, we rely on payments from our operating companies to meet our
obligations.
As
a holding company, substantially all of our income and operating cash flow is
dependent upon the earnings of our subsidiaries and the distribution of those
earnings to, or upon loans or other payments of funds by those subsidiaries to,
us. As a result, we rely upon our subsidiaries to generate the funds
necessary to meet our obligations, including the payment of amounts owed under
our long-term debt. Our subsidiaries are separate and distinct legal
entities and have no obligation to pay any amounts owed by us or, subject to
limited exceptions for tax-sharing purposes, to make any funds available to us
to repay our obligations, whether by dividends, loans or other
payments. Certain of our subsidiaries may be restricted under loan
agreements or regulatory orders from transferring funds to us, including certain
loan provisions that restrict the amount of dividends that may be paid to
us. Moreover, our rights to receive assets of any subsidiary upon its
liquidation or reorganization will be effectively subordinated to the claims of
creditors of that subsidiary, including trade creditors. The
footnotes to our consolidated financial statements included in this Annual
Report on Form 10-K describe these matters in additional
detail.
39
Our
agreements and organizational documents and applicable law could limit another
party’s ability to acquire us.
Our
articles of incorporation provide for a classified board of directors, which
limits the ability of an insurgent to rapidly replace the board. In
addition, a number of other provisions in our agreements and organizational
documents and various provisions of applicable law may delay, defer or prevent a
future takeover of CenturyTel unless the takeover is approved by our Board of
Directors. This could deprive our shareholders of any related
takeover premium.
We
face other risks.
The
list of risks above is not exhaustive, and you should be aware that we face
various other risks discussed in this or other reports filed by us or Embarq
with the Securities and Exchange Commission.
Cautionary
Statements Regarding Forward-Looking Statements
This
Annual Report on Form 10-K and other documents filed by us under the federal
securities laws include, and future oral or written statements or press releases
by us and our management may include, certain forward-looking statements
relating to the operations of our company, including without limitation
statements with respect to our anticipated future operating and financial
performance, financial position and liquidity, growth opportunities and growth
rates, acquisition and divestiture opportunities, merger synergies, business
prospects, regulatory and competitive outlook, investment and expenditure plans,
investment results, financing opportunities and sources (including the impact of
financings on our financial position, financial performance or credit ratings),
pricing plans, strategic alternatives, business strategies, and other similar
statements of expectations or objectives or accompanying statements of
assumptions that are highlighted by words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “projects,” “seeks,” “estimates,” “hopes,”
“should,” “could,” and “may,” and variations thereof and similar
expressions. Such forward-looking statements are based upon our
judgment and assumptions as of the date such statements are made concerning
future developments and events, many of which are outside of our
control. These forward-looking statements, and the assumptions upon
which such statements are based, are inherently speculative and are subject to
uncertainties that could cause our actual results to differ materially from such
statements. Our actual results or performance may differ materially
from those anticipated, estimated or projected if one or more of these risks or
uncertainties materialize, or if underlying assumptions prove
incorrect. Factors that could impact actual our results include but
are not limited to:
40
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■
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the
extent, timing, success and overall effects of competition from wireless
carriers, VoIP providers, CLECs, cable television companies, electric
utilities and others, including without limitation the risks that these
competitors may offer less expensive or more innovative products and
services;
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■
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the
risks inherent in rapid technological change, including without limitation
the risk that new technologies will displace our products and
services;
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■
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the
effects of ongoing changes in the regulation of the communications
industry, including without limitation (i) increased competition resulting
from regulatory changes, (ii) the final outcome of various federal, state
and local regulatory initiatives and proceedings, including switched
access-related proceedings and legislation, that could impact our
competitive position, revenues, compliance costs, capital expenditures or
prospects, (iii) the effect of the National Broadband Plan,
(iv) reductions in revenues received from the federal Universal
Service Fund or other current or future federal and state support programs
designed to compensate ILECs operating in high-cost markets, and (v)
changes in the regulation of special
access;
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■
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our
ability to effectively adjust to changes in the communications
industry;
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■
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the
possibility that the anticipated benefits from the Embarq merger cannot be
fully realized in a timely manner or at all, or that integrating Embarq’s
operations into ours will be more difficult, disruptive or costly than
anticipated;
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■
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our
ability to effectively manage our expansion opportunities, including
without limitation our ability to (i) effectively integrate newly-acquired
or newly-developed businesses into our operations, (ii) attract and retain
technological, managerial and other key personnel, (iii) achieve projected
growth, revenue and cost savings targets from the Embarq acquisition
within the anticipated timeframe, and (iv) otherwise monitor our
operations, costs, regulatory compliance, and service quality and maintain
other necessary internal controls;
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possible
changes in the demand for, or pricing of, our products and services,
including without limitation reduced demand for our traditional telephone
or access services caused by greater use of wireless, electronic mail or
Internet communications or other
factors;
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■
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our
ability to successfully introduce new product or service offerings on a
timely and cost-effective basis, including without limitation our ability
to (i) successfully roll out our new video, voice and broadband services,
(ii) successfully exploiting the 700 MHz spectrum that we purchased in
2008, (iii) expand successfully our full array of service offerings to new
or acquired markets and (iv) offer bundled service packages on terms
attractive to our customers;
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41
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■
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our
continued access to credit markets on favorable terms, including our
continued access to financing in amounts, and on terms and conditions,
necessary to support our operations and refinance existing indebtedness
when it becomes due;
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our
ability to collect receivables from financially troubled communications
companies;
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■
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the
inability of third parties to discharge their commitments to
us;
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■
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our
ability to pay a $2.90 per common share dividend annually, which may be
affected by changes in our cash requirements, capital spending plans, cash
flows or financial position;
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■
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unanticipated
increases in our capital
expenditures;
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■
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our
ability to successfully negotiate collective bargaining agreements on
reasonable terms without work
stoppages;
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our
ownership of or access to technology that may be necessary for us to
operate or expand our business;
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■
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regulatory
limits on our ability to change the prices for telephone services in
response to industry changes;
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■
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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;
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■
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uncertainties
relating to the implementation of our business strategies, including 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;
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■
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the
lack of assurance that we can compete effectively against
better-capitalized competitors;
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the
impact of equipment failure, including potential network
disruptions;
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■
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general
worldwide economic conditions and related uncertainties, including
continued access to credit markets on favorable
terms;
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42
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■
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the
effects of adverse weather on our customers or
properties;
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■
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other
risks referenced in this report and from time to time in our other filings
with the Securities and Exchange
Commission;
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■
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the
effects of more general factors, including without
limitation:
|
▪ changes
in general industry and market conditions and growth rates
▪ changes
in labor conditions, including workforce levels and labor costs
▪ changes
in interest rates or other general national, regional or local economic
conditions
▪ changes
in legislation, regulation or public policy, including changes 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
▪ changes
in our relationships with vendors, or the failure of these vendors to provide
competitive products on a timely basis
▪ failures
in our internal controls that could result in inaccurate public disclosures or
fraud
▪ changes
in our debt ratings
▪
unfavorable outcomes of regulatory or legal proceedings and investigations,
including rate proceedings and tax audits
▪ 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 Annual Report on Form 10-K. Due to these
uncertainties, there can be no assurance that our anticipated results will
occur, that our judgments or assumptions will prove correct, or that unforeseen
developments will not occur. Accordingly, you are cautioned not to
place undue reliance upon any of our forward-looking statements, which speak
only as of the date made. Additional risks that we currently deem
immaterial or that are not presently known to us could also cause our actual
results to differ materially from those expected in our forward-looking
statements. We undertake no obligation to update or revise any of our
forward-looking statements for any reason, whether as a result of new
information, future events or developments, changed circumstances, or
otherwise.
Investors
should also be aware that while we do, at various times, communicate with
securities analysts, it is against our policy to disclose to them selectively
any material non-public information or other confidential
information. Accordingly, investors should not assume that we agree
with any statement or report issued by an analyst irrespective of the content of
the statement or report. To the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, such reports
are not our responsibility.
43
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Item
1B.
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Unresolved
Staff Comments
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Not
applicable.
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Item
2.
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Properties.
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Our
properties consist principally of telephone lines, central office equipment, and
land and buildings related to telephone operations. As of December 31, 2009 and
2008, our gross property, plant and equipment of approximately $15.6 billion and
$8.9 billion, respectively, consisted of the following:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
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Cable
and wire
|
52.3 | % | 52.5 | |||||
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Central
office
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29.6 | 32.3 | ||||||
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General
support
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11.4 | 9.2 | ||||||
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Fiber
transport
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2.2 | 3.7 | ||||||
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Construction
in progress
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2.8 | .8 | ||||||
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Other
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1.7 | 1.5 | ||||||
| 100.0 | % | 100.0 | ||||||
“Cable
and wire” facilities consist primarily of buried cable and aerial cable, poles,
wire, conduit and drops used in providing local and long distance
services. “Central office” consists primarily of switching equipment,
circuit equipment and related facilities. “General support” consists
primarily of land, buildings, tools, furnishings, fixtures, motor vehicles and
work equipment. “Fiber transport” consists of network assets and
equipment to provide fiber transport services. “Construction in
progress” includes property of the foregoing categories that has not been placed
in service because it is still under construction.
The
properties of certain of our telephone subsidiaries are subject to mortgages
securing the debt of such companies. We own substantially all of the
central office buildings, local administrative buildings, warehouses, and
storage facilities used in our telephone operations.
For
further information on the location and type of our properties, see the
descriptions of our operations in Item 1 of this Annual Report on Form
10-K.
44
|
Item
3.
|
Legal
Proceedings.
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In Barbrasue Beattie and James
Sovis, on behalf of themselves and all others similarly situated, v. CenturyTel,
Inc., filed on October 28, 2002, in the United States District Court for
the Eastern District of Michigan (Case No. 02-10277), the plaintiffs alleged
that we unjustly and unreasonably billed customers for inside wire maintenance
services, and sought unspecified monetary damages and injunctive relief under
various legal theories on behalf of a purported class of over two million
customers in our telephone markets. On March 10, 2006, the Court
certified a class of plaintiffs and issued a ruling that the billing
descriptions we used for these services during an approximately 18-month period
between October 2000 and May 2002 were legally insufficient. In
February 2010, subject to court approval and agreement on other terms and
conditions, we settled this case in principle in an amount that exceeded our
previously established reserves by $8 million and such amount was reflected as
an expense in the fourth quarter of 2009.
Over 60
years ago, one of our indirect subsidiaries, Centel Corporation, acquired
entities that may have owned or operated seven former plant sites that produced
“manufactured gas” under a process widely used through the
mid-1900s. Centel has been a subsidiary of Embarq since being
spun-off in 2006 from Sprint Nextel, which acquired Centel in
1993. None of these plant sites are currently owned or operated by
either Sprint Nextel, Embarq or their subsidiaries. On three sites,
Embarq and the current landowners are working with the Environmental Protection
Agency (“EPA”) pursuant to administrative consent orders. Remediation
expenditures pursuant to the orders are not expected to be material. On five
sites, including the three sites where the EPA is involved, Centel has entered
into agreements with other potentially responsible parties to share remediation
costs. Further, Sprint Nextel has agreed to indemnify Embarq for most of any
eventual liability arising from all seven of these sites. Based upon
current circumstances, we do not expect this issue to have a material adverse
impact on our results of operations or financial condition.
In William Douglas Fulghum, et
al. v. Embarq Corporation, et al., filed on December 28, 2007 in the
United States District Court for the District of Kansas (Civil Action No.
07-CV-2602), a group of retirees filed a putative class action lawsuit in the
United States District Court for the District of Kansas, challenging the
decision to make certain modifications to Embarq’s retiree benefits programs
generally effective January 1, 2008. Defendants include Embarq, certain of
its benefit plans, its Employee Benefits Committee and the individual plan
administrator of certain of its benefits plans. Additional defendants include
Sprint Nextel and certain of its benefit plans. In addition, a complaint in
arbitration has been filed by 15 former Centel executives, similarly challenging
the benefits changes. A ruling in Embarq’s favor was recently entered
in the arbitration proceeding. Embarq and other defendants continue
to vigorously contest these claims and charges. Given that this
litigation is still in the initial stages of discovery, it is premature to
estimate the impact this lawsuit could have to our results of operation or
financial condition.
45
In Robert M. Garst, Sr. et al.
v. CenturyTel, Inc. et al., filed March 13, 2009 in the 142nd
Judicial District Court of Texas, Midland County (Case No. CV-46861), certain of
our former ten-vote shareholders challenged the effectiveness of the vote to
eliminate our time-phase voting structure. We believe we followed all
necessary steps to properly effect the amendments described above and are
defending the case accordingly.
In
December 2009, subsidiaries of CenturyTel filed two lawsuits against
subsidiaries of Sprint Nextel (“Sprint”) to recover approximately $26 million in
access charges for VoIP traffic owed under various interconnection agreements
and tariffs. One lawsuit, filed on behalf of all legacy Embarq
operating entities, is pending in federal court in Virginia, and the other,
filed on behalf of all legacy CenturyTel operating entities, is pending in
federal court in Louisiana. The lawsuits allege that Sprint has
breached contracts, violated tariffs, and violated the Federal Communications
Act by failing to pay these charges.
From time to time, we are involved in
other proceedings or investigations incidental to our business, including
administrative hearings of state public utility commissions relating primarily
to rate making, disputes with other communications companies and service
providers, actions relating to employee claims, occasional grievance hearings
before labor regulatory agencies and miscellaneous third party tort
actions. The outcome of these other proceedings is not
predictable. However, we do not expect that the ultimate resolution
of these other proceedings, after considering available insurance coverage, will
have a material adverse effect on our financial position, results of operations
or cash flows.
|
Item
4.
|
[Reserved] |
46
|
|
PART
II
|
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Our
common stock is listed on the New York Stock Exchange and is traded under the
symbol CTL. The following table sets forth the high and low sales
prices, along with the quarterly dividends, for each of the quarters
indicated.
|
Sales
prices
|
Dividend
per
|
|||||||||||
|
High
|
Low
|
common
share
|
||||||||||
|
2009:
|
||||||||||||
|
First
quarter
|
$ | 29.22 | 23.41 | .70 | ||||||||
|
Second
quarter
|
$ | 33.62 | 25.26 | .70 | ||||||||
|
Third
quarter
|
$ | 34.00 | 28.90 | .70 | ||||||||
|
Fourth
quarter
|
$ | 37.15 | 32.25 | .70 | ||||||||
|
2008:
|
||||||||||||
|
First
quarter
|
$ | 42.00 | 32.00 | .0675 | ||||||||
|
Second
quarter
|
$ | 37.25 | 30.55 | .0675 | ||||||||
|
Third
quarter
|
$ | 40.35 | 34.13 | 1.3325 | ||||||||
|
Fourth
quarter
|
$ | 40.00 | 20.45 | .70 | ||||||||
Common
stock dividends during 2009 and 2008 were paid each quarter.
In
June 2008, our board of directors increased our quarterly cash dividend
rate from $.0675 to $.70 per share, and declared a one-time dividend of $.6325
per share, payable in July 2008, which, when coupled with the previously-paid
second quarter 2008 dividend, equaled the $.70 per share quarterly rate. In
February 2010, our board of directors further increased our quarterly cash
dividend rate to $.725 per share.
As
described in greater detail in Item 1A of this Annual Report on Form 10-K, the
declaration and payment of dividends is at the discretion of our Board of
Directors, and will depend upon our financial results, cash requirements, future
prospects and other factors deemed relevant by the Board of
Directors.
As of
February 26, 2010, there were approximately 36,000 stockholders of record
of our common stock. As of February 26, 2010, the closing stock price
of our common stock was $34.27.
In
February 2006, our Board of Directors authorized a $1.0 billion share repurchase
program under which, in February 2006, we repurchased $500 million (or
approximately 14.36 million shares) of our common stock under accelerated share
repurchase agreements with certain investment banks at an initial average price
of $34.83. The investment banks completed their repurchases in
mid-July 2006 and in connection therewith we paid an aggregate of approximately
$28.4 million cash to the investment banks to compensate them for the difference
between their weighted average purchase price during the repurchase period and
the initial average price. We repurchased the remaining $500 million
of common stock of this program in open-market transactions through June
2007.
47
In August
2007, our board of directors authorized a $750 million share repurchase program
which expired on September 30, 2009. We repurchased approximately
13.2 million shares for $503.9 million under this program.
During
the fourth quarter of 2009, we withheld 146,153 shares of stock at an average
price of $36.87 per share to pay taxes due upon the vesting of restricted stock
for certain of our employees in October and December 2009.
For
information regarding shares of our common stock authorized for issuance under
our equity compensation plans, see Item 12.
|
Item
6.
|
Selected
Financial Data.
|
The
following table presents certain selected consolidated financial data as of and
for each of the years ended in the five-year period ended December 31,
2009. The results of operations of the Embarq properties are included
herein subsequent to its July 1, 2009 acquisition date.
The
selected consolidated financial data shown below is derived from our audited
consolidated financial statements. These historical results are not
necessarily indicative of results that you can expect for any future period. You
should read this data in conjunction with Management’s Discussion and Analysis
of Financial Condition and Results of Operations and our full consolidated
financial statements and notes thereto contained elsewhere in this Annual Report
on Form 10-K.
48
Selected
Income Statement Data
|
Year
ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(Dollars,
except per share amounts, and shares expressed in
thousands)
|
||||||||||||||||||||
|
Operating
revenues
|
$ | 4,974,239 | 2,599,747 | 2,656,241 | 2,447,730 | 2,479,252 | ||||||||||||||
|
Operating
income
|
$ | 1,233,101 | 721,352 | 793,078 | 665,538 | 736,403 | ||||||||||||||
|
Net
income attributable to CenturyTel, Inc.
|
$ | 647,211 | 365,732 | 418,370 | 370,027 | 334,479 | ||||||||||||||
|
Basic
earnings per share
|
$ | 3.23 | 3.53 | 3.79 | 3.15 | 2.55 | ||||||||||||||
|
Diluted
earnings per share
|
$ | 3.23 | 3.52 | 3.71 | 3.07 | 2.49 | ||||||||||||||
|
Dividends
per common share
|
$ | 2.80 | 2.1675 | .26 | .25 | .24 | ||||||||||||||
|
Average
basic shares outstanding
|
198,813 | 102,268 | 109,360 | 116,671 | 130,841 | |||||||||||||||
|
Average
diluted shares outstanding
|
199,057 | 102,560 | 112,787 | 121,990 | 136,083 | |||||||||||||||
Selected
Balance Sheet Data
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Net
property, plant and equipment
|
$ | 9,097,139 | 2,895,892 | 3,108,376 | 3,109,277 | 3,304,486 | ||||||||||||||
|
Goodwill
|
$ | 10,251,758 | 4,015,674 | 4,010,916 | 3,431,136 | 3,432,649 | ||||||||||||||
|
Total
assets
|
$ | 22,562,729 | 8,254,195 | 8,184,553 | 7,441,007 | 7,762,707 | ||||||||||||||
|
Long-term
debt
|
$ | 7,253,653 | 3,294,119 | 2,734,357 | 2,412,852 | 2,376,070 | ||||||||||||||
|
Stockholders'
equity
|
$ | 9,466,799 | 3,167,808 | 3,415,810 | 3,198,964 | 3,624,431 | ||||||||||||||
The
following table presents certain selected consolidated operating data as of the
following dates:
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Telephone
access lines (1) (2)
|
7,039,000 | 2,025,000 | 2,135,000 | 2,094,000 | 2,214,000 | |||||||||||||||
|
High-speed
Internet customers (1)
|
2,236,000 | 641,000 | 555,000 | 369,000 | 249,000 | |||||||||||||||
|
(1)
|
In
connection with our Embarq acquisition in July 2009, we acquired
approximately 5.4 million telephone access lines and 1.5 million
high-speed Internet customers. In connection with our Madison
River acquisition in April 2007, we acquired approximately 164,000
telephone access lines and 57,000 high-speed Internet
customers.
|
|
(2)
|
Access
line counts for all periods reflect line count methodology adjustments to
standardize legacy CenturyTel and Embarq line
counts.
|
See Items
1 and 2 in Part I and Items 7 and 8 elsewhere herein for additional
information.
49
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
All
references to “Notes” in this Item 7 refer to the Notes to Consolidated
Financial Statements included in Item 8 of this annual report.
OVERVIEW
On
July 1, 2009, we acquired Embarq Corporation (“Embarq”) in a transaction
that substantially expanded the size and scope of our business. The
results of operations of Embarq are included in our consolidated results of
operations beginning July 1, 2009. Due to the significant size of
Embarq, direct comparisons of our results of operations for the year ended
December 31, 2009 with prior periods are less meaningful than
usual. We discuss below certain trends that we believe are
significant, even if they are not necessarily material to the combined
company.
Subsequent
to the Embarq acquisition, we are now an integrated communications company
primarily engaged in providing an array of communications services to customers
in 33 states, including local and long distance voice, wholesale network access,
high-speed Internet access, other data services, and video
services. In certain local and regional markets, we also provide
fiber transport, competitive local exchange carrier, security monitoring, and
other communications, professional and business information
services. We operate approximately 7.0 million access lines and
serve approximately 2.2 million broadband customers, based on operating data as
of December 31, 2009. For additional information on our revenue
sources, see Note 19. For additional information on our
acquisition of Embarq, see Note 2.
During
the year ended December 31, 2009, we incurred a significant amount of one-time
expenses, the vast majority of which are directly attributable to our
acquisition of Embarq. Such expenses are summarized in the table
below.
|
Year
ended
|
||||
|
Description
|
December 31, 2009
|
|||
|
(Dollars
in thousands)
|
||||
|
Severance
and retention costs due to workforce reductions, including contractual
early
retirement pension benefits for certain participants
|
$ | 98,922 | ||
|
Integration
related costs associated with our acquisition of Embarq
|
86,371 | |||
|
Net
charge associated with certain debt extinguishments
|
60,849 | |||
|
Transaction
related costs associated with our acquisition of Embarq, including
investment banker and legal fees
|
47,154 | |||
|
Accelerated
recognition of share-based compensation expense due to change of control
provisions and terminations of employment
|
21,244 | |||
|
Settlement
expenses related to certain executive retirement plans
|
17,834 | |||
|
Charge
incurred in connection with our $800 million bridge
facility
|
8,000 | |||
| $ | 340,374 | |||
50
All of
the above items are included in operating expenses, except for the $60.8 million
net charge incurred associated with certain debt extinguishments (which is
reflected in other income (expense) and interest expense) and the $8.0 million
charge incurred in connection with our $800 million bridge facility (which is
reflected in other income (expense)). None of the above items include
pre-closing expenses incurred and recorded by Embarq prior to the effective time
of the acquisition. Based on current plans and information, we
expect to incur approximately $200 million of additional non-recurring
integration related operating expenses subsequent to December 31,
2009.
In
addition, due to executive compensation limitations pursuant to the Internal
Revenue Code, a portion of the lump sum distributions related to the termination
of an executive retirement plan made in the first quarter of 2009 is reflected
as non-deductible for income tax purposes and thus increased our effective
income tax rate. Certain merger-related costs incurred during 2009
are also non-deductible for income tax purposes and similarly increased our
effective income tax rate. Such increase in our effective tax rate
was partially offset by a $7.0 million reduction to our deferred tax asset
valuation allowance associated with state net operating loss
carryforwards. In addition, in 2009, 2008 and 2007, we recognized net
after-tax benefits of approximately $15.7 million, $12.8 million and $32.7
million, respectively, primarily related to the recognition of previously
unrecognized tax benefits. See Note 12 and “Income Tax Expense” below
for additional information.
Upon the discontinuance of regulatory accounting effective July 1, 2009, we
recorded a one-time, non-cash extraordinary gain that aggregated approximately
$218.6 million before income tax expense and noncontrolling
interests ($136.0 million after-tax and noncontrolling
interests). See Note 15 for additional information.
As
further discussed in Note 11, during the second quarter of 2008, we recognized
an $8.2 million curtailment loss (reflected in selling, general and
administrative expense) in connection with amending our executive
retirement plan. We also recognized a $4.5 million pre-tax gain
(reflected in other income (expense)) upon liquidation of our investments in
marketable securities in the executive retirement plan trust in the second
quarter of 2008.
On April
30, 2007, we acquired all of the outstanding stock of Madison River
Communications Corp. (“Madison River”). See Note 2 for additional
information. We have reflected the results of operations of the
Madison River properties in our consolidated results of operations since May 1,
2007.
In the
fourth quarter of 2007, we recorded a $16.6 million pre-tax impairment charge to
write-down the value of certain long-lived assets in six of our northern
competitive local exchange carrier markets to their estimated realizable
value. We determined the estimated realizable value based on
proposals received during our sales process of such properties commenced in
2007. We sold such properties in separate transactions in May and
July 2008. Results of operations for these markets are included in
our consolidated results of operations up to the respective sales
dates.
51
During
2007, we recognized approximately $49.0 million of network access revenues in
connection with the settlement of a dispute with a carrier and approximately
$42.2 million of revenues in connection with the lapse of a regulatory
monitoring period (of which approximately $25.4 million is reflected in network
access revenues and $16.8 million is reflected in data revenues). We
do not expect this level of favorable revenue settlements to reoccur in the
future.
In the
fourth quarter of 2007, upon final distribution of the remaining proceeds from
the Rural Telephone Bank dissolution, we recorded a pre-tax gain of
approximately $5.2 million.
During
the last several years (exclusive of acquisitions and certain non-recurring
favorable adjustments), we have experienced revenue declines in our voice and
network access revenues primarily due to declines in access lines, intrastate
access rates, minutes of use, and federal support fund payments. To
mitigate these declines, we plan to, among other things, (i) promote long-term
relationships with our customers through bundling of integrated services, (ii)
provide new services, such as video and wireless broadband, and other additional
services that may become available in the future due to advances in technology,
wireless spectrum sales by the Federal Communications Commission (“FCC”) or
improvements in our infrastructure, (iii) provide our broadband and premium
services to a higher percentage of our customers, (iv) pursue acquisitions of
additional communications properties if available at attractive prices, (v)
increase usage of our networks and (vi) market our products and services to new
customers.
In
addition to historical information, this management’s discussion and analysis
includes certain forward-looking statements that are based on current
expectations only, and are subject to a number of risks, uncertainties and
assumptions, many of which are beyond our control. Actual events and
results may differ materially from those anticipated, estimated or projected if
one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect. Factors that could affect actual results
include but are not limited to: the timing, success and overall
effects of competition from a wide variety of competitive providers; the risks
inherent in rapid technological change; the effects of ongoing changes in the
regulation of the communications industry (including those arising out of the
FCC’s proposed rules regarding intercarrier compensation and the Universal
Service Fund and the FCC’s National Broadband Plan scheduled to be released in
the first quarter of 2010, each as described elsewhere herein); our ability to
effectively adjust to changes in the communications industry; our ability
to successfully integrate Embarq into our operations, including realizing the
anticipated benefits of the transaction and retaining and hiring key personnel;
our ability to effectively manage our expansion opportunities; possible changes
in the demand for, or pricing of, our products and services; our ability to
successfully introduce new product or service offerings on a timely and
cost-effective basis; our continued access to credit markets on favorable terms;
our ability to collect our receivables from financially troubled communications
companies; our ability to pay a $2.90 per common share dividend annually, which
may be affected by changes in our cash requirements, capital spending plans,
cash flows or financial position; unanticipated increases in our capital
expenditures; our ability to successfully negotiate collective bargaining
agreements on reasonable terms without work stoppages;
52
the effects of adverse weather; other risks referenced from time to time in this report or other of our filings with the Securities and Exchange Commission; and the effects of more general factors such as changes in interest rates, in tax rates, in accounting policies or practices, in operating, medical or administrative costs, in general market, labor or economic conditions, or in legislation, regulation or public policy. These and other uncertainties related to our business and our acquisition of Embarq are described in greater detail in Item 1A included herein. You should be aware that new factors may emerge from time to time and it is not possible for us to identify all such factors nor can we predict the impact of each such factor on the business or the extent to which any one or more factors may cause actual results to differ from those reflected in any forward-looking statements. You are further cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update any of our forward-looking statements for any reason.
53
RESULTS
OF OPERATIONS
Net income attributable to CenturyTel, Inc. for 2009 was $647.2 million,
compared to $365.7 million during 2008 and $418.4 million during
2007. Net income before extraordinary item was $511.3 million, $365.7
million and $418.4 million for the years ended December 31, 2009, 2008 and 2007,
respectively. Diluted earnings per share for 2009 was $3.23 compared
to $3.52 in 2008 and $3.71 in 2007. Diluted earnings per share before
extraordinary item for 2009 was $2.55. As mentioned in the
“Overview” section above, we incurred a significant amount of one-time expenses
in 2009 related to our acquisition of Embarq. The increase in the
number of shares outstanding in 2009 is primarily attributable to the common
stock issued in connection with our acquisition of Embarq on July 1,
2009. The number of average diluted shares outstanding declined in
2008 compared to 2007 primarily due to share repurchases.
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars,
except per share amounts,
and
shares in thousands)
|
||||||||||||
|
Operating
income
|
$ | 1,233,101 | 721,352 | 793,078 | ||||||||
|
Interest
expense
|
(370,414 | ) | (202,217 | ) | (212,906 | ) | ||||||
|
Other
income (expense)
|
(48,175 | ) | 42,252 | 40,029 | ||||||||
|
Income
tax expense
|
(301,881 | ) | (194,357 | ) | (200,572 | ) | ||||||
|
Income
before noncontrolling interests and extraordinary item
|
512,631 | 367,030 | 419,629 | |||||||||
|
Noncontrolling
interests
|
(1,377 | ) | (1,298 | ) | (1,259 | ) | ||||||
|
Net
income before extraordinary item
|
511,254 | 365,732 | 418,370 | |||||||||
|
Extraordinary
item, net of income tax expense and noncontrolling
interests
|
135,957 | - | - | |||||||||
|
Net
income attributable to CenturyTel, Inc.
|
$ | 647,211 | 365,732 | 418,370 | ||||||||
|
Basic
earnings per share
|
||||||||||||
|
Before extraordinary item
|
$ | 2.55 | 3.53 | 3.79 | ||||||||
|
Extraordinary item
|
$ | .68 | - | - | ||||||||
|
Basic earnings per share
|
$ | 3.23 | 3.53 | 3.79 | ||||||||
|
Diluted
earnings per share
|
||||||||||||
|
Before extraordinary item
|
$ | 2.55 | 3.52 | 3.71 | ||||||||
|
Extraordinary item
|
$ | .68 | - | - | ||||||||
|
Diluted earnings per share
|
$ | 3.23 | 3.52 | 3.71 | ||||||||
|
Average
basic shares outstanding
|
198,813 | 102,268 | 109,360 | |||||||||
|
Average
diluted shares outstanding
|
199,057 | 102,560 | 112,787 | |||||||||
Operating
income increased $511.7 million in 2009 due to a $2.374 billion increase in
operating revenues and a $1.863 billion increase in operating
expenses. Such increases in operating revenues, operating expenses
and operating income were substantially due to our July 1, 2009 acquisition of
Embarq. Operating income decreased $71.7 million in 2008 due to a
$56.5 million decrease in operating revenues and a $15.2 million increase in
operating expenses.
54
As
mentioned in Note 15, we discontinued the application of regulatory accounting
effective July 1, 2009. As a result of such discontinuance, since the
third quarter of 2009 we have eliminated all intercompany transactions with
regulated affiliates that previously were not eliminated under the application
of regulatory accounting. This has caused our revenues and operating
expenses to be lower by equivalent amounts (approximately $108 million) for the
year ended December 31, 2009 as compared to the year ended December 31,
2008.
OPERATING
REVENUES
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Voice
|
$ | 1,827,063 | 874,041 | 889,960 | ||||||||
|
Network
access
|
1,269,322 | 820,383 | 941,506 | |||||||||
|
Data
|
1,202,284 | 524,194 | 460,755 | |||||||||
|
Fiber
transport and CLEC
|
172,541 | 162,050 | 159,317 | |||||||||
|
Other
|
503,029 | 219,079 | 204,703 | |||||||||
|
Operating
revenues
|
$ | 4,974,239 | 2,599,747 | 2,656,241 | ||||||||
Voice revenues.
We derive voice revenues by providing local exchange
telephone services and retail long distance services to customers in our service
areas. The $953.0 million increase in voice revenues in 2009 is
primarily due to $1.016 billion of revenues attributable to the Embarq
properties acquired July 1, 2009. The remaining $63.2 million
decrease is primarily due to (i) a $30.9 million decrease due to a 6.6% decline
in the average number of access lines in our incumbent markets; (ii) a $14.5
million decrease in custom calling feature revenues primarily due to the
continued migration of customers to bundled service offerings at a lower
effective rate and (iii) an $8.1 million reduction due to the elimination of all
intercompany transactions due to the discontinuance of regulatory
accounting.
The $15.9
million (1.8%) decrease in voice revenues in 2008 is primarily due to (i) a
$22.5 million decrease due to a 5.9% decline in the average number of access
lines (exclusive of our acquisition of Madison River properties); (ii) a $10.8
million decrease in custom calling feature revenues primarily due to the
continued migration to bundled service offerings at a lower effective rate; and
(iii) a $7.7 million decline as a result of a decrease in revenues associated
with extended area calling plans. These decreases were partially
offset by $17.0 million of additional revenues attributable to the Madison River
properties acquired April 30, 2007 and a $9.9 million increase in long distance
revenues attributable to an increase in the percentage of our customer base
subscribing to fixed rate unlimited calling plans and the implementation of rate
increases applicable to several rate plans in late 2007 and early
2008.
55
Total
access lines declined 380,000 during 2009 (excluding access lines we acquired
from Embarq on July 1, 2009 but including access lines lost in Embarq’s markets
following such acquisition) compared to a decline of 136,800 during
2008. We believe the decline in the number of access lines during
2009 and 2008 is primarily due to the displacement of traditional wireline
telephone services by other competitive services and recent economic
conditions. Based on our current retention initiatives, we estimate
that our access line loss will be between 7.5% and 8.5% in
2010.
Network access
revenues. We derive our network access revenues primarily from
(i) providing services to various carriers and customers in connection with the
use of our facilities to originate and terminate their interstate and intrastate
voice transmissions; (ii) receiving universal support funds which allows us to
recover a portion of our costs under federal and state cost recovery mechanisms
and (iii) receiving reciprocal compensation from competitive local exchange
carriers and wireless service providers for terminating their
calls. Substantially all of our interstate network access revenues
are based on tariffed access charges filed directly with the Federal
Communications Commission (“FCC”). Certain of our intrastate network
access revenues are derived through access charges that we bill to intrastate
long distance carriers and other LEC customers.
Network
access revenues increased $448.9 million (54.7%) in 2009 and decreased $121.1
million (12.9%) in 2008 due to the following factors:
|
2009
|
2008
|
|||||||
|
increase
|
increase
|
|||||||
|
(decrease)
|
(decrease)
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
Acquisition
of Embarq in 2009
|
$ | 530,969 | - | |||||
|
Favorable
settlement of a dispute with a carrier in 2007
|
- | (48,987 | ) | |||||
|
Intrastate
revenues due to decreased minutes of use, decreased access rates in
certain states and recoveries from state support funds
|
(35,501 | ) | (29,022 | ) | ||||
|
Elimination
of all intercompany transactions due to the discontinuance of
regulatory accounting
|
(26,031 | ) | - | |||||
|
Revenue
recognition upon expiration of regulatory monitoring periods in
2007
|
- | (25,402 | ) | |||||
|
Partial
recovery of operating costs through revenue sharing arrangements with
other
telephone companies, interstate access revenues and return on rate
base
|
(17,052 | ) | (15,857 | ) | ||||
|
Recovery
from the federal Universal Service
|
||||||||
|
High Cost Loop support program
|
(12,964 | ) | (14,596 | ) | ||||
|
Acquisition
of Madison River in 2007
|
- | 12,345 | ||||||
|
Prior
year revenue settlement agreements and other
|
9,518 | 396 | ||||||
| $ | 448,939 | (121,123 | ) | |||||
56
We
believe that intrastate access rates and minutes will continue to decline in
2010, although we cannot precisely estimate the magnitude of such
decrease. Complaints filed by interexchange carriers in several of
our operating states or state initiated legislation could, if successful, place
further downward pressure on our intrastate access
rates.
As
mentioned above, upon the discontinuance of regulatory accounting effective July
1, 2009, we began eliminating all intercompany transactions with regulated
affiliates that previously were not eliminated under the application of
regulatory accounting.
We currently expect our network access revenues to continue to be negatively
impacted in 2010 by a reduction in Universal Service Fund
receipts. In addition, a wireless carrier has notified us of its
intention to migrate a portion of its network traffic from us in
2010. We currently estimate these items, along with the transition of
long distance voice services from a wholesale arrangement with another carrier
to our owned networks, will reduce network access revenues approximately
$120-130 million in 2010 as compared to the annual run rate for the last half of
2009.
In March
2006, we filed a complaint against a carrier for recovery of unpaid and
underpaid access charges for calls made using the carrier’s prepaid calling
cards and calls that used Internet Protocol for a portion of their
transmission. In April 2007, we entered into a settlement agreement
with the carrier and received approximately $49 million cash from them related
to the issues described above.
Data revenues. We
derive our data revenues primarily by providing high-speed Internet access
services and data transmission services over special circuits and private
lines. Data revenues increased $678.1 million in 2009 due to $689.8
million of revenues attributable to Embarq. Excluding Embarq, data
revenues decreased $11.7 million substantially due to a $51.4 million reduction
due to the elimination of all intercompany transactions resulting from the
discontinuance of regulatory accounting. Such decrease was partially
offset by a $38.5 million increase in DSL-related revenues primarily due to
growth in the number of DSL customers in our incumbent markets.
Data
revenues increased $63.4 million (13.8%) in 2008 substantially due to (i) a
$57.8 million increase in DSL-related revenues primarily due to growth in the
number of DSL customers and (ii) $16.3 million of additional revenues
contributed by Madison River. Such increases were partially offset by
$16.8 million of one-time revenues recorded in third quarter 2007 upon
expiration of a regulatory monitoring period.
Fiber transport and
CLEC. Our fiber transport and CLEC revenues include
revenues from our fiber transport, competitive local exchange carrier (“CLEC”)
and security monitoring businesses. Fiber transport and CLEC revenues
increased $10.5 million in 2009 primarily due to $8.3 million of revenues
attributable to Embarq and a $6.8 million increase in fiber transport
revenues. Such increases were partially offset by a $4.5
million reduction due to the elimination of all intercompany transactions
resulting from the discontinuance of regulatory accounting beginning in the
third quarter of 2009.
57
Fiber
transport and CLEC revenues increased $2.7 million (1.7%) in 2008, of which $6.4
million was due to growth in our incumbent fiber transport business and $2.5
million was due to additional revenue contributed by Madison
River. Such increases were partially offset by a $2.6 million
decrease due to the sales of six CLEC markets that were consummated in the
second and third quarters of 2008 and a $3.5 million decrease in CLEC revenues
primarily due to the loss of customers.
Other revenues. We
derive other revenues primarily by (i) leasing, selling, installing and
maintaining customer premise telecommunications equipment and wiring; (ii)
providing payphone services primarily within our local service territories and
various correctional facilities around the country; (iii) participating in the
publication of local directories; (iv) providing network database services; and
(iv) providing our video services, as well as other new product and service
offerings. Other revenues increased $284.0 million in 2009, of which
approximately $318.1 million related to our acquisition of
Embarq. Excluding Embarq, other revenues decreased $34.2 million
primarily as a result of a $17.4 million reduction due to the elimination of all
intercompany transactions resulting from the discontinuance of regulatory
accounting and a $10.5 million decrease in certain non-regulated product sales
and service offerings.
Other
revenues increased $14.4 million (7.0%) in 2008 primarily due to (i) $7.7
million of additional revenues contributed by Madison River and (ii) a $2.8
million increase in directory revenues.
OPERATING
EXPENSES
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Cost
of services and products (exclusive of depreciation
|
||||||||||||
|
and
amortization)
|
$ | 1,752,087 | 955,473 | 937,375 | ||||||||
|
Selling,
general and administrative
|
1,014,341 | 399,136 | 389,533 | |||||||||
|
Depreciation
and amortization
|
974,710 | 523,786 | 536,255 | |||||||||
|
Operating
expenses
|
$ | 3,741,138 | 1,878,395 | 1,863,163 | ||||||||
Cost of services and
products. Cost of services and products increased $796.6
million (83.4%) in 2009 primarily due to $888.8 million of expenses attributable
to the Embarq properties acquired on July 1, 2009. The remaining
$92.2 million decrease is primarily due to (i) a $88.7 million reduction in
expenses resulting from the elimination of all intercompany transactions
resulting from the discontinuance of regulatory accounting; (ii) a $4.9 million
decrease in customer service related expenses; (iii) a $4.6 million decrease in
access expense; and (iv) a $4.1 million decrease in CLEC expenses as a result of
the divestiture of six CLEC markets in 2008. Such decreases were
partially offset by a $15.8 million increase in salaries, wages and benefits
primarily due to increases in pension expense and share-based compensation
expense and a $12.4 million increase in DSL-related expenses due to an increase
in the number of DSL customers served.
58
Cost of
services and products increased $18.1 million (1.9%) in 2008 primarily due to
(i) $22.7 million of additional costs incurred by the Madison River properties;
(ii) a $12.3 million increase in DSL-related expenses due to growth in the
number of DSL customers; (iii) a $4.9 million increase in costs associated with
initiating switched digital video services; and (iv) a $4.1 million increase due
to a one-time reimbursement of costs received from our satellite television
service provider in the second quarter of 2007 in connection with the change in
our contractual arrangement. Such increases were partially offset by
(i) a $16.6 million impairment charge recorded in 2007 related to certain of our
CLEC assets that were subsequently sold in 2008; (ii) a $4.4 million reduction
in costs due to the six CLEC markets sold; and (iii) a $1.6 million decrease in
salaries and benefits.
Selling, general and
administrative. Selling, general and administrative expenses
increased $615.2 million in 2009 primarily due to $500.6 million of expenses
attributable to Embarq (which includes approximately $106.0 million of costs
associated with employee termination benefits, primarily due to severance and
retention benefits, contractual pension benefits and acceleration of share-based
compensation expense associated with Embarq employee
terminations). The remaining $114.6 million increase is primarily due
to (i) $86.4 million of integration costs associated with our acquisition of
Embarq, primarily related to system conversion efforts; (ii) $47.2 million of
transaction related merger costs, including investment banker and legal fees
associated with our acquisition of Embarq; and (iii) $13.8 million of higher
employee benefit costs, primarily due to higher pension expense (primarily due
to $17.8 million of accelerated expense recognition due to change of control
provisions triggered upon our acquisition of Embarq and the termination of a
supplemental executive retirement plan) and share-based compensation expense
(due to the accelerated vesting of equity grants of our employees upon the
acquisition of Embarq). Such increases were partially offset by (i) a
$19.5 million reduction in expenses resulting from the elimination of all
intercompany transactions due to the discontinuance of regulatory accounting;
(ii) a $10.7 million reduction in operating taxes primarily due to the favorable
resolution of certain transaction tax audit issues; and (iii) an $8.1 million
reduction in marketing expenses.
Selling,
general and administrative expenses increased $9.6 million (2.5%) in 2008
primarily due to (i) an $11.4 million increase in marketing expenses; (ii) an
$8.2 million increase due to expenses related to the curtailment loss associated
with our SERP; (iii) $5.0 million of costs associated with our acquisition of
Embarq; and (iv) $4.8 million of additional costs incurred by Madison
River. Such increases were partially offset by (i) an $8.8 million
decrease in operating taxes; (ii) a $5.4 million decrease in bad debt expense
(most of which was attributable to a favorable settlement with a carrier in
first quarter 2008); (iii) a $4.3 million decrease in salaries and benefits; and
(iv) a $2.7 million decrease in information technology expenses.
Depreciation and
amortization. Depreciation and amortization increased $450.9
million (86.1%) in 2009 primarily due to $492.6 million of depreciation and
amortization attributable to Embarq (including $118.4 million of amortization
expense related to its customer list and other intangible
assets). The remaining $41.7 million decrease was primarily due to a
$59.8 million decrease in depreciation expense resulting from a reduction in
certain depreciation rates effective July 1, 2009 upon the discontinuance of
regulatory accounting (see Note 15) and due to certain assets becoming fully
depreciated. Such decreases were partially offset by an $18.8 million
increase due to higher levels of plant placed in service in our incumbent
markets.
59
Depreciation
and amortization decreased $12.5 million (2.3%) in 2008 primarily due to a $36.7
million reduction in depreciation expense due to certain assets becoming fully
depreciated. Such decrease was partially offset by $13.7
million of additional depreciation and amortization incurred by Madison River
and a $12.8 million increase due to higher levels of plant in
service.
Other. For
additional information regarding certain matters that have impacted or may
impact our operations, see “Regulation and Competition”.
INTEREST
EXPENSE
Interest
expense increased $168.2 million in 2009 compared to 2008 primarily due to
$179.9 million of interest expense attributable to Embarq’s indebtedness assumed
in connection with our acquisition of Embarq. The remaining $11.7
million decrease is primarily attributable to a $4.6 million decrease in
interest expense due to favorable resolution of certain transaction tax audit
issues and a $4.7 million one-time reduction in interest expense in 2009 related
to debt extinguishment transactions consummated in October 2009. See
Note 5 for additional information.
Interest
expense decreased $10.7 million (5.0%) in 2008 compared to 2007. An
$18.0 million decrease due to lower average interest rates was partially offset
by a $9.3 million increase due to increased average debt
outstanding.
OTHER
INCOME (EXPENSE)
Other
income (expense) includes the effects of certain items not directly related to
our core operations, including gains or losses from nonoperating asset
dispositions and impairments, our share of the income from our 49% interest in a
cellular partnership, interest income and allowance for funds used during
construction. Other income (expense) was $(48.2) million for 2009
compared to $42.3 million for 2008 and $40.0 million in 2007. Included in 2009
is (i) a $72.0 million pre-tax charge related to certain debt extinguishment
transactions consummated in October 2009 (see Note 5 for additional
information) and (ii) an $8.0 million pre-tax charge associated with our $800
million bridge credit facility (see Note 2 for additional
information). Included in 2008 is (i) approximately $10 million
related to the recognition of previously accrued transaction related and other
contingencies; (ii) a pre-tax gain of $4.5 million upon the liquidation of our
investments in marketable securities in our SERP trust; (iii) a pre-tax gain of
approximately $7.3 million from the sales of certain nonoperating investments;
and (iv) a $3.4 million pre-tax charge related to terminating all of our
existing derivative instruments in the first quarter of 2008. The
year 2007 includes a non-recurring pre-tax gain of $10.4 million related to the
sale of our interest in a real estate partnership and a $5.2 million pre-tax
gain resulting from the final distribution of funds from the Rural Telephone
Bank redemption mentioned below. Our share of income from our 49%
interest in a cellular partnership increased $7.0 million in 2009 compared to
2008 and decreased $2.5 million in 2008 compared to 2007. We record our share of
the partnership income based on unaudited results of operations until the time
we receive audited financial statements for the partnership from the
unaffiliated general partner. Upon receipt of the respective audited
financial statements, we recorded unfavorable adjustments in 2008 (upon
completion of the 2007 audit) and favorable adjustments in 2007 (upon completion
of the 2006 and 2005 audits).
60
INCOME
TAX EXPENSE
The
effective income tax rate was 37.2%, 34.7%, and 32.4% for 2009, 2008 and 2007,
respectively. Certain executive compensation amounts, including the
lump sum distributions paid to certain executive officers in connection with
discontinuing the Supplemental Executive Retirement Plan (see Note 11), are
reflected as non-deductible for income tax purposes pursuant to executive
compensation limitations prescribed by the Internal Revenue Code. The
treatment of these amounts as non-deductible resulted in the recognition of
approximately $9.2 million of income tax expense in 2009 above amounts that
would have been recognized had such payments been deductible for income tax
purposes. Our 2009 effective tax rate is also higher because a
portion of our merger-related transaction costs incurred during 2009 are
non-deductible for income tax purposes (with such treatment resulting in a $6.9
million increase to income tax expense). Such increases in income tax
expense were partially offset by a $7.0 million reduction in income tax expense
primarily caused by a reduction to our deferred tax asset valuation allowance
associated with state net operating loss carryforwards primarily due to a law
change in one of our operating states that we believe will allow us to utilize
our net operating loss carryforwards in the future. Prior to the law
change, such net operating loss carryforwards were fully reserved as it was more
likely than not that these carryforwards would not be utilized prior to
expiration.
Income tax expense was reduced by approximately $15.7 million in 2009, $12.8
million in 2008 and $32.7 million in 2007 due to the recognition of previously
unrecognized tax benefits (see Critical Accounting Policies below and Note 12)
and other adjustments upon finalization of tax returns.
EXTRAORDINARY
ITEM
Upon the
discontinuance of regulatory accounting on July 1, 2009, we recorded a one-time
extraordinary gain of approximately $136.0 million after-tax. See
Note 15 for additional information related to this extraordinary
gain.
ACCOUNTING
PRONOUNCEMENTS
In June
2009, the Financial Accounting Standards Board issued guidance regarding the
accounting standards codification and the hierarchy of generally accepted
accounting principles (“GAAP”). The codification is now the single
source of authoritative United States GAAP for all non-governmental entities.
The codification, which became effective July 1, 2009, changes the
referencing and organization of accounting guidance. The issuance of this
codification standard will not change GAAP, and therefore the adoption of this
guidance will only affect how specific references to GAAP literature are
disclosed in the notes to our consolidated financial statements and elsewhere in
our reports filed with the SEC.
61
In
December 2007, the Financial Accounting Standards Board issued guidance on
business combinations, which requires an acquiring entity to recognize all of
the assets acquired and liabilities assumed in a transaction at the acquisition
date fair value with limited exceptions. Such guidance also changes
the accounting treatment for certain specific items, including acquisition
costs, acquired contingent liabilities, restructuring costs, deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date and
is effective for us for all business combinations for which the acquisition date
is on or after January 1, 2009. We have accounted for our acquisition
of Embarq using this guidance. During 2009, we incurred approximately
$47.2 million of transaction-related expenses (primarily investment banker and
legal fees) related to our acquisition of Embarq. Such costs are
required to be expensed as incurred and are reflected in selling, general and
administrative expense in our consolidated statement of income for the year
ended December 31, 2009.
In June
2008, the Financial Accounting Standards Board issued guidance on determining
whether instruments granted in share-based payment transactions are
participating securities. Based on this guidance, we have concluded
that our outstanding non-vested restricted stock is a participating security and
therefore should be included in the earnings allocation in computing earnings
per share using the two-class method. The guidance was effective for
us beginning in first quarter 2009 and required us to recast our previously
reported earnings per share. Under the new accounting guidance, we
have recast our previously reported diluted earnings per share for 2008 ($3.56
per share) and 2007 ($3.72 per share) as $3.52 per share for 2008 and $3.71 for
2007.
In
December 2007, the Financial Accounting Standards Board issued guidance
regarding noncontrolling interests in consolidated financial statements, which
requires noncontrolling interests to be recognized as equity in the consolidated
balance sheets. In addition, net income attributable to such
noncontrolling interests is required to be included in consolidated net
income. This guidance is effective for fiscal years beginning on or
after December 15, 2008. Our financial statements as of and for the
twelve months ended December 31, 2009 reflect our noncontrolling interests as
equity in our consolidated balance sheet. Prior periods have been
adjusted to reflect this presentation.
In
January 2009, we adopted new accounting guidance related to employers’
disclosure about postretirement benefit plan assets, which expands the
disclosures required by previous guidance to discuss the assumptions and risks
used to compute fair value for each category of plan assets. See
Notes 10 and 11 for additional information.
We are
subject to certain accounting standards that define fair value, establish a
framework for measuring fair value and expand the disclosures about fair value
measurements required or permitted under other accounting
pronouncements. The fair value accounting guidance establishes a
three-tier fair value hierarchy, which prioritizes the inputs used to measure
fair value. These tiers include: Level 1 (defined as observable
inputs such as quoted market prices in active markets), Level 2 (defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable), and Level 3 (defined as unobservable inputs in which
little or no market data exists). See Note 18 for additional
information.
62
CRITICAL
ACCOUNTING POLICIES
Our
financial statements are prepared in accordance with accounting principles that
are generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses. We continually evaluate our estimates and assumptions
including those related to (i) revenue recognition, (ii) allowance for doubtful
accounts, (iii) pension and postretirement benefits, (iv) intangible and
long-lived assets, (v) business combinations and (vi) income
taxes. Actual results may differ from these estimates and assumptions
and these differences may be material. We believe these critical
accounting policies discussed below involve a higher degree of judgment or
complexity.
Revenue
recognition. We collect in advance fees for fixed rate
services, such as local service, unlimited long distance, high-speed Internet
and certain data services, and defer revenue recognition until these services
are provided to the customer. We bill in arrears variable rate
billing services, including minute driven long distance, data and access
revenues. We have multiple billing cycles spread throughout each month resulting
in accounts receivables and deferred revenue balances at the end of each
reporting period. In the event that the variable rate usage date is
not available at the end of a reporting period, we estimate revenue based on
historic usage and other relevant factors. Service activation and
installation fees are deferred and amortized on a straight-line basis over the
average life of the customer. Operating revenues include certain
revenue reserves for billing disputes and contract
interpretations. These reserves require management’s judgment and are
based on many factors including historical trends, contract and tariff
interpretations and developments during the resolution process.
Allowance for doubtful
accounts. In evaluating the collectibility of our accounts
receivable, we assess a number of factors, including a specific customer’s or
carrier’s ability to meet its financial obligations to us, the length of time
the receivable has been past due and historical collection
experience. Based on these assessments, we record both specific and
general reserves for uncollectible accounts receivable to reduce the related
accounts receivable to the amount we ultimately expect to collect from customers
and carriers. If circumstances change or economic conditions worsen
such that our past collection experience is no longer relevant, we may need to
increase our reserves from the levels reflected in our accompanying consolidated
balance sheet.
Pension and postretirement
benefits. Accounting for pensions and postretirement benefits
involves estimating the cost of benefits to be provided well into the future and
attributing that cost over the time period each employee provides service to
us. To accomplish this, extensive use is made of various assumptions,
such as discount rates, investment returns, mortality, turnover, medical costs
and inflation through a collaborative effort by management and independent
actuaries. The results of this effort provide management with the
necessary information on which to base its judgment and develop the estimates
used to prepare the financial statements. Changes in assumptions used
could result in a material impact to our financial results in any given
period.
63
The
pension plan we assumed in connection with the Embarq acquisition was
underfunded by approximately $1.0 billion with respect to the projected benefit
obligation as of the July 1, 2009 acquisition date. In the third
quarter of 2009, we contributed $115 million to the legacy Embarq pension
plan. We currently expect to contribute approximately $300 million to
the legacy Embarq pension plan in 2010. Based on current actuarial
estimates as of December 31, 2009 that assume a $300 million contribution in
2010, the utilization of our existing remaining credit balance to partially
satisfy future required cash contributions and assuming no further discretionary
contributions are made, we would not be required to make a minimum contribution
to the legacy Embarq pension plan until 2012. Our minimum required
contributions to our other pension plans are immaterial. The actual
level of contributions required in future years can change significantly
depending on discount rates and actual returns on plan
assets.
A
significant assumption used in determining our pension and postretirement
expense is the expected long-term rate of return on plan assets. For
2009 and 2008, we utilized an expected long-term rate of return on plan assets
of 8.25% for our incumbent pension plan and 8.50% for the pension plan we
assumed in connection with the Embarq acquisition. We believe such
return assumptions reflect the expected long-term rates of return in the
financial markets based on our current plan asset allocation. We also
reviewed the historical rates of return on those plan assets over long-term
periods that ranged from 10 to 20 years. A 25 basis point decrease in
the return on plan asset assumption would increase our annual combined pension
and postretirement expense approximately $8.0
million. Should we experience asset returns that are
significantly below our 8.25-8.50% long-term rate of return assumptions, we may
experience in the future higher levels of pension expense, higher levels of
required contributions and lower stockholders’ equity balances (due to
accumulated other comprehensive losses).
Another
assumption used in the determination of our pension and postretirement benefit
plan obligations is the appropriate discount rate. The discount rate
is an assumed rate of return derived from high-quality debt securities that, if
applicable at the measurement date to a specified amount of principal, would
provide the necessary future cash flows to pay our pension benefit obligations
when they become due. For our pension plans, the discount rate used
for the December 31, 2009 and 2008 measurement dates were derived by matching
projected benefit payments to bond yields obtained from the CitiGroup Pension
Discount Curve (Above Median) which are ultimately derived from the AA-rated
corporate bond sector. For the year ended December 31, 2007, we
utilized the CitiGroup Pension Discount Curve to derive our discount
rate. Our discount rate for determining benefit obligations
under our pension plans at December 31, 2009 ranged from 5.5 to 6.0% compared to
6.6 to 6.9% at December 31, 2008. The discount rate can change from
year to year based on market conditions that impact corporate bond
yields. We use a similar methodology to determine the
discount rate for our postretirement plan by utilizing as a reference the Hewitt
Top Quartile Yield Curve as of the end of the year. Our discount rate
for determining benefit obligations under our postretirement plans at December
31, 2009 was 5.70-5.80% compared to 6.9% at December 31, 2008. A 25
basis point decrease in the assumed discount rate would increase annual combined
pension and postretirement expense approximately $2.0 million.
64
Intangible and long-lived
assets. We are subject to testing for impairment of long-lived
assets (including goodwill, intangible assets and other long-lived assets) based
on applicable accounting guidelines.
We are
required to review goodwill recorded in business combinations for impairment at
least annually and are required to write-down the value of goodwill only in
periods in which the recorded amount of goodwill exceeds the fair
value. As disclosed in the table below, substantially all of our
goodwill is associated with our local exchange telephone
operations. Subsequent to our acquisition of Embarq on July 1, 2009,
we have managed our local exchange telephone operations based on five geographic
regions (which we internally refer to as Mid-Atlantic, Southern, South Central,
Northeast and Western) and have considered these five operating regions to be
our reporting units in testing for goodwill impairment of our telephone
operations. Prior to our Embarq acquisition, we managed our local
exchange telephone operations based on three geographic regions. The
remainder of our goodwill is associated with our competitive local exchange
carrier (CLEC), fiber transport, security monitoring and other operations of our
business, all of which we treat as separate reporting units in our goodwill
impairment testing.
The
breakdown of our goodwill balances as of December 31, 2009 by reporting unit is
as follows (amounts in thousands):
|
Telephone
operations (Mid-Atlantic)
|
$ | 2,224,699 | ||
|
Telephone
operations (Southern)
|
2,294,998 | |||
|
Telephone
operations (South Central)
|
2,486,041 | |||
|
Telephone
operations (Northeast)
|
2,250,397 | |||
|
Telephone
operations (Western)
|
945,834 | |||
|
CLEC
operations
|
29,935 | |||
|
Fiber
transport operations
|
10,607 | |||
|
Security
monitoring operations
|
4,966 | |||
|
All
other operations
|
4,281 | |||
|
Total
goodwill
|
$ | 10,251,758 |
We
estimate the fair value of our telephone operations reporting units using a
multiple of earnings before interest, taxes and depreciation (EBITDA), as
described below. For each telephone reporting unit, we compare its
estimated fair value to its carrying value. If the estimated fair
value of the reporting unit is greater than the carrying value, we conclude that
no impairment exists. If the fair value of the reporting unit is less
than the carrying value, a second calculation is required in which the implied
fair value of goodwill is compared to its carrying value. If the
implied fair value of goodwill is less than its carrying value, goodwill must be
written down to its implied fair value.
65
As of
September 30, 2009, we completed the required annual test of goodwill
impairment. Such impairment test excluded the goodwill associated
with our acquisition of Embarq pending finalization of the determination of the
fair values of assets acquired and liabilities assumed in connection
therewith. We determined that our goodwill was not impaired as of
such date. As of December 31, 2009, we performed a subsequent
impairment test that included the goodwill associated with our Embarq
acquisition and concluded that our goodwill was not impaired as of December
31, 2009.
The
multiple of EBITDA we utilize in our goodwill impairment testing for our
telephone operations is supported by a sum-of-the-parts independent valuation
analysis performed and updated annually by a major investment banking firm on
behalf of its clients. This valuation report includes CenturyTel as
well as other peer companies in the local exchange carrier
industry. In the most recent analysis performed by this firm,
valuations of specific assets were based on a combination of public and private
market comparables and EBITDA multiples were affected by access line trends and
the future expectations of those trends. Based on the above, we
utilized an EBITDA multiple of 5.6 times for our goodwill impairment analyses
performed as of September 30, 2009 and December 31, 2009. For the
past several years, we have consistently utilized the EBITDA multiples derived
from this independent analysis. The EBITDA multiple derived in the
analyst report and utilized in our goodwill impairment testing decreased from
7.0 in 2007 to 6.5 in 2008 to 5.6 in 2009, in large part we believe due to the
continued erosion of access lines.
As of
December 31, 2009, the estimated fair value of the Southern region exceeded its
carrying value by less than 5%. Should events occur (such as
continued access line losses or other revenue reductions) that would cause the
fair value to decline below its carrying value, we may be required to record a
non-cash charge to earnings during the period in which the impairment is
determined.
We
estimate the fair value of our other reporting units using various methods,
including multiples of EBITDA (as described above) and multiples of
revenues. We completed the tests of goodwill impairment (as of
September 30, 2009 and December 31, 2009) for our other reporting units and
determined that our goodwill was not impaired as of such dates.
The
carrying value of long-lived assets other than goodwill is reviewed for
impairment whenever events or circumstances indicate that such carrying amount
cannot be recoverable by assessing the recoverability of the carrying value
through estimated undiscounted net cash flows expected to be generated by the
assets. If the undiscounted net cash flows are less than the carrying
value, an impairment loss would be measured as the excess of the carrying value
of a long-lived asset over its fair value. We recognized a $16.6
million pre-tax impairment charge in 2007 related to certain of our CLEC assets
that were subsequently sold in 2008.
Business combinations. The
new accounting guidance for business combinations was effective for us for all
business combinations consummated on or after January 1, 2009 and requires an
acquiring entity to recognize all of the assets acquired and liabilities assumed
at the acquisition date fair value. We were the accounting acquirer
in our acquisition of Embarq. The allocation of the purchase price to
the assets acquired and liabilities assumed of Embarq (and the related estimated
lives of depreciable tangible and identifiable intangible assets) required a
significant amount of judgment and was considered a critical
estimate. Such allocation of certain aspects of the purchase
price to items that are more complex to value was performed by an independent
valuation firm based on information provided by management. See Note
2 for additional information concerning the assignment of fair values to the
assets acquired and liabilities assumed of Embarq.
66
Income taxes. We
estimate our current and deferred income taxes based on our assessment of the
future tax consequences of transactions that have been reflected in our
financial statements or applicable tax returns. Actual income taxes
paid could vary from these estimates due to future changes in income tax law or
the resolution of audits by federal and state taxing authorities. We
maintain liabilities for unrecognized tax benefits for various uncertain tax
positions taken in our tax returns. These liabilities are estimated
based on our judgment of the probable outcome of the uncertain tax positions and
are adjusted periodically based on changing facts and
circumstances. Changes to the liabilities for unrecognized tax
benefits could materially affect operating results in the period of
change. During 2009, 2008 and 2007, we recognized approximately $15.7
million, $12.8 million, and $32.7 million, respectively, of previously
unrecognized tax benefits (including related interest and net of federal tax
benefit) and other adjustments upon finalization of tax returns. Such
benefits were recorded primarily as a result of the favorable resolution of
audits, administrative practices and the lapse of statute of limitations in
certain jurisdictions. See Note 12 for additional information
regarding our unrecognized tax benefits.
For
additional information on our critical accounting policies, see “Accounting
Pronouncements” and “Regulation and Competition – Other Matters” below, and the
Notes to our consolidated financial statements included elsewhere
herein.
INFLATION
The vast
majority of our telephone operations are now regulated under price-cap
regulation for interstate purposes, for which price changes for certain revenue
components are limited to the rate of inflation. As operating
expenses in our nonregulated lines of business increase as a result of
inflation, we, to the extent permitted by competition, attempt to recover the
costs by increasing prices for our services and equipment.
MARKET
RISK
We are
exposed to market risk from changes in interest rates on our long-term debt
obligations. We have estimated our market risk using sensitivity
analysis. Market risk is defined as the potential change in the fair
value of a fixed-rate debt obligation due to a hypothetical adverse change in
interest rates. We determine fair value of long-term debt obligations
based on a discounted cash flow analysis, using the rates and maturities of
these obligations compared to terms and rates currently available in the
long-term financing markets. The results of the sensitivity analysis
used to estimate market risk are presented below, although the actual results
may differ from these estimates.
67
In
connection with our Embarq acquisition, Embarq’s existing long-term debt as of
the acquisition date was valued at its estimated fair value. At
December 31, 2009, we estimated the fair value of our long-term debt to be $8.4
billion based on the overall weighted average interest rate of our debt of 7.1%
and an overall weighted maturity of 11 years compared to terms and rates
currently available in long-term financing markets. As of December
31, 2009, approximately 96.2% of our long-term debt obligations were fixed
rate. Market risk is estimated as the potential decrease in fair
value of our long-term debt resulting from a hypothetical increase of 71 basis
points in interest rates (ten percent of our overall weighted average borrowing
rate). Such an increase in interest rates would result in
approximately a $362.1 million decrease in fair value of our fixed-rate
long-term debt at December 31, 2009, but would have no impact on our results of
operations or cash flows. A 100 basis point increase in
variable interest rates would have had a negative pre-tax impact of
approximately $2.6 million on our results of operations and cash flows for the
twelve months ended December 31, 2009, but would have no impact on the fair
value of our long-term variable-rate debt.
We seek
to maintain a favorable mix of fixed and variable rate debt in an effort to
limit interest costs and cash flow volatility resulting from changes in
rates. From time to time over the past several years, we have used
derivative instruments to (i) lock-in or swap our exposure to changing or
variable interest rates for fixed interest rates or (ii) to swap obligations to
pay fixed interest rates for variable interest rates. We have
established policies and procedures for risk assessment and the approval,
reporting and monitoring of derivative instrument activities. We do
not hold or issue derivative financial instruments for trading or speculative
purposes. Management periodically reviews our exposure to interest
rate fluctuations and implements strategies to manage the exposure.
In
January 2008, we terminated all of our existing “fixed to variable” interest
rate swaps associated with the $500 million principal amount of our Series L
senior notes, due 2012. In connection with the termination of these
derivatives, we received aggregate cash payments of approximately $25.6 million,
which has been reflected as a premium of the associated long-term debt and is
being amortized as a reduction of interest expense through 2012 using the
effective interest method. In addition, in January 2008, we also
terminated certain other derivatives that were not deemed to be effective
hedges. Upon the termination of these derivatives, we paid an
aggregate of approximately $4.9 million (and recorded a $3.4 million pre-tax
charge in the first quarter of 2008 related to the settlement of these
derivatives). As of December 31, 2009, we had no derivative
instruments outstanding.
We are also exposed to market risk from changes in the fair value of our pension
plan assets. While our pension plan asset returns were positive for
2009, the loss on our incumbent pension plan assets was approximately 28% for
2008. If our actual return on plan assets is significantly lower than
our expected return assumption, our net periodic pension expense will increase
in the future and we may be required to contribute additional funds to our
pension plans in the future. The pension plan we assumed in our
acquisition of Embarq was substantially underfunded as of the acquisition
date. During the last half of 2009, we contributed $115 million to
the Embarq pension plan. Such plan may require a significant amount
of additional funding in the near future. Based on current actuarial
estimates as of December 31, 2009 that assume a $300 million contribution in
2010, the utilization of our existing remaining credit balance to partially
satisfy future required cash contributions and assuming no further discretionary
contributions are made, we would not be required to make a minimum contribution
to the legacy Embarq pension plan until 2012. Our minimum required
contributions to our other pension plans are immaterial. The actual
level of contributions required in future years can change significantly
depending on discount rates and actual returns on plan
assets.
68
Certain
shortcomings are inherent in the method of analysis presented in the computation
of fair value of financial instruments. Actual values may differ from
those presented if market conditions vary from assumptions used in the fair
value calculations. The analysis above incorporates only those risk
exposures that existed as of December 31, 2009.
LIQUIDITY
AND CAPITAL RESOURCES
Excluding
cash used for acquisitions, we rely on cash provided by operations to fund our
dividend payments and our operating and capital expenditures. During
the last few months of 2008, we borrowed against our long-term revolving credit
facility and held excess cash to provide us flexibility in the challenging
economic environment. As a result, our working capital position was
positive as of December 31, 2008. During 2009, we repaid a portion of
these borrowings which resulted in a negative working capital position as of
December 31, 2009, which is more representative of our typical working capital
position. Our operations have historically provided a stable source
of cash flow which has helped us continue our long-term program of capital
improvements.
Operating
activities. Net cash provided by operating activities was
$1.574 billion, $853.3 million and $1.030 billion in 2009, 2008 and 2007,
respectively. Payments for income taxes aggregated $258.9 million,
$208.8 million and $185.3 million in 2009, 2008 and 2007,
respectively. In 2009, we paid approximately $54 million to fund lump
sum distributions under our frozen supplemental executive retirement plan upon
the discontinuance of such plan and under change of control provisions triggered
upon the acquisition of Embarq. We also contributed $115 million to
the legacy Embarq pension plan during the last half of 2009. Our
accompanying consolidated statements of cash flows identify major differences
between net income and net cash provided by operating activities for each of
these periods. For additional information relating to our operations,
see “Results of Operations” above.
Investing
activities. Net cash used in investing activities was $678.8
million, $389.0 million and $619.2 million in 2009, 2008 and 2007,
respectively. Payments for property, plant and equipment were $754.5
million in 2009 (which includes $396.1 million of capital expenditures
attributable to our Embarq operations subsequent to our July 1, 2009 acquisition
of Embarq), $286.8 million in 2008 and $326.0 million in
2007. Capital expenditures for 2009 include approximately $75.1
million of one-time capital expenditures related to the integration of
Embarq. We used $306.8 million of cash (net of approximately $20.0
million of acquired cash) to purchase Madison River Communications Corp. and pay
related closing costs on April 30, 2007.
69
During
2008, we paid an aggregate of approximately $149 million for 69 licenses in the
Federal Communications Commission’s (“FCC”) auction of 700 megahertz (“MHz”)
wireless spectrum. We expect to complete our planning regarding the use of
this spectrum in the first half of 2010 and to begin our trial phase in late
2010 or early 2011. Based on our planning, we are considering developing
wireless voice and data service capabilities based on equipment using LTE
(Long-Term Evolution) technology. Given that simple data devices are not
expected to be commercially available until later this year and more complex,
integrated voice and data devices such as smartphones are not expected to be
available until 2012, we do not expect to deploy network equipment, other than
trial equipment, in 2010. Therefore, our deployment plans will not likely
result in any material impact to our capital and operating budgets for
2010.
On July
1, 2009, we consummated the acquisition of Embarq Corporation by issuing
approximately $6.0 billion of CenturyTel common stock (valued as of June 30,
2009). We financed our merger transaction expenses with (i) available cash of
the combined company and (ii) proceeds from CenturyTel’s and Embarq’s
existing revolving credit facilities. We acquired $76.9 million of
cash in connection with our acquisition of Embarq.
In
anticipation of making lump sum distributions to certain participants of our
SERP in early 2009, we liquidated our investments in marketable securities in
the SERP trust during the second quarter of 2008 and thereby increased our cash
and cash equivalents by $34.9 million. As noted above, the lump sum
distributions were paid in 2009 and aggregated approximately $54
million.
Financing
activities. Net cash used in financing activities was $976.4
million during 2009, $255.4 million in 2008, and $402.1 million in
2007. In September 2009, we received net proceeds of $644.4
million from the issuance of $250 million of 10-year, 6.15% senior notes and
$400 million of 30-year, 7.6% senior notes. In October 2009, the
proceeds from these note offerings, along with additional borrowings under our
existing credit facility, were used to buy back an aggregate of $746.1 million
of CenturyTel, Inc. and Embarq indebtedness (see Note 5 for additional
information). During 2008, we paid our $240 million Series F Senior
Notes at maturity primarily using borrowings from our credit
facility.
In
accordance with previously announced stock repurchase programs, we repurchased
9.7 million shares (for $347.3 million) and 10.2 million shares (for $460.7
million) in 2008 and 2007, respectively.
In late
March 2007, we publicly issued an aggregate of $750 million of Senior
Notes. The net proceeds from the issuance of such Senior Notes
aggregated approximately $741.8 million and were used (along with cash on hand
and approximately $50 million of borrowings under our commercial paper program)
to (i) finance the initial purchase price for the April 30, 2007 acquisition of
Madison River ($322 million) and (ii) pay off Madison River’s existing
indebtedness (including accrued interest) at closing ($522
million).
70
In June
2008, our Board of Directors (i) increased our annual cash dividend to $2.80
from $.27 per share and (ii) declared a one-time dividend of $.6325 per share,
which was paid in July 2008, effectively adjusting the total second quarter
dividend to the new $.70 quarterly dividend rate. In February 2010, our Board of
Directors further increased our quarterly dividend to $.725 per
share. Based on current circumstances, we intend to continue our
current dividend practice, subject to our intention to maintain investment grade
credit ratings on our senior debt and any other factors that our Board in its
discretion deems relevant.
In the
first quarter of 2008, we received a net cash settlement of approximately $20.7
million from the termination of all of our existing derivative
instruments. See “Market Risk” above for additional information
concerning the termination of these derivatives.
During
2008, CenturyTel suffered a substantial loss on its pension plan
assets. The pension plan we assumed in our acquisition of Embarq was
substantially underfunded as of the acquisition date. If this
underfunded status continues, we may be required to contribute additional funds
to our pension plan in the near future. To reduce the underfunded
position, in March 2010 we expect to contribute $300 million to the legacy
Embarq pension plan using cash on hand and borrowings from our credit
facility. For further information, see Item 1A - Risk Factors, of
this annual report.
As
previously announced, Embarq amended its credit facility to enable the facility
to remain in place as an $800 million revolving credit facility after the
completion of the merger through May 2011. See Note 2 for additional
information.
Subsequent
to the Embarq acquisition, we have available two unsecured revolving credit
facilities, (i) a five-year, $728 million facility of CenturyTel which expires
in December 2011 and (ii) an $800 million facility of Embarq which expires in
May 2011. These credit facilities contain financial covenants that
require us to meet certain leverage ratios and minimum interest coverage
ratios. Up to $250 million of the credit facilities can be used for
letters of credit, which reduces the amount available for other extensions of
credit. As of December 31, 2009, approximately $46 million of letters
of credit were outstanding. Available borrowings under these credit
facilities are also effectively reduced by any outstanding borrowings under our
commercial paper program. Our commercial paper program borrowings are
effectively limited to the total amount available under the two credit
facilities. As of December 31, 2009, we had approximately $291.2
million outstanding under our credit facilities (all of which relates to
CenturyTel’s facility) and no amounts outstanding under our commercial paper
program.
As
described in Note 5, we called for redemption on August 14, 2007, all of our
$165 million aggregate principal amount of Series K convertible senior
debentures, subject to the right of holders to convert their debentures into
shares of our common stock at a conversion price of $40.455. In lieu
of cash redemption, holders of approximately $149.6 million aggregate principal
amount of the debentures elected to convert their holdings into approximately
3.7 million shares of CenturyTel common stock. The remaining $15.4
million of outstanding debentures were retired for cash (including premium and
accrued and unpaid interest).
71
Other. For 2010,
we have budgeted between $825-875 million for capital
expenditures. Previously, we concluded that our prior extensive
capital investment in our wireline network permitted us to reduce wireline
network capital spending to maintenance levels. Our 2010 capital
expenditure budget also includes amounts for expanding our new service offerings
and our data networks.
The
following table contains certain information concerning our material contractual
obligations as of December 31, 2009.
|
Payments
due by period
|
||||||||||||||||||||
|
Contractual
obligations
|
Total
|
2010
|
2011-2012 | 2013-2014 |
2014
and Other
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Long-term
debt, including current maturities and
capital lease obligations (1)
|
$ | 7,753,718 | 500,065 | 630,328 | 849,926 | 5,773,399 | ||||||||||||||
|
|
||||||||||||||||||||
|
Interest
on long-term debt obligations
|
$ | 6,714,617 | 539,504 | 1,003,065 | 874,946 | 4,297,102 | ||||||||||||||
|
|
||||||||||||||||||||
|
Unrecognized
tax benefits (2)
|
$ | 81,663 | - | - | - | 81,663 | ||||||||||||||
(1) For additional information on the terms of our outstanding debt
instruments, see Note 5 to the consolidated financial statements included in
Item 8 of this annual report.
(2) Represents the amount of tax and interest we would pay assuming
we are required to pay the entire amount that we have reserved for our
unrecognized tax benefits (see Note 12 for additional information). The
timing of any payments for our unrecognized tax benefits cannot be predicted
with certainty; therefore, such amount is reflected in the “After 2014 and
Other” column in the above table.
We
continually evaluate the possibility of acquiring additional communications
operations and expect to continue our long-term strategy of pursuing the
acquisition of attractively-priced communications properties in exchange for
cash, securities or both. At any given time, we may be engaged in
discussions or negotiations regarding additional acquisitions. We
generally do not announce our acquisitions or dispositions until we have entered
into a preliminary or definitive agreement. We may require additional
financing in connection with any such acquisitions, the consummation of which
could have a material impact on our financial condition or operations.
Approximately 4.1 million shares of our common stock and 200,000 shares of our
preferred stock remain available for future issuance in connection with
acquisitions under our acquisition shelf registration statement. We also
have access to debt and equity capital markets.
Moody’s Investors Service (“Moody’s”) currently rates CenturyTel, Inc.’s and
Embarq Corporation’s long-term debt Baa3 (with a stable
outlook). Standard & Poor’s (“S&P”) rates the same long-term
debt BBB- (with a stable outlook). Our commercial paper program is
rated P-3 by Moody’s and A-3 by S&P. Any downgrade in our credit
ratings will increase our borrowing costs and commitment fees under our
revolving credit facility. Downgrades could also restrict our access
to the capital markets, increase our borrowing costs under new or replacement
debt financings, or otherwise adversely affect the terms of future borrowings
by, among other things, increasing the scope of our debt covenants and
decreasing our financial or operating flexibility.
72
The following table reflects our debt to total capitalization percentage and
ratio of earnings to fixed charges and preferred stock dividends as of and for
the years ended December 31, 2009, 2008 and 2007. The debt to total
capitalization ratio for 2009 reflects our Embarq acquisition. The ratio
of earnings to fixed charges and preferred stock dividends calculation for 2009
reflects the operations of Embarq only since July 1, 2009.
|
|
2009
|
2008
|
2007
|
|
|
|
|
|
|
Debt to total
capitalization
|
45.0 %
|
51.2
|
46.9
|
|
Ratio of earnings to
fixed charges
|
|||
|
and
preferred stock dividends*
|
3.17
|
3.74
|
3.85
|
*
For purposes of the chart above, “earnings” consist of income before income
taxes (before extraordinary item) and fixed charges, and “fixed charges”
include our interest expense, including amortized debt issuance costs, and our
preferred stock dividend costs.
73
Regulation and
Competition
The
communications industry continues to undergo various fundamental regulatory,
legislative, competitive and technological changes. These changes may have
a significant impact on the future financial performance of all communications
companies.
Events affecting the communications
industry. Wireless telephone services increasingly constitute a
significant source of competition with LEC services, especially since wireless
carriers have begun to compete effectively on the basis of price with more
traditional telephone services. Similarly, electronic mail and other
digital communications continue to reduce the demand for traditional landline
voice services. We anticipate these trends will continue.
Federal USF programs have undergone substantial changes since 1997, and are
expected to experience more changes in the coming years as the overall program
is modernized. As mandated by the 1996 Act, in May 2001 the FCC
modified its existing universal service support mechanism for rural telephone
companies by adopting an interim mechanism for a five-year period based on
embedded, or historical, costs that provide relatively predictable levels of
support to many LECs, including substantially all of our
LECs. In May 2006, the FCC extended this interim mechanism
until such time that new high-cost support rules are adopted for rural telephone
companies. Increased requests for payments, coupled with changes in
usage of telecommunications services, have placed stress on the funding
mechanism of the USF, which is subject to annual caps on
disbursements. These developments have placed additional financial
pressure on the amount of money that is necessary and available to provide
support to all eligible service providers, including payments we receive from
the USF High Cost Loop program. Increases in the nationwide average
cost per loop factor used to allocate funds among all USF recipients caused our
revenues from the USF High Cost Loop program (exclusive of USF revenues
recognized during the last half of 2009 in connection with our Embarq
acquisition) to decrease approximately $13 million in 2009 when compared to
2008. We estimate that our 2010 revenues from the USF High Cost Loop
program will be approximately $45 million lower as compared to the annual run
rate for the last half of 2009.
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. Improvements in the quality of
"Voice-over-Internet Protocol" ("VoIP") service have led several cable,
Internet, data and other communications companies, as well as start-up
companies, to substantially increase their offerings of VoIP service to business
and residential customers. VoIP providers frequently use existing
broadband networks to deliver flat-rate, all distance calling plans that may
offer features that cannot readily be provided by traditional LECs and may be
priced below those currently charged for traditional local and long distance
telephone services. In late 2003, the FCC initiated a rulemaking
intended to address the regulation of VoIP, and has adopted orders establishing
some initial broad regulatory guidelines. The FCC has not completed
the rulemaking, but could address the treatment of VoIP traffic and services by
concluding this proceeding or in combination with intercarrier compensation
reform proceedings already underway. There can be no assurance that
future rulemaking will be on terms favorable to ILECs, or that VoIP providers
will not successfully compete for our customers.
74
Beginning
in 2003, the FCC opened broad intercarrier compensation proceedings designed to
create a uniform mechanism to be used by the entire telecommunications industry
for payments between carriers originating, terminating, transiting or delivering
telecommunications traffic. In connection therewith, the FCC
has received intercarrier compensation proposals from several industry groups,
and solicited public comments on a variety of topics related to access charges
and intercarrier compensation. Broad industry negotiations have taken
place with the goal of developing a consensus plan that addresses the concerns
of carriers from all industry segments. The ultimate outcome of the
FCC’s intercarrier compensation proceedings could change the way we receive
compensation from, and remit compensation to, other carriers, our end user
customers and the federal USF. Until the FCC’s proceedings conclude
and the changes, if any, to the existing rules are established, we cannot
estimate the impact these proceedings will have on our operations.
Many
cable, technology or other communication companies that previously offered a
limited range of services are now, like us, offering diversified bundles of
services. As such, a growing number of companies are competing to
serve the communications needs of the same customer base. Several of
these companies started offering full service bundles before us, which could
give them an advantage in building customer loyalty. Such activities
will continue to place downward pressure on the demand for our access
lines.
Recent events affecting
us. During the last few years, most of the states in which we
provide telephone services have taken legislative or regulatory steps to further
introduce competition into the LEC business. The number of companies
which have requested authorization to provide local exchange service in our
service areas has increased in recent years, particularly in Embarq’s legacy
markets, and we anticipate that similar action may be taken by others in the
future.
Certain
long distance carriers continue to request that certain of our ILECs reduce
intrastate access tariffed rates. Long distance carriers have also
aggressively pursued regulatory or legislative changes that would reduce access
rates. In light of pending intercarrier compensation reform
that is expected to address intrastate access charges, most states are deferring
action until they receive direction from the FCC. However, some
carriers are continuing to pursue lower intrastate access rates in some
states. Currently, we are responding to carrier complaints,
legislation or investigations regarding our intrastate switched access rate
levels in Minnesota, Missouri, Ohio, Pennsylvania, North Carolina, Wisconsin,
and Virginia. Although the outcome cannot be determined at this time, we believe
our intrastate switched access rate levels are appropriate and we plan to
vigorously defend them.
Over the
past few years, each of the FCC, Universal Service Administrative Company and
certain Congressional committees has initiated wide-ranging reviews of the
administration of the federal USF. As part of this process, we, along
with a number of other USF recipients, have undergone a number of USF audits and
have also received requests for information from the FCC’s Office of Inspector
General (“OIG”) and Congressional committees. In addition, in July
2008 we received a subpoena from the OIG requesting a broad range of information
regarding our depreciation rates and methodologies since 2000, and in July 2009
we received a second subpoena requesting information about our participation in
the E-rate program for Wisconsin schools and libraries since
2004. The OIG has not identified to us any specific issues with
respect to our participation in the USF program and none of the audits completed
to date has identified any material issues regarding our participation in the
USF program. While we believe our participation is in compliance with
FCC rules and in accordance with accepted industry practices, we cannot predict
with certainty the timing or outcome of these various reviews. We
have complied with and are continuing to respond to all requests for
information.
75
We expect
our 2010 operating revenues to be higher than 2009 since 2010 will include a
full year of operating results from our Embarq properties acquired July 1,
2009. Excluding this impact, we expect our operating revenues in 2010
to decline as we continue to experience downward pressure primarily due to
continued access line losses, reduced universal service funding and lower
network access revenues. In addition, our revenues will be
negatively impacted in 2010 compared to 2009 due to a full year impact of the
elimination of all intercompany transactions with regulated affiliates resulting
from the discontinuance of regulatory accounting that was effective July 1, 2009
(which will not impact operating income levels since there will be an equivalent
amount of expenses eliminated). We expect such revenue declines to be
partially offset primarily due to increased demand for our high-speed Internet
service offering.
For a
more complete description of regulation and competition impacting our operations
and various attendant risks, please see Items 1 and 1A of this annual
report.
Other
matters. Through June 30, 2009, CenturyTel accounted for
its regulated telephone operations (except for the properties acquired from
Verizon in 2002) in accordance with the provisions of codification ASC 980-10
(formerly SFAS 71) which addresses regulatory accounting under which actions by
regulators can provide reasonable assurance of the recognition of an asset,
reduce or eliminate the value of an asset and impose a liability on a regulated
enterprise. Such regulatory assets and liabilities were required to
be recorded and, accordingly, reflected in the balance sheet of an entity
subject to regulatory accounting.
As we
previously disclosed, on July 1, 2009, we discontinued the accounting
requirements of regulatory accounting upon the conversion of substantially all
of our rate-of-return study areas to federal price cap regulation (based on the
FCC’s approval of our petition to convert our study areas to price cap
regulation).
In the
third quarter of 2009, we recorded a net non-cash extraordinary after-tax gain
of approximately $136.0 million upon the discontinuance of regulatory
accounting. See Note 15 for additional information.
76
We have
certain obligations based on federal, state and local laws relating to the
protection of the environment. Costs of compliance through 2009 have
not been material, and we currently do not believe that such costs will become
material.
Item
7A.
Quantitative and Qualitative Disclosure About Market Risk
For
information pertaining to the our market risk disclosure, see “Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Market Risk”.
77
Item
8.
Financial Statements and
Supplementary Data
Report of
Management
The Shareholders
CenturyTel, Inc.:
Management
has prepared and is responsible for the integrity and objectivity of our
consolidated financial statements. The consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America and necessarily include amounts determined using
our best judgments and estimates.
Our
consolidated financial statements have been audited by KPMG LLP, an independent
registered public accounting firm, who have expressed their opinion with respect
to the fairness of the consolidated financial statements. Their audit was
conducted in accordance with standards of the Public Company Accounting
Oversight Board (United States).
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Under the supervision and with the participation of
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on our evaluation under the framework of
COSO, management
concluded that our internal control over financial reporting was effective as of
December 31, 2009. The effectiveness of our internal control over
financial reporting as of December 31, 2009 has been audited by KPMG LLP, as
stated in their report which is included herein.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Audit Committee of the Board of Directors is composed of independent directors
who are not officers or employees. The Committee meets periodically with
the external auditors, internal auditors and management. The Committee
considers the independence of the external auditors and the audit scope and
discusses internal control, financial and reporting matters. Both the
external and internal auditors have free access to the Committee.
/s/ R. Stewart Ewing,
Jr.
R. Stewart Ewing, Jr.
Executive Vice President and Chief Financial
Officer
March 1, 2010
78
Report of
Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders
CenturyTel, Inc.:
CenturyTel, Inc.:
We
have audited the consolidated financial statements of CenturyTel, Inc. and
subsidiaries (the Company) as listed in Item 15a(1). In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in Item 15a(2). These consolidated
financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2009 and 2008, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2009, in conformity with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
As
discussed in Notes 2, 9 and 13 to the consolidated financial statements,
effective January 1, 2009, the Company changed its method of accounting for
business combinations, non-controlling interests and earnings per share.
In addition, as discussed in Note 12 to the consolidated financial statements,
effective January 1, 2007, the Company changed its method of accounting for
uncertain tax positions.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control over
financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 1, 2010 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial
reporting.
/s/ KPMG
LLP
Shreveport, Louisiana
March 1, 2010
79
Report of
Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders
CenturyTel, Inc.:
CenturyTel, Inc.:
We
have audited CenturyTel, Inc. and subsidiaries’ (the Company) internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Report of
Management. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in
Internal Control—Integrated Framework issued by the COSO.
80
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of CenturyTel, Inc. and subsidiaries as listed in Item 15(a)(1), and
our report dated March 1, 2010 expressed an unqualified opinion on those
consolidated financial statements.
/s/
KPMG LLP
Shreveport, Louisiana
March 1, 2010
Shreveport, Louisiana
March 1, 2010
81
CENTURYTEL,
INC.
Consolidated
Statements of Income
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(Dollars,
except per share amounts, and shares in thousands)
|
||||||||||||
|
OPERATING REVENUES
|
$ | 4,974,239 | 2,599,747 | 2,656,241 | ||||||||
|
OPERATING
EXPENSES
|
||||||||||||
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
1,752,087 | 955,473 | 937,375 | |||||||||
|
Selling,
general and administrative
|
1,014,341 | 399,136 | 389,533 | |||||||||
|
Depreciation and
amortization
|
974,710 | 523,786 | 536,255 | |||||||||
|
Total operating expenses
|
3,741,138 | 1,878,395 | 1,863,163 | |||||||||
|
OPERATING INCOME
|
1,233,101 | 721,352 | 793,078 | |||||||||
|
OTHER
INCOME (EXPENSE)
|
||||||||||||
|
Interest
expense
|
(370,414 | ) | (202,217 | ) | (212,906 | ) | ||||||
|
Other income (expense)
|
(48,175 | ) | 42,252 | 40,029 | ||||||||
|
Total other income
(expense)
|
(418,589 | ) | (159,965 | ) | (172,877 | ) | ||||||
|
INCOME
BEFORE INCOME TAX EXPENSE
|
814,512 | 561,387 | 620,201 | |||||||||
|
Income tax expense
|
301,881 | 194,357 | 200,572 | |||||||||
|
INCOME
BEFORE NONCONTROLLING INTERESTS AND EXTRAORDINARY ITEM
|
512,631 | 367,030 | 419,629 | |||||||||
|
Noncontrolling interests
|
(1,377 | ) | (1,298 | ) | (1,259 | ) | ||||||
|
NET
INCOME BEFORE EXTRAORDINARY ITEM
|
511,254 | 365,732 | 418,370 | |||||||||
|
Extraordinary
item, net of income tax expense and noncontrolling interests (see Note
15)
|
135,957 | - | - | |||||||||
|
NET
INCOME ATTRIBUTABLE TO
|
||||||||||||
|
CENTURYTEL,
INC.
|
$ | 647,211 | 365,732 | 418,370 | ||||||||
|
BASIC
EARNINGS PER SHARE
|
||||||||||||
|
Income
before extraordinary item
|
$ | 2.55 | 3.53 | 3.79 | ||||||||
|
Extraordinary
item
|
$ | .68 | - | - | ||||||||
|
Basic
earnings per share
|
$ | 3.23 | 3.53 | 3.79 | ||||||||
|
DILUTED
EARNINGS PER SHARE
|
||||||||||||
|
Income
before extraordinary item
|
$ | 2.55 | 3.52 | 3.71 | ||||||||
|
Extraordinary
item
|
$ | .68 | - | - | ||||||||
|
Diluted
earnings per share
|
$ | 3.23 | 3.52 | 3.71 | ||||||||
|
DIVIDENDS PER COMMON SHARE
|
$ | 2.80 | 2.1675 | .26 | ||||||||
|
AVERAGE BASIC SHARES
OUTSTANDING
|
198,813 | 102,268 | 109,360 | |||||||||
|
AVERAGE DILUTED SHARES
OUTSTANDING
|
199,057 | 102,560 | 112,787 | |||||||||
See
accompanying notes to consolidated financial statements.
82
CENTURYTEL,
INC.
Consolidated
Statements of Comprehensive Income
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
NET
INCOME BEFORE NONCONTROLLING
INTERESTS
|
$ | 650,133 | 367,030 | 419,629 | ||||||||
|
OTHER
COMPREHENSIVE INCOME, NET OF TAXES
|
||||||||||||
|
Marketable
securities:
|
||||||||||||
|
Unrealized
gain (loss) on investments, net of($332) and $547 tax
|
- | (533 | ) | 877 | ||||||||
|
Reclassification
adjustment for gain included in net income, net of ($1,730)
tax
|
- | (2,776 | ) | - | ||||||||
|
Derivative
instruments:
|
||||||||||||
|
Net
gains on derivatives hedging variability of cash flows, net of $294
tax
|
- | - | 471 | |||||||||
|
Reclassification
adjustment for gains included in net income, net of $267, $267 and $254
tax
|
429 | 429 | 407 | |||||||||
|
Items
related to employee benefit plans:
|
||||||||||||
|
Change
in net actuarial loss, net of $30,100, ($48,656) and $28,583
tax
|
39,209 | (82,505 | ) | 52,485 | ||||||||
|
Change
in net prior service credit, net of ($5,798), ($589) and $1,724
tax
|
(9,301 | ) | (945 | ) | 2,766 | |||||||
|
Reclassification
adjustment for gains (losses) included in net income:
|
||||||||||||
|
Amortization
of net actuarial loss, net of $6,161, $1,198 and $4,409
tax
|
9,883 | 1,921 | 6,554 | |||||||||
|
Amortization
of net prior service credit, net of ($1,270), $2,261 and ($771)
tax
|
(2,037 | ) | 3,627 | (1,236 | ) | |||||||
|
Amortization
of unrecognized transition asset, net of
($55) tax
|
- | - | (89 | ) | ||||||||
|
Net
change in other comprehensive income (loss) (net of reclassification adjustment), net of
taxes
|
38,183 | (80,782 | ) | 62,235 | ||||||||
|
COMPREHENSIVE
INCOME
|
688,316 | 286,248 | 481,864 | |||||||||
|
Comprehensive
income attributable to noncontrolling
interests
|
(2,922 | ) | (1,298 | ) | (1,259 | ) | ||||||
|
COMPREHENSIVE
INCOME ATTRIBUTABLE TO CENTURYTEL,
INC.
|
$ | 685,394 | 284,950 | 480,605 | ||||||||
See
accompanying notes to consolidated financial statements.
83
CENTURYTEL,
INC.
Consolidated
Balance Sheets
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 161,807 | 243,327 | |||||
|
Accounts
receivable
|
||||||||
|
Customers,
less allowance of $38,275 and $10,973
|
487,958 | 153,838 | ||||||
|
Interexchange
carriers and other, less allowance of $9,175 and $5,317
|
197,631 | 62,178 | ||||||
| Income tax receivable | 115,684 | 14,276 | ||||||
|
Materials
and supplies, at average cost
|
35,755 | 8,862 | ||||||
|
Deferred
income tax asset
|
83,319 | 29,421 | ||||||
|
Other
|
41,437 | 43,505 | ||||||
|
Total current assets
|
1,123,591 | 555,407 | ||||||
|
NET PROPERTY, PLANT AND
EQUIPMENT
|
9,097,139 | 2,895,892 | ||||||
|
GOODWILL
AND OTHER ASSETS
|
||||||||
|
Goodwill
|
10,251,758 | 4,015,674 | ||||||
|
Other
intangible assets
|
||||||||
|
Customer
list
|
1,130,817 | 146,283 | ||||||
|
Other
|
315,601 | 42,750 | ||||||
|
Other assets
|
643,823 | 598,189 | ||||||
|
Total goodwill and other
assets
|
12,341,999 | 4,802,896 | ||||||
|
TOTAL ASSETS
|
$ | 22,562,729 | 8,254,195 | |||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Current
maturities of long-term debt
|
$ | 500,065 | 20,407 | |||||
|
Accounts
payable
|
394,687 | 135,086 | ||||||
|
Accrued
expenses and other current liabilities
|
||||||||
|
Salaries
and benefits
|
255,103 | 99,648 | ||||||
|
Other
taxes
|
98,743 | 44,137 | ||||||
|
Interest
|
108,020 | 75,769 | ||||||
|
Other
|
168,203 | 26,773 | ||||||
|
Advance billings and customer
deposits
|
182,374 | 56,570 | ||||||
|
Total current liabilities
|
1,707,195 | 458,390 | ||||||
|
LONG-TERM DEBT
|
7,253,653 | 3,294,119 | ||||||
|
DEFERRED
CREDITS AND OTHER LIABILITIES
|
||||||||
|
Deferred
income taxes
|
2,256,579 | 854,102 | ||||||
|
Benefit
plan obligations
|
1,485,564 | 348,140 | ||||||
|
Other deferred credits
|
392,939 | 131,636 | ||||||
|
Total deferred credits and other
liabilities
|
4,135,082 | 1,333,878 | ||||||
|
STOCKHOLDERS'
EQUITY
|
||||||||
|
Common
stock, $1.00 par value, authorized 800,000,000 shares, issued and
outstanding 299,189,279 and 100,277,216 shares
|
299,189 | 100,277 | ||||||
|
Paid-in
capital
|
6,014,051 | 39,961 | ||||||
|
Accumulated
other comprehensive loss, net of tax
|
(85,306 | ) | (123,489 | ) | ||||
|
Retained
earnings
|
3,232,769 | 3,146,255 | ||||||
|
Preferred
stock - non-redeemable
|
236 | 236 | ||||||
|
Noncontrolling interests
|
5,860 | 4,568 | ||||||
|
Total stockholders' equity
|
9,466,799 | 3,167,808 | ||||||
|
TOTAL LIABILITIES AND
EQUITY
|
$ | 22,562,729 | 8,254,195 | |||||
See
accompanying notes to consolidated financial statements.
84
CENTURYTEL,
INC.
Consolidated
Statements of Cash Flows
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 648,588 | 367,030 | 419,629 | ||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
974,710 | 523,786 | 536,255 | |||||||||
|
Extraordinary
item
|
(135,957 | ) | - | - | ||||||||
|
Gains
on asset dispositions and liquidation of marketable
securities
|
- | (12,452 | ) | (15,643 | ) | |||||||
|
Deferred
income taxes
|
153,950 | 67,518 | 1,018 | |||||||||
|
Share-based
compensation
|
55,153 | 16,390 | 19,962 | |||||||||
|
Income
from unconsolidated cellular entity
|
(19,087 | ) | (12,045 | ) | (14,578 | ) | ||||||
|
Distributions
from unconsolidated cellular entity
|
20,100 | 15,960 | 10,229 | |||||||||
|
Changes
in current assets and current liabilities:
|
||||||||||||
|
Accounts
receivable
|
(23,778 | ) | (7,978 | ) | 15,920 | |||||||
|
Accounts
payable
|
(32,209 | ) | 14,043 | (13,698 | ) | |||||||
|
Accrued
taxes
|
(150,073 | ) | (64,778 | ) | 11,604 | |||||||
|
Other
current assets and other current liabilities, net
|
121,380 | (15,612 | ) | 23,782 | ||||||||
|
Retirement
benefits
|
(82,114 | ) | (26,066 | ) | 27,350 | |||||||
|
Excess
tax benefits from share-based compensation
|
(4,194 | ) | (1,123 | ) | (6,427 | ) | ||||||
|
(Increase)
decrease in noncurrent assets
|
(2,347 | ) | 9,744 | 12,718 | ||||||||
|
Increase
(decrease) in other noncurrent liabilities
|
41,649 | (27,561 | ) | (20,781 | ) | |||||||
|
Other, net
|
7,944 | 6,444 | 22,646 | |||||||||
|
Net cash provided by operating
activities
|
1,573,715 | 853,300 | 1,029,986 | |||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||
|
Payments
for property, plant and equipment
|
(754,544 | ) | (286,817 | ) | (326,045 | ) | ||||||
|
Cash
acquired from Embarq acquisition
|
76,906 | - | - | |||||||||
|
Purchase
of wireless spectrum
|
(2,000 | ) | (148,964 | ) | - | |||||||
|
Acquisitions,
net of cash acquired
|
- | - | (306,805 | ) | ||||||||
|
Proceeds
from liquidation of marketable securities
|
- | 34,945 | - | |||||||||
|
Proceeds
from redemption of Rural Telephone Bank stock
|
- | - | 5,206 | |||||||||
|
Proceeds
from sale of assets
|
1,595 | 15,809 | 8,231 | |||||||||
|
Other, net
|
(801 | ) | (3,968 | ) | 225 | |||||||
|
Net cash used in investing
activities
|
(678,844 | ) | (388,995 | ) | (619,188 | ) | ||||||
|
FINANCING
ACTIVITIES
|
||||||||||||
|
Payments
of debt
|
(1,097,064 | ) | (285,401 | ) | (712,980 | ) | ||||||
|
Net
proceeds from issuance of debt
|
644,423 | 563,115 | 741,840 | |||||||||
|
Repurchase
of common stock
|
(15,563 | ) | (347,264 | ) | (460,676 | ) | ||||||
|
Net
proceeds from settlement of hedges
|
- | 20,745 | - | |||||||||
|
Proceeds
from issuance of common stock
|
56,823 | 14,599 | 49,404 | |||||||||
|
Excess
tax benefits from share-based compensation
|
4,194 | 1,123 | 6,427 | |||||||||
|
Cash
dividends
|
(560,697 | ) | (220,266 | ) | (29,052 | ) | ||||||
|
Other, net
|
(8,507 | ) | (2,031 | ) | 2,973 | |||||||
|
Net cash used in financing
activities
|
(976,391 | ) | (255,380 | ) | (402,064 | ) | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(81,520 | ) | 208,925 | 8,734 | ||||||||
|
Cash and cash equivalents at beginning of
year
|
243,327 | 34,402 | 25,668 | |||||||||
|
CASH AND CASH EQUIVALENTS AT END OF
YEAR
|
$ | 161,807 | 243,327 | 34,402 | ||||||||
See
accompanying notes to consolidated financial statements.
85
CENTURYTEL,
INC.
Consolidated
Statements of Stockholders’ Equity
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(Dollars,
except per share amounts, and shares in thousands)
|
||||||||||||
|
COMMON
STOCK (represents dollars and shares)
|
||||||||||||
|
Balance
at beginning of year
|
$ | 100,277 | 108,492 | 113,254 | ||||||||
|
Issuance
of common stock to acquire Embarq Corporation
|
196,083 | - | - | |||||||||
|
Repurchase
of common stock
|
- | (9,626 | ) | (10,172 | ) | |||||||
|
Conversion
of debt into common stock
|
- | - | 3,699 | |||||||||
|
Conversion
of preferred stock into common stock
|
- | 367 | 26 | |||||||||
|
Shares
withheld to satisfy tax withholdings
|
(503 | ) | (50 | ) | (41 | ) | ||||||
|
Issuance
of common stock through dividend reinvestment, incentive and benefit
plans
|
3,332 | 1,094 | 1,726 | |||||||||
|
Balance at end of year
|
299,189 | 100,277 | 108,492 | |||||||||
|
PAID-IN
CAPITAL
|
||||||||||||
|
Balance
at beginning of year
|
39,961 | 91,147 | 24,256 | |||||||||
|
Issuance
of common stock to acquire Embarq Corporation, including portion of
share-based
compensation awards assumed by CenturyTel
|
5,873,904 | - | - | |||||||||
|
Repurchase
of common stock
|
- | (91,408 | ) | (154,970 | ) | |||||||
|
Shares
withheld to satisfy tax withholdings
|
(15,060 | ) | (1,667 | ) | (66 | ) | ||||||
|
Conversion
of debt into common stock
|
- | - | 142,732 | |||||||||
|
Conversion
of preferred stock into common stock
|
- | 6,368 | 453 | |||||||||
|
Issuance
of common stock through dividend reinvestment, incentive and benefit
plans
|
53,491 | 13,505 | 47,678 | |||||||||
|
Excess
tax benefits from share-based compensation
|
4,194 | 1,123 | 6,427 | |||||||||
|
Share-based
compensation
|
55,153 | 16,390 | 19,962 | |||||||||
|
Other
|
2,408 | 4,503 | 4,675 | |||||||||
|
Balance at end of year
|
6,014,051 | 39,961 | 91,147 | |||||||||
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS, NET OF TAX
|
||||||||||||
|
Balance
at beginning of year
|
(123,489 | ) | (42,707 | ) | (104,942 | ) | ||||||
|
Net
change in other comprehensive loss (net of reclassification adjustment), net of
tax
|
38,183 | (80,782 | ) | 62,235 | ||||||||
|
Balance at end of year
|
(85,306 | ) | (123,489 | ) | (42,707 | ) | ||||||
|
RETAINED
EARNINGS
|
||||||||||||
|
Balance
at beginning of year
|
3,146,255 | 3,245,302 | 3,150,933 | |||||||||
|
Net
income attributable to CenturyTel, Inc.
|
647,211 | 365,732 | 418,370 | |||||||||
|
Repurchase
of common stock
|
- | (244,513 | ) | (293,728 | ) | |||||||
|
Shares
withheld to satisfy tax withholdings
|
- | - | (1,699 | ) | ||||||||
|
Cumulative
effect of adoption of FIN 48 (see Note 12)
|
- | - | 478 | |||||||||
|
Cash
dividends declared
|
||||||||||||
|
Common
stock - $2.80, $2.1675 and $.26 per share
|
(560,685 | ) | (220,086 | ) | (28,684 | ) | ||||||
|
Preferred stock
|
(12 | ) | (180 | ) | (368 | ) | ||||||
|
Balance at end of year
|
3,232,769 | 3,146,255 | 3,245,302 | |||||||||
|
PREFERRED
STOCK - NON-REDEEMABLE
|
||||||||||||
|
Balance
at beginning of year
|
236 | 6,971 | 7,450 | |||||||||
|
Conversion of preferred stock into common
stock
|
- | (6,735 | ) | (479 | ) | |||||||
|
Balance at end of year
|
236 | 236 | 6,971 | |||||||||
|
NONCONTROLLING
INTERESTS
|
||||||||||||
|
Balance
at beginning of period
|
4,568 | 6,605 | 8,013 | |||||||||
|
Net
income attributable to noncontrolling interests
|
1,377 | 1,298 | 1,259 | |||||||||
|
Extraordinary
gain attributable to noncontrolling interests
|
1,545 | - | - | |||||||||
|
Distributions to noncontrolling
interests
|
(1,630 | ) | (3,335 | ) | (2,667 | ) | ||||||
|
Balance at end of period
|
5,860 | 4,568 | 6,605 | |||||||||
|
TOTAL STOCKHOLDERS' EQUITY
|
$ | 9,466,799 | 3,167,808 | 3,415,810 | ||||||||
See
accompanying notes to consolidated financial statements.
86
CENTURYTEL,
INC.
Notes to
Consolidated Financial Statements
December
31, 2009
(1) SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Embarq acquisition - On
July 1, 2009, pursuant to the terms and conditions of the Agreement and
Plan of Merger, dated as of October 26, 2008 (the “Merger Agreement”), we
acquired Embarq Corporation (“Embarq”) through a merger transaction, with Embarq
surviving the merger as a wholly-owned subsidiary of CenturyTel. The
results of operations of Embarq are included in our consolidated results of
operations beginning July 1, 2009. See Note 2 for additional
information related to the Embarq acquisition.
Principles of consolidation -
Our consolidated financial statements include the accounts of CenturyTel, Inc.
and its majority-owned subsidiaries.
Regulatory accounting –
Through June 30, 2009, CenturyTel accounted for its regulated telephone
operations (except for the properties acquired from Verizon in 2002) in
accordance with the provisions of regulatory accounting under which actions by
regulators can provide reasonable assurance of the recognition of an asset,
reduce or eliminate the value of an asset and impose a liability on a regulated
enterprise. Such regulatory assets and liabilities were required to
be recorded and, accordingly, reflected in the balance sheet of an entity
subject to regulatory accounting. On July 1, 2009, we discontinued
the accounting requirements of regulatory accounting upon the conversion of
substantially all of our rate-of-return study areas to federal price cap
regulation (based on the FCC’s approval of our petition to convert our study
areas to price cap regulation). In the third quarter of 2009, upon
the discontinuance of regulatory accounting, we recorded a non-cash
extraordinary gain in our consolidated statements of income of $136.0 million
after-tax. See Note 15 for additional information.
Subsequent
to the July 1, 2009 discontinuance of regulatory accounting, all intercompany
transactions with affiliates have been eliminated from the consolidated
financial statements. Prior to July 1, 2009, intercompany
transactions with regulated affiliates subject to regulatory accounting were not
eliminated in connection with preparing the consolidated financial statements,
as allowed by the provisions of regulatory accounting. The
amount of intercompany revenues and costs that were not eliminated related to
the first half of 2009 approximated $114 million.
Estimates - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
may differ from those estimates.
87
Revenue recognition -
Revenues are generally recognized when services are provided or when products
are delivered to customers. Revenue that is billed in advance
includes monthly recurring network access services, special access services and
monthly recurring local line charges. The unearned portion of this
revenue is initially deferred as a component of advance billings and customer
deposits on our balance sheet and recognized as revenue over the period that the
services are provided. Revenue that is billed in arrears includes
switched access services, nonrecurring network access services, nonrecurring
local services and long distance services. The earned but unbilled
portion of this revenue is recognized as revenue in the period that the services
are provided. Revenues from installation activities are deferred and
recognized as revenue over the estimated life of the customer
relationship. The costs associated with such installation activities,
up to the related amount of deferred revenue, are deferred and recognized as an
operating expense over the same period.
Allowance for doubtful
accounts. In evaluating the collectibility of our accounts
receivable, we assess a number of factors, including a specific customer’s or
carrier’s ability to meet its financial obligations to us, the length of time
the receivable has been past due and historical collection
experience. Based on these assessments, we record both specific and
general reserves for uncollectible accounts receivable to reduce the stated
amount of applicable accounts receivable to the amount we ultimately expect to
collect.
Property, plant and equipment
– As discussed in Note 2, the property acquired in connection with the
acquisition of Embarq was recorded based on its fair
value. Substantially all other telephone plant is stated at original
cost. Normal retirements of telephone plant are charged against
accumulated depreciation, along with the costs of removal, less salvage, with no
gain or loss recognized. Renewals and betterments of plant and
equipment are capitalized while repairs, as well as renewals of minor items, are
charged to operating expense. Depreciation of telephone plant is
provided on the straight line method using class or overall group rates; such
average rates range from 2% to 25%.
Non-telephone
property is stated at cost and, when sold or retired, a gain or loss is
recognized. Depreciation of such property is provided on the straight
line method over estimated service lives ranging from two to 35
years.
Goodwill and other long-lived
assets – Goodwill recorded in a business combination is required to be
reviewed for impairment and to be written down only in periods in which the
recorded amount of goodwill exceeds its fair value. Applicable
accounting guidance also stipulates certain factors to consider regarding
whether or not a triggering event has occurred that would require performance of
an interim goodwill impairment test. We test impairment of goodwill at least
annually by comparing the fair value of the reporting unit to its carrying value
(including goodwill). We base our estimates of the fair value of the reporting
unit on valuation models using criterion such as multiples of
earnings. See Note 3 for additional information. Other
long-lived assets (exclusive of goodwill) are reviewed for impairment whenever
events and circumstances indicate that such carrying amount cannot be
recoverable by assessing the recoverability of the carrying value through
undiscounted net cash flows expected to be generated by the
assets. During 2007, we recognized a $16.6 million pre-tax impairment
charge in order to write-down the value of certain of our long-lived assets in
certain of our CLEC markets to their estimated realizable value. Such
assets were subsequently sold in two separate transactions in 2008.
88
Income taxes - We file a
consolidated federal income tax return with our eligible
subsidiaries. We use the asset and liability method of accounting for
income taxes under which deferred tax assets and liabilities are established for
the future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases.
Postretirement and pension
plans – We recognize the overfunded or underfunded status of our defined
benefit and postretirement plans as an asset or a liability on our balance
sheet, with an adjustment to stockholders’ equity (reflected as an increase or
decrease in accumulated other comprehensive income or loss) for the accumulated
actuarial gains or losses. See Notes 10 and 11 for additional
information.
Stock-based compensation – We
measure our cost of awarding employees with equity instruments based upon
allocations of the fair value of the award on the grant date. See
Note 14 for additional information.
Derivative financial
instruments – We account for derivative instruments and hedging
activities in accordance with applicable accounting guidance which requires that
all derivative instruments, such as interest rate swaps, be recognized in the
financial statements and measured at fair value regardless of the purpose or
intent of holding them. On the date a derivative contract is entered
into, we designate the derivative as either a fair value or cash flow
hedge. A hedge of the fair value of a recognized asset or liability
or of an unrecognized firm commitment is a fair value hedge. A hedge of a
forecasted transaction or the variability of cash flows to be received or paid
related to a recognized asset or liability is a cash flow hedge. We
also formally assess, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items. If
we determine that a derivative is not, or is no longer, highly effective as a
hedge, we would discontinue hedge accounting prospectively. We
recognize all derivatives on the balance sheet at their fair
value. Changes in the fair value of derivative financial instruments
are either recognized in income or stockholders’ equity (as a component of
accumulated other comprehensive income (loss)), depending on the use of the
derivative and whether it qualifies for hedge accounting. We do not
hold or issue derivative financial instruments for trading or speculative
purposes. Management periodically reviews our exposure to interest
rate fluctuations and implements strategies to manage the
exposure. See Note 6 for additional information.
Earnings per share – We
determine basic earnings per share amounts on the basis of the weighted average
number of common shares outstanding during the applicable accounting
period. Diluted earnings per share gives effect to all potential
dilutive common shares that were outstanding during the period. See
Note 13 for additional information.
89
Cash equivalents - We
consider short-term investments with a maturity at date of purchase of three
months or less to be cash equivalents.
(2) ACQUISITIONS
On
July 1, 2009, pursuant to the terms and conditions of the Merger Agreement,
we acquired Embarq through a merger transaction, with Embarq surviving the
merger as a wholly-owned subsidiary of CenturyTel. Such acquisition
was recorded pursuant to Financial Accounting Standards Board guidance on
business combinations, which was effective for all business combinations
consummated on or after January 1, 2009, as more fully described
below.
As a
result of the acquisition, each outstanding share of Embarq common stock was
converted into the right to receive 1.37 shares of CenturyTel common stock (“CTL
common stock”), with cash paid in lieu of fractional shares. Based on the number
of CenturyTel common shares issued to consummate the merger (196.1 million), the
closing stock price of CTL common stock as of June 30, 2009 ($30.70) and the
pre-combination portion of share-based compensation awards assumed by CenturyTel
($50.2 million), the aggregate merger consideration approximated $6.1
billion. The premium paid by us in this transaction is attributable
to strategic benefits, including enhanced financial and operational scale,
market diversification, leveraged combined networks and improved competitive
positioning. None of the goodwill associated with this transaction is
deductible for income tax purposes.
The
results of operations of Embarq are included in our consolidated results of
operations beginning July 1, 2009. Approximately $2.563 billion of
operating revenues of Embarq are included in our consolidated results of
operations for 2009. CenturyTel was the accounting acquirer in this
transaction. We have recognized Embarq’s assets and liabilities at
their acquisition date estimated fair values pursuant to business combination
accounting rules that were effective for acquisitions consummated on or after
January 1, 2009. The assignment of a fair value to the assets
acquired and liabilities assumed of Embarq (and the related estimated lives of
depreciable tangible and identifiable intangible assets) require a significant
amount of judgment. The fair value of property, plant and equipment
and identifiable intangible assets were determined based upon analysis performed
by an independent valuation firm. The fair value of pension and
postretirement obligations was determined by independent
actuaries. The fair value of long-term debt was determined by
management based on a discounted cash flow analysis, using the rates and
maturities of these obligations compared to terms and rates currently available
in the long-term financing markets. All other fair value
determinations, which consisted primarily of current assets, current liabilities
and deferred income taxes, were made by management. The following is
a preliminary assignment of the fair value of the assets acquired and
liabilities assumed based on currently available information.
90
|
Fair
value
as
of July
1, 2009
|
||||
|
(Dollars
in thousands)
|
||||
|
Current
assets*
|
$ | 675,720 | ||
|
Net
property, plant and equipment
|
6,077,672 | |||
|
Identifiable
intangible assets
|
||||
|
Customer
list
|
1,098,000 | |||
|
Rights
of way
|
268,472 | |||
|
Other
(trademarks, internally developed software, licenses)
|
26,817 | |||
|
Other
non-current assets
|
24,131 | |||
|
Current
liabilities
|
(828,385 | ) | ||
|
Long-term
debt, including current maturities
|
(4,886,708 | ) | ||
|
Other
long-term liabilities
|
(2,621,358 | ) | ||
|
Goodwill
|
6,236,084 | |||
|
Total
purchase price
|
$ | 6,070,445 | ||
|
|
*
|
Includes
a fair value of $440 million assigned to accounts receivable which had a
gross contractual value of $492 million as of July 1, 2009. The $52
million difference represents our best estimate of the contractual cash
flows that will not be collected.
|
We recognized approximately $64 million of liabilities arising from
contingencies as of the acquisition date on the basis that it was probable that
a liability had been incurred and the amount could be reasonably
estimated. Such contingencies primarily relate to transaction and
property tax contingencies and contingencies arising from billing disputes with
various parties in the communications industry. The assignment of
fair values to Embarq’s assets and liabilities has not been finalized as of
December 31, 2009. Further adjustments may be necessary prior to June
30, 2010, particularly as it relates to contingent liabilities and other
long-term liabilities (including deferred income taxes).
The
following unaudited pro forma financial information presents the combined
results of CenturyTel and Embarq as though the acquisition had been consummated
as of January 1, 2009 and 2008, respectively, for the two periods presented
below.
|
Twelve
months
|
||||||||
|
ended
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
Operating
revenues
|
$ | 7,645 | 8,289 | |||||
|
Income
before extraordinary item
|
895 | 1,087 | ||||||
|
Basic
earnings per share before extraordinary item
|
3.00 | 3.55 | ||||||
|
Diluted
earnings per share before extraordinary item
|
2.99 | 3.53 | ||||||
These
results include certain adjustments, primarily due to increased depreciation and
amortization associated with the property, plant and equipment and identifiable
intangible assets, increased retiree benefit costs due to the remeasurement of
the benefit obligations, and the related income tax effects. The pro
forma information does not necessarily reflect the actual results of operations
had the acquisition been consummated at the beginning of the periods indicated
nor is it necessarily indicative of future operating results. Other
than those actually realized subsequent to the July 1, 2009 acquisition date,
the pro forma information does not give effect to any potential revenue
enhancements or cost synergies or other operating efficiencies that could result
from the acquisition.
During
2009, we recognized an aggregate of approximately $253.7 million of integration,
transaction and other costs related to the Embarq acquisition. Of the
$253.7 million, approximately $47.2 million related to closing costs, including
investment banker and legal fees, in connection with consummation of the merger
and is reflected as an operating expense. In addition, we incurred
approximately $206.5 million of integration-related operating expenses related
to system and customer conversions, employee-related severance and benefit costs
and branding costs associated with changing our trade name to
CenturyLink.
91
On July
1, 2009, in connection with the Merger Agreement, and as approved by our
shareholders on January 27, 2009, we filed Amended and Restated Articles of
Incorporation to (i) eliminate our time-phase voting structure, which previously
entitled persons who beneficially owned shares of our common stock continuously
since May 30, 1987 to ten votes per share, and (ii) increase the authorized
number of shares of our common stock from 350 million to 800
million. As so amended and restated, our Articles of Incorporation
provide that each share of our common stock is entitled to one vote per share
with respect to each matter properly submitted to shareholders for their vote,
consent, waiver, release or other action. These amendments reflect
changes contemplated or necessitated by the Merger Agreement and are described
in detail in our joint proxy statement-prospectus filed with the Securities and
Exchange Commission and first mailed to shareholders of CenturyTel and Embarq on
or about December 22, 2008. In Robert M. Garst, Sr. et al.
v. CenturyTel, Inc. et al., filed March 13, 2009 in the 142nd
Judicial District Court of Texas, Midland County (Case No. CV-46861), certain of
our former ten-vote shareholders challenged the effectiveness of the vote to
eliminate our time-phase voting structure. We believe we followed all
necessary steps to properly effect the amendments described above and are
defending the case accordingly.
On
January 23, 2009, Embarq amended its Credit Agreement to effect, upon completion
of the merger, a waiver of the event of default that would have arisen under the
Credit Agreement solely as a result of the merger and enabled the Credit
Agreement, as amended, to remain in place after the
merger. Previously, in connection with the Merger Agreement, we had
entered into a commitment letter with various lenders which provided for an $800
million bridge facility that would be available to, among other things,
refinance borrowings under the Credit Agreement in the event a waiver of the
event of default arising from the consummation of the merger could not have been
obtained and other financing was unavailable. On January 23, 2009, we
terminated the commitment letter and paid an aggregate of $8.0 million to the
lenders. Such amount has been reflected as an expense (in Other
income (expense)) in 2009.
On April 30, 2007, we acquired all of the outstanding stock of Madison River
Communications Corp. (“Madison River”) from Madison River Telephone Company, LLC
for an initial aggregate purchase price of approximately $322 million
cash. In connection with the acquisition, we also paid all of Madison
River’s existing indebtedness (including accrued interest), which approximated
$522 million.
92
(3) GOODWILL
AND OTHER ASSETS
Goodwill
and other assets at December 31, 2009 and 2008 were composed of the
following:
|
December
31,
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
||||||||
|
Goodwill
|
$ | 10,251,758 | 4,015,674 | |||||
|
Intangible
assets subject to amortization
|
||||||||
|
Customer list, less accumulated amortization of $148,491 and
$35,026
|
1,130,817 | 146,283 | ||||||
|
Other, less accumulated amortization of $22,466
|
47,101 | 42,750 | ||||||
|
Intangible
assets not subject to amortization
|
268,500 | - | ||||||
|
Billing
system development costs, less accumulated amortization
|
||||||||
|
of
$61,672 and $49,979
|
174,872 | 181,210 | ||||||
|
Investment
in 700 MHz wireless spectrum licenses
|
149,425 | 148,964 | ||||||
|
Cash
surrender value of life insurance contracts
|
100,945 | 96,606 | ||||||
|
Deferred
costs associated with installation activities
|
91,865 | 77,202 | ||||||
|
Investment
in unconsolidated cellular partnership
|
32,679 | 33,662 | ||||||
|
Other
|
94,037 | 60,545 | ||||||
| $ | 12,341,999 | 4,802,896 | ||||||
Our
goodwill was derived from numerous previous acquisitions whereby the purchase
price exceeded the fair value of the net assets acquired. The
increase in goodwill and intangible assets from December 31, 2008 is due to our
acquisition of Embarq. See Note 2 for additional information
concerning the fair value assigned to these assets.
The vast
majority of our goodwill is attributable to our telephone operations, which we
internally operate and manage based on five geographic regions which were
established in connection with our acquisition of Embarq. Prior to
this, our operations were managed based on three geographic
regions. We test for goodwill impairment for our telephone operations
at the region level due to the similar economic characteristics of the
individual reporting units that comprise each region. Impairment of
goodwill is tested by comparing the fair value of the reporting unit to its
carrying value (including goodwill). Estimates of the fair value of
the reporting unit of our telephone operations are based on valuation models
using techniques such as multiples of earnings (before interest, taxes and
depreciation and amortization). We also evaluate goodwill impairment
of our other operations primarily based on multiples of earnings and
revenues. If the fair value of the reporting unit is less than the
carrying value, a second calculation is required in which the implied fair value
of goodwill is compared to its carrying value. If the implied fair
value of goodwill is less than its carrying value, goodwill must be written down
to its implied fair value.
As of
September 30, 2009, we completed our annual impairment test of goodwill based on
our historical three geographic regions. Such impairment test
excluded the goodwill associated with our acquisition of Embarq pending
finalization of the determination of the fair values of assets acquired and
liabilities assumed in connection therewith. We determined that our
goodwill (excluding the goodwill associated with the Embarq acquisition) was not
impaired as of September 30, 2009. During the fourth quarter of 2009,
we performed an additional goodwill impairment test which included the goodwill
associated with our Embarq acquisition (based on preliminary fair value
determinations). Based on the analysis performed, we determined that
goodwill was not impaired as of December 31, 2009.
93
We are
amortizing our customer list intangible asset associated with our Embarq
acquisition over an average of 10 years using an accelerated method of
amortization (sum-of-the-years digits) to more closely match the estimated cash
flow generated by such asset. Our remaining customer list intangible
assets are being amortized over a range of 5-15 years using the straight-line
amortization method. Effective July 1, 2009 we changed the assessment
of useful life for our franchise rights from indefinite to 20 years
(straight-line).
Total
amortization expense related to the intangible assets subject to amortization
for 2009 was $135.9 million (which includes $118.4 million of amortization
related to intangible assets from our Embarq acquisition) and is expected to be
$206.4 million for 2010, $185.6 million for 2011, $164.5 million for 2012,
$145.2 million in 2013 and $126.0 million in 2014 (based on intangible assets
held at December 31, 2009 and based on the determination of fair values related
to Embarq’s assets acquired and liabilities assumed as discussed further in Note
2).
We
accounted for the costs to develop an integrated billing and customer care
system in accordance with Statement of Position 98-1, “Accounting for the Costs
of Computer Software Developed or Obtained for Internal
Use.” Aggregate capitalized costs (before accumulated amortization)
totaled $236.5 million and are being amortized over a twenty-year
period.
During
2008, we paid an aggregate of approximately $149 million for 69 licenses in the
FCC’s auction of 700 megahertz (“MHz”) wireless spectrum.
The costs
associated with installation activities are deferred and recognized as an
operating expense over the estimated life of the customer relationship (10
years). Such costs are only deferred to the extent of the related
deferred revenue.
94
(4) PROPERTY,
PLANT AND EQUIPMENT
Net
property, plant and equipment at December 31, 2009 and 2008 was composed of the
following:
|
December
31,
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
||||||||
|
Cable
and wire
|
$ | 8,133,830 | 4,659,001 | |||||
|
Central
office
|
4,611,407 | 2,861,929 | ||||||
|
General
support
|
1,778,022 | 815,638 | ||||||
|
Fiber
transport
|
343,208 | 327,010 | ||||||
|
Information
origination/termination
|
85,029 | 81,296 | ||||||
|
Construction
in progress
|
430,119 | 72,129 | ||||||
|
Other
|
175,148 | 51,448 | ||||||
| 15,556,763 | 8,868,451 | |||||||
|
Accumulated
depreciation
|
(6,459,624 | ) | (5,972,559 | ) | ||||
|
Net
property, plant and equipment
|
$ | 9,097,139 | 2,895,892 | |||||
Depreciation
expense was $838.8 million, $506.9 million and $524.1 million in 2009, 2008 and
2007, respectively.
95
(5) LONG-TERM
DEBT
Our
long-term debt as of December 31, 2009 and 2008 was as
follows:
|
December
31,
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
||||||||
|
CenturyTel
|
||||||||
|
.79%*
Senior credit facility
|
$ | 291,200 | 563,115 | |||||
|
Senior
notes and debentures:
|
||||||||
|
7.20%
Series D, due 2025
|
100,000 | 100,000 | ||||||
|
6.875%
Series G, due 2028
|
425,000 | 425,000 | ||||||
|
8.375%
Series H, due 2010
|
482,470 | 500,000 | ||||||
|
7.875%
Series L, due 2012
|
317,530 | 500,000 | ||||||
|
5.0%
Series M, due 2015
|
350,000 | 350,000 | ||||||
|
6.0%
Series N, due 2017
|
500,000 | 500,000 | ||||||
|
5.5%
Series O, due 2013
|
175,665 | 250,000 | ||||||
|
7.6%
Series P, due 2039
|
400,000 | - | ||||||
|
6.15%
Series Q, due 2019
|
250,000 | - | ||||||
|
Unamortized
net discount
|
(5,331 | ) | (6,539 | ) | ||||
|
Unamortized
premium associated with derivative instruments:
|
||||||||
|
Series
H senior notes
|
2,240 | 5,128 | ||||||
|
Series
L senior notes
|
9,182 | 20,018 | ||||||
|
Total CenturyTel
|
3,297,956 | 3,206,722 | ||||||
|
Subsidiaries
|
||||||||
|
Embarq
Corporation
|
||||||||
|
Senior
notes
|
||||||||
|
6.738%
due 2013
|
528,256 | - | ||||||
|
7.1%,
due 2016
|
2,000,000 | - | ||||||
|
8.0%,
due 2036
|
1,485,000 | - | ||||||
|
8.1%*
Other, due through 2025
|
524,273 | - | ||||||
|
Unamortized
net discount
|
(178,155 | ) | - | |||||
|
First
mortgage debt
|
||||||||
|
538%*
notes, payable to agencies of the U. S. government and
cooperative lending associations, due in installments through
2028
|
94,603 | 107,704 | ||||||
|
Other
debt
|
||||||||
|
10.0%
notes
|
100 | 100 | ||||||
|
Capital
lease obligations
|
1,685 | - | ||||||
|
Total subsidiaries
|
4,455,762 | 107,804 | ||||||
|
Total
long-term debt
|
7,753,718 | 3,314,526 | ||||||
|
Less
current maturities
|
500,065 | 20,407 | ||||||
|
Long-term
debt, excluding current maturities
|
$ | 7,253,653 | 3,294,119 | |||||
*
Weighted average interest rate at December 31, 2009
The
approximate annual debt maturities for the five years subsequent to December 31,
2009 are as follows: 2010 - $500.1 million; 2011 - $302.8 million; 2012 - $327.6
million; 2013 - $818.4 million and 2014 $31.5 million.
Certain
of our loan agreements contain various restrictions, among which are limitations
regarding issuance of additional debt, payment of cash dividends, reacquisition
of capital stock and other matters. In addition, the transfer of
funds from certain consolidated subsidiaries to CenturyTel is restricted by
various loan agreements. Subsidiaries which have loans from
government agencies and cooperative lending associations, or have issued first
mortgage bonds, generally may not loan or advance any funds to CenturyTel, but
may pay dividends if certain financial ratios are met. At December
31, 2009, all of our consolidated retained earnings reflected on the balance
sheet was available under our loan agreements for the declaration of
dividends.
96
The
senior notes and debentures of CenturyTel referred to above were issued under an
indenture dated March 31, 1994. This indenture does not contain any
financial covenants, but does include restrictions that limit our ability to (i)
incur, issue or create liens upon our property and (ii) consolidate with or
merge into, or transfer or lease all or substantially all of its assets to, any
other party. The indenture does not contain any provisions that are
impacted by our credit ratings, or that restrict the issuance of new securities
in the event of a material adverse change to us.
Various
of our subsidiaries have outstanding first mortgage bonds or unsecured
debentures. Each issue of these first mortgage bonds are secured by
substantially all of the property, plant and equipment of the issuing
subsidiary. Approximately 50% of our property, plant and equipment is
pledged to secure the long-term debt of subsidiaries.
In
September 2009, CenturyTel and its wholly-owned subsidiary, Embarq Corporation,
commenced joint debt tender offers under which they offered to purchase up to
$800 million of their outstanding notes. In October 2009, (i)
Embarq purchased for cash $471.7 million principal amount of its 6.738% Notes
due 2013 and (ii) CenturyTel purchased for cash $74.3 million principal amount
of its 5.5% Series O Senior Notes, due 2013, $182.5 million principal amount of
its 7.875% Series L Senior Notes, due 2012, and $17.5 million principal amount
of its 8.375% Series H Senior Notes, due 2010. Due primarily to the
premiums paid in connection with these debt extinguishments, we recorded a
one-time pre-tax charge of approximately $61 million in the fourth quarter of
2009 related to the completion of the tender offers.
We funded
these debt tender offers with net proceeds of $644.4 million from the September
2009 issuance of (i) $250 million of 10-year, 6.15% senior notes and $400
million of 30-year, 7.6% senior notes and (ii) additional borrowings under our
existing revolving credit facility.
As of
December 31, 2009, we have available two unsecured revolving credit facilities,
(i) a $728 million five-year facility of CenturyTel which expires in December
2011 and (ii) an $800 million facility of Embarq which expires in May
2011. The interest rate on revolving loans under the facility is
based on our choice of several prevailing commercial lending rates plus an
additional margin that varies depending on our credit ratings and aggregate
borrowings under the facilities. Up to $250 million of the credit
facilities can be used for letters of credit, which reduces the amount available
for other extensions of credit. As of December 31, 2009,
approximately $46 million of letters of credit were outstanding. Available
borrowings under these credit facilities are also effectively reduced by any
outstanding borrowings under our commercial paper program. Our
commercial paper program borrowings are effectively limited to the total amount
available under the two credit facilities. As of December 31, 2009,
we had approximately $291.2 million outstanding under our credit facility (all
of which relates to CenturyTel’s facility) and no amounts outstanding under our
commercial paper program.
97
In August
2007, we called for redemption all of our $165 million aggregate principal
amount 4.75% convertible senior debentures due 2032 at a redemption price of
$1,023.80 per $1,000 principal amount of debentures, plus accrued and unpaid
interest through August 13, 2007. In accordance with the indenture,
holders could elect to convert their debentures into shares of CenturyTel common
stock at a conversion price of $40.455 per share prior to August 10,
2007. In lieu of cash redemption, holders of approximately $149.6
million aggregate principal amount of the debentures elected to convert their
holdings into approximately 3.7 million shares of CenturyTel common
stock. The remaining $15.4 million of outstanding debentures were
retired for cash.
|
(6)
|
DERIVATIVE
INSTRUMENTS
|
In 2003,
we entered into four separate fair value interest rate hedges associated with
the full $500 million principal amount of our Series L senior notes, due 2012,
that pay interest at a fixed rate of 7.875%. These hedges were “fixed
to variable” interest rate swaps that effectively converted our fixed rate
interest payment obligations under these notes into obligations to pay variable
rates. In January 2008, we terminated all of our existing “fixed to
variable” interest rate swaps associated with the full $500 million principal
amount of our Series L senior notes. In connection with the
termination of these derivatives, we received aggregate cash payments of
approximately $25.6 million, which has been reflected as a premium of the
associated long-term debt and is being amortized as a reduction of interest
expense through 2012 using the effective interest method. In
addition, in January 2008, we also terminated certain other derivatives that
were not deemed to be effective hedges. Upon the termination of these
derivatives, we paid an aggregate of approximately $4.9 million (and recorded a
$3.4 million pre-tax charge in the first quarter of 2008 related to the
settlement of these derivatives). As of December 31, 2009, we had no
derivative instruments outstanding.
(7) DEFERRED
CREDITS AND OTHER LIABILITIES
Deferred
credits and other liabilities at December 31, 2009 and 2008 were composed of the
following:
|
December
31,
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
||||||||
|
Deferred
federal and state income taxes
|
$ | 2,256,579 | 854,102 | |||||
|
Accrued
pension costs
|
960,610 | 72,058 | ||||||
|
Accrued
postretirement benefit costs
|
525,033 | 276,082 | ||||||
|
Deferred
revenue
|
136,969 | 99,549 | ||||||
|
Unrecognized
tax benefits for uncertain tax positions
|
83,931 | 3,138 | ||||||
|
Casualty
insurance reserves
|
60,666 | 2,655 | ||||||
|
Other
|
111,294 | 26,294 | ||||||
| $ | 4,135,082 | 1,333,878 | ||||||
98
For
additional information on deferred federal and state income taxes, accrued
pension costs and accrued postretirement benefit costs, see Notes 12, 11 and 10,
respectively.
(8) REDUCTIONS
IN WORKFORCE
During
each of the last three years, we have announced workforce reductions primarily
due to (i) increased competitive pressures and the loss of access lines over the
last several years; (ii) progression or completion of our Embarq and Madison
River integration plans; and (iii) the elimination of certain customer service
personnel due to reduced call volumes. In connection therewith, we
incurred pre-tax operating expense charges of approximately $80.6 million in
2009, $2.0 million in 2008 and $2.7 million in 2007 for severance and related
costs.
The
following table reflects additional information regarding the severance-related
liability for 2009, 2008 and 2007 (in thousands):
|
Balance
at December 31, 2006
|
$ | 457 | ||
|
Amount
accrued to expense
|
2,741 | |||
|
Amount
paid
|
(1,363 | ) | ||
|
Balance
at December 31, 2007
|
1,835 | |||
|
Amount
accrued to expense
|
2,046 | |||
|
Amount
paid
|
(2,083 | ) | ||
|
Balance
at December 31, 2008
|
1,798 | |||
|
Severance-related
liability assumed in Embarq acquisition
|
31,086 | |||
|
Amount
accrued to expense
|
80,580 | |||
|
Amount
paid
|
(44,895 | ) | ||
|
Balance
at December 31, 2009
|
$ | 68,569 |
(9) STOCKHOLDERS’
EQUITY
Common stock - Unissued
shares of CenturyTel common stock were reserved as follows:
|
December
31,
|
2009
|
|||
|
(In
thousands)
|
||||
|
Incentive
compensation programs
|
30,919 | |||
|
Acquisitions
|
4,064 | |||
|
Employee
stock purchase plan
|
4,115 | |||
|
Dividend
reinvestment plan
|
31 | |||
|
Conversion
of convertible preferred stock
|
13 | |||
| 39,142 | ||||
On July
1, 2009, we issued 196.1 million shares of CenturyTel common stock in connection
with the acquisition of Embarq. See Note 2 for additional
information.
99
In
accordance with previously-announced stock repurchase programs, we repurchased
9.7 million shares (for $347.3 million) in 2008 and 10.2 million shares (for
$460.7 million) in 2007.
In
January 2009, in connection with the special meeting of shareholders to approve
share issuances in connection with our acquisition of Embarq, our shareholders
approved a charter amendment to eliminate certain special voting rights of
long-term shareholders upon the consummation of the Embarq
acquisition. See Note 2 for additional
information.
In
December 2007, the Financial Accounting Standards Board issued guidance
regarding noncontrolling interests in consolidated financial statements, which
requires noncontrolling interests to be recognized as equity in the consolidated
financial statements. In addition, net income attributable to such
noncontrolling interests is required to be included in consolidated net
income. This guidance is effective for our 2009 fiscal
year. Our financial statements as of and for the year ended December
31, 2009 reflect our noncontrolling interests as equity in our consolidated
balance sheet. Prior periods have been adjusted to reflect this
presentation.
Preferred stock - As of
December 31, 2009, we had 2.0 million shares of authorized preferred stock, $25
par value per share. At December 31, 2009 and 2008, there were
approximately 9,400 shares of outstanding convertible preferred
stock. Holders of outstanding CenturyTel preferred stock are entitled
to receive cumulative dividends, receive preferential distributions equal to $25
per share plus unpaid dividends upon CenturyTel’s liquidation and vote as a
single class with the holders of common stock.
(10) POSTRETIREMENT
BENEFITS
Our
incumbent postretirement health care plan provides postretirement benefits to
qualified legacy CenturyTel retirees. The postretirement health care
plan we acquired as part of our acquisition of Embarq provides postretirement
benefits to qualified legacy Embarq retirees. The legacy Embarq plan
allows eligible employees retiring before certain dates to receive benefits at
no or reduced cost. Employees retiring after certain dates are
eligible for benefits on a shared cost basis. These plans are
generally funded by us and we expect to continue funding these postretirement
obligations as benefits are paid. Until such time as we can integrate
Embarq’s postretirement benefit plan with ours, we plan to continue to operate
those plans independently. Our plans use a December 31 measurement
date. The benefit plan obligations and plan assets associated with
the legacy Embarq plan were remeasured as of the July 1, 2009 acquisition
date.
100
The
following is a reconciliation of the beginning and ending balances for the
benefit obligation and the plan assets.
|
December
31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Change
in benefit obligation
|
||||||||||||
|
Benefit obligation at beginning of year
|
$ | 292,887 | 306,633 | 357,417 | ||||||||
|
Service cost
|
8,764 | 4,926 | 6,923 | |||||||||
|
Interest cost
|
26,693 | 19,395 | 20,133 | |||||||||
|
Participant contributions
|
3,013 | 2,789 | 2,016 | |||||||||
|
Plan amendments
|
- | (9,093 | ) | (4,552 | ) | |||||||
|
Acquisitions
|
228,200 | - | 2,277 | |||||||||
|
Direct subsidy receipts
|
626 | 1,092 | 1,299 | |||||||||
|
Actuarial (gain) loss
|
58,455 | (11,992 | ) | (60,312 | ) | |||||||
|
Benefits paid
|
(36,293 | ) | (20,863 | ) | (18,568 | ) | ||||||
|
Benefit
obligation at end of year
|
$ | 582,345 | 292,887 | 306,633 | ||||||||
|
Change
in plan assets
|
||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 16,805 | 28,324 | 30,080 | ||||||||
|
Return (loss) on plan assets
|
6,405 | (6,166 | ) | 1,916 | ||||||||
|
Acquisitions
|
33,200 | - | - | |||||||||
|
Employer
contributions
|
34,182 | 12,721 | 12,880 | |||||||||
|
Participant contributions
|
3,013 | 2,789 | 2,016 | |||||||||
|
Benefits paid
|
(36,293 | ) | (20,863 | ) | (18,568 | ) | ||||||
|
Fair
value of plan assets at end of year
|
$ | 57,312 | 16,805 | 28,324 | ||||||||
The
following table sets forth the amounts recognized as liabilities on the balance
sheet for postretirement benefits at December 31, 2009, 2008 and
2007.
|
December
31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Benefit
obligation
|
$ | (582,345 | ) | (292,887 | ) | (306,633 | ) | |||||
|
Fair
value of plan assets
|
57,312 | 16,805 | 28,324 | |||||||||
|
Accrued
benefit cost
|
$ | (525,033 | ) | (276,082 | ) | (278,309 | ) | |||||
Net
periodic postretirement benefit cost for 2009 (which includes the effects of our
July 1, 2009 acquisition of Embarq), 2008 and 2007 included the following
components:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Service
cost
|
$ | 8,764 | 4,926 | 6,923 | ||||||||
|
Interest
cost
|
26,693 | 19,395 | 20,133 | |||||||||
|
Expected
return on plan assets
|
(2,386 | ) | (2,337 | ) | (2,482 | ) | ||||||
|
Amortization
of unrecognized actuarial loss
|
- | - | 3,595 | |||||||||
|
Amortization
of unrecognized prior service credit
|
(3,546 | ) | (2,606 | ) | (2,020 | ) | ||||||
|
Net
periodic postretirement benefit cost
|
$ | 29,525 | 19,378 | 26,149 | ||||||||
The
unamortized prior service credit ($14.3 million as of December 31, 2009) and
unrecognized net actuarial loss ($66.0 million as of December 31, 2009)
components have been reflected as a $32.0 million after-tax decrease to
accumulated other comprehensive loss within stockholders’ equity. The
estimated amount of net amortization income of the above unrecognized items that
will be amortized from accumulated other comprehensive loss and reflected as a
component of net periodic postretirement cost during 2010 is (i) $3.4 million
income for the prior service credit and (ii) $2.0 million loss for the net
actuarial loss.
101
Assumptions used in accounting for postretirement benefits as of December 31,
2009 and 2008 were:
|
2009
|
2008
|
||
|
Determination
of benefit obligation
|
|||
|
Discount rate
|
5.7-5.8%
|
6.90
|
|
|
Healthcare cost increase trend rates (Medical/Prescription
Drug)
|
|||
|
Following
year
|
8.0%/8.0%
|
7.0/10.0
|
|
|
Rate
to which the cost trend rate is assumed to decline (the
|
|||
|
ultimate
cost trend rate)
|
5.0%/5.0%
|
5.0/5.0
|
|
|
Year
that the rate reaches the ultimate cost trend rate
|
2014/2014
|
2011/2014
|
|
|
Determination
of benefit cost
|
|||
|
Discount rate
|
6.4-6.90%
|
6.50
|
|
|
Expected return on plan
assets
|
8.25-8.50%
|
8.25
|
Our
discount rate is based on a hypothetical portfolio of bonds rated AA- or better
that produces a cash flow matching the projected benefit payments of the
plans. In determining the expected return on plan assets, we study
historical markets and apply the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. We evaluate current market factors such as inflation and
interest rates before determining long-term capital market
assumptions. We also review peer data and historical returns to check
for reasonableness.
Assumed
health care cost trends have a significant effect on the amounts reported for
postretirement benefit plans. A one-percentage-point change in
assumed health care cost rates would have the following
effects:
|
1-Percentage
|
1-Percentage
|
|||||||
|
Point
Increase
|
Point
Decrease
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
Effect
on annual total of service and interest cost components
|
$ | 374 | (417 | ) | ||||
|
Effect
on postretirement benefit obligation
|
$ | 3,957 | (4,380 | ) | ||||
We employ
a total return investment approach whereby a mix of equities and fixed income
investments are used to maximize the long-term return of plan assets for a
prudent level of risk. Risk tolerance is established through careful
consideration of plan liabilities, plan funded status and corporate financial
condition. We measure and monitor investment risk on an ongoing basis
through annual liability measurements, periodic asset studies and periodic
portfolio reviews.
102
Our
postretirement benefit plan weighted-average asset allocations at December 31,
2009 and 2008 by asset category are as follows:
|
2009
|
2008
|
|||||||
|
Equity
securities
|
18.6 | % | 46.7 | |||||
|
Debt
securities
|
64.5 | 26.4 | ||||||
|
Cash
and cash equivalents
|
16.9 | 26.9 | ||||||
|
Total
|
100.0 | % | 100.0 | |||||
As of
December 31, 2009, we used the following valuation techniques to measure fair
value for assets. There were no changes to these methodologies during
2009:
Level 1 -
Assets were valued using the closing price reported in the active market in
which the individual security was traded.
Level 2 -
Assets were valued using quoted prices in markets that are not active, broker
dealer quotations, net asset value of shares held by the plans and other methods
by which all significant input were observable at the measurement date.
Level 3 -
Assets were valued using valuation reports from the respective institutions at
the measurement date.
The
following table presents the hierarchy levels for our postretirement benefit
plans’ investments as of December 31, 2009:
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Equity
securities
|
||||||||||||||||
|
Common
stocks, preferred stocks,
|
||||||||||||||||
|
equity
funds and related securities
|
$ | 4,967 | 5,688 | - | 10,655 | |||||||||||
|
Debt
securities
|
32,900 | 4,075 | - | 36,975 | ||||||||||||
|
Cash
|
9,682 | - | - | 9,682 | ||||||||||||
|
Total
|
$ | 47,549 | 9,763 | - | 57,312 | |||||||||||
Our plans
invest in various securities, some of which are exposed to various risks such as
interest rate, market and credit risks. Due to the level of risk
associated with certain investment securities, it is at least reasonably
possible that changes in the values of investment securities will occur in the
near term and that those changes could materially affect the amounts reported in
the statement of net assets available for benefits.
We expect
to contribute approximately $49.5 million to our postretirement benefit plans in
2010.
103
Our
estimated future projected benefit payments under our postretirement benefit
plans are as follows:
|
Before
Medicare
|
Medicare
|
Net
of
|
||||||||||
|
Year
|
Subsidy
|
Subsidy
|
Medicare
Subsidy
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
2010
|
$ | 50,791 | (1,317 | ) | 49,474 | |||||||
|
2011
|
$ | 52,993 | (691 | ) | 52,302 | |||||||
|
2012
|
$ | 49,603 | (486 | ) | 49,117 | |||||||
|
2013
|
$ | 48,773 | (174 | ) | 48,599 | |||||||
|
2014
|
$ | 47,771 | (3 | ) | 47,768 | |||||||
|
2015-2019
|
$ | 225,992 | - | 225,992 | ||||||||
(11) DEFINED
BENEFIT AND OTHER RETIREMENT PLANS
Our
incumbent noncontributory defined benefit pension plans provide pension benefits
for substantially all legacy CenturyTel employees. The
noncontributory defined benefit pension plan we acquired as part of our
acquisition of Embarq provides pension benefits for substantially all legacy
Embarq employees. Pension benefits for participants of these plans
represented by a collective bargaining agreement are based on negotiated
schedules. All other participants’ pension benefits are based on each
individual participants’ years of service and compensation. Both
CenturyTel and Embarq have previously sponsored, or continue to sponsor,
supplemental executive retirement plans providing certain officers with
supplemental retirement, death and disability benefits. Until such
time as we can integrate Embarq’s benefit plans with ours, we plan to continue
to operate these plans independently. We use a December 31
measurement date for all our plans. The benefit plan obligations and
plan assets associated with the legacy Embarq pension plan were remeasured as of
the July 1, 2009 acquisition date.
In late
February 2008, our Board of Directors approved certain actions related to
CenturyTel’s Supplemental Executive Retirement Plan, including (i) freezing
benefit accruals effective February 29, 2008 and (ii) amending the plan in the
second quarter of 2008 to permit participants to receive in 2009 a lump sum
distribution of the present value of their accrued plan benefits based on their
election. We also enhanced plan termination benefits by (i) crediting
each active participant with three additional years of service and (ii)
crediting each participant who was not in pay status under the plan with three
additional years of age in connection with calculating the present value of any
lump sum distribution. We recorded an aggregate curtailment loss of
approximately $8.2 million in 2008 related to the above-described
items. In addition, principally due to the payment of the lump sum
distributions in early 2009, we also recognized a settlement loss (which is
included in selling, general and administrative expense) of approximately $7.7
million in 2009.
Due to
change of control provisions that were triggered upon the consummation of the
Embarq acquisition on July 1, 2009, certain retirees who were receiving monthly
annuity payments under a CenturyTel supplemental executive retirement plan were
paid a lump sum distribution calculated in accordance with the provisions of the
plan. A settlement expense of approximately $8.9 million was
recognized in the third quarter of 2009 as a result of these
actions.
104
The
legacy Embarq pension plan contains a provision that grants early retirement
benefits for certain participants affected by workforce
reductions. During 2009, we recognized approximately $14.7 million of
additional pension expense related to these contractual benefits.
The
following is a reconciliation of the beginning and ending balances for the
aggregate benefit obligation and the plan assets for our above-referenced
defined benefit plans.
|
December
31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Change
in benefit obligation
|
||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 462,701 | 469,437 | 474,302 | ||||||||
|
Service
cost
|
36,223 | 13,761 | 16,431 | |||||||||
|
Interest cost
|
134,898 | 29,373 | 28,180 | |||||||||
|
Plan
amendments
|
16,016 | 2,393 | 61 | |||||||||
|
Acquisitions
|
3,467,260 | - | 15,266 | |||||||||
|
Actuarial (gain) loss
|
231,663 | (24,819 | ) | (16,153 | ) | |||||||
|
Contractual retirement benefits
|
14,676 | - | - | |||||||||
|
Curtailment
|
- | 8,235 | - | |||||||||
|
Settlements
|
8,294 | (1,945 | ) | (410 | ) | |||||||
|
Benefits paid
|
(190,149 | ) | (33,734 | ) | (48,240 | ) | ||||||
|
Benefit
obligation at end of year
|
$ | 4,181,582 | 462,701 | 469,437 | ||||||||
|
Change
in plan assets
|
||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 352,830 | 459,198 | 452,293 | ||||||||
|
Return (loss) on plan assets
|
473,878 | (123,210 | ) | 41,537 | ||||||||
|
Acquisitions
|
2,407,200 | - | 12,502 | |||||||||
|
Employer contributions
|
175,946 | 52,521 | 1,516 | |||||||||
|
Settlements
|
- | (1,945 | ) | (410 | ) | |||||||
|
Benefits paid
|
(190,148 | ) | (33,734 | ) | (48,240 | ) | ||||||
|
Fair
value of plan assets at end of year
|
$ | 3,219,706 | 352,830 | 459,198 | ||||||||
The
following table sets forth the combined plans’ funded status and amounts
recognized in our consolidated balance sheet at December 31, 2009, 2008 and
2007.
|
December
31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Benefit
obligation
|
$ | (4,181,582 | ) | (462,701 | ) | (469,437 | ) | |||||
|
Fair
value of plan assets
|
3,219,706 | 352,830 | 459,198 | |||||||||
|
Net
amount recognized
|
$ | (961,876 | ) | (109,871 | ) | (10,239 | ) | |||||
105
Net
periodic pension expense for 2009 includes the effects of our July 1, 2009
acquisition of Embarq. Net periodic pension expense for 2009, 2008
and 2007 included the following components:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Service
cost
|
$ | 36,223 | 13,761 | 16,431 | ||||||||
|
Interest
cost
|
134,898 | 29,373 | 28,180 | |||||||||
|
Expected
return on plan assets
|
(127,613 | ) | (36,667 | ) | (36,780 | ) | ||||||
|
Curtailment
loss
|
- | 8,235 | - | |||||||||
|
Settlements
|
17,834 | 410 | 410 | |||||||||
|
Contractual
retirement benefits
|
14,676 | - | - | |||||||||
|
Recognized
net losses
|
15,801 | 3,119 | 7,367 | |||||||||
|
Net
amortization and deferral
|
470 | 258 | (131 | ) | ||||||||
|
Net
periodic pension expense
|
$ | 92,289 | 18,489 | 15,477 | ||||||||
The
unamortized prior service cost ($16.1 million as of December 31, 2009) and
unrecognized net actuarial loss ($67.1 million as of December 31, 2009)
components have been reflected as a $83.2 million net reduction ($51.2 million
after-tax) to accumulated other comprehensive loss within stockholders’
equity. The estimated amount of amortization expense of the above
unrecognized amounts that will be amortized from accumulated other comprehensive
loss and reflected as a component of net periodic pension cost for 2010 are (i)
$238,000 for the prior service cost and (ii) $14.4 million for the net actuarial
loss.
Amounts recognized on the balance sheet consist of:
|
December
31,
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
||||||||
|
Accrued
expenses and other current liabilities
|
$ | (1,266 | ) | (37,813 | ) | |||
|
Other
deferred credits
|
(960,610 | ) | (72,058 | ) | ||||
|
Net
amount recognized
|
$ | (961,876 | ) | (109,871 | ) | |||
Our
aggregate accumulated benefit obligation as of December 31, 2009 and 2008 was
$4.042 billion and $418.8 million, respectively.
106
Assumptions
used in accounting for pension plans as of December 31, 2009 and 2008
were:
|
2009
|
2008
|
|||||||
|
Determination
of benefit obligation
|
||||||||
|
Discount rate
|
5.5-6.0 | % | 6.60-6.90 | |||||
|
Weighted average rate of compensation increase
|
3.5-4.0 | % | 4.0 | |||||
|
Determination
of benefit cost
|
||||||||
|
Discount rate
|
6.60-6.90 | % | 6.30-6.50 | |||||
|
Weighted average rate of compensation increase
|
4.0 | % | 4.0 | |||||
|
Expected return on plan assets
|
8.25-8.50 | % | 8.25 | |||||
Our
discount rate is based on a hypothetical portfolio of bonds rated AA- or better
that produces a cash flow matching the projected benefit payments of the
plans. In determining the expected return on plan assets, we study
historical markets and apply the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. We evaluate current market factors such as inflation and
interest rates before determining long-term capital market
assumptions. We also review peer data and historical returns to check
for reasonableness.
We employ
a total return investment approach whereby a mix of equities and fixed income
investments are used to maximize the long-term return of plan assets for a
prudent level of risk. Risk tolerance is established through careful
consideration of plan liabilities, plan funded status and corporate financial
condition. We measure and monitor investment risk on an ongoing basis
through annual liability measurements, periodic asset studies and periodic
portfolio reviews. The fair value of most of our pension plan assets
is determined by reference to observable market data consisting of published
market quotes.
Our
pension plans weighted-average asset allocations at December 31, 2009 and 2008
by asset category are as follows:
|
2009
|
2008
|
|||||||
|
Equity
securities
|
49.3 | % | 64.3 | |||||
|
Debt
securities
|
28.8 | 32.7 | ||||||
| Hedge funds | 8.5 | - | ||||||
|
Real
estate
|
5.0 | - | ||||||
|
Cash
equivalents and other
|
8.4 | 3.0 | ||||||
|
Total
|
100.0 | % | 100.0 | |||||
As of December 31, 2009, we used the following valuation techniques to measure
fair value for assets. There
Level 1 -
Assets were valued using the closing price reported in the active market in
which the individual security was traded.
Level 2 -
Assets were valued using quoted prices in markets that are not active, broker
dealer quotations, net asset value of shares held by the plans and other methods
by which all significant input were observable at the measurement date.
107
Level 3 -
Assets were valued using valuation reports from the respective institutions at
the measurement date.
The
following table presents the hierarchy levels for our defined benefit pension
plans’ investments as of December 31, 2009:
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Equity
securities
|
||||||||||||||||
|
Common stocks, preferred stocks, equity funds and related
securities
|
$ | 1,345,669 | 242,852 | - | 1,588,521 | |||||||||||
|
Debt
securities
|
||||||||||||||||
|
U.S. corporate bonds and related securities
|
- | 798,143 | 1,005 | 799,148 | ||||||||||||
|
U.S. government bonds, municipal bonds and related
securities
|
- | 129,129 | - | 129,129 | ||||||||||||
|
Hedge
funds
|
- | 113,340 | 159,886 | 273,226 | ||||||||||||
|
Real
estate
|
- | - | 161,336 | 161,336 | ||||||||||||
|
Cash
and cash equivalents
|
21,210 | - | - | 21,210 | ||||||||||||
|
Other
|
67,156 | 181,116 | (1,136 | ) | 247,136 | |||||||||||
|
Total
|
$ | 1,434,035 | 1,464,580 | 321,091 | 3,219,706 | |||||||||||
The
following sets forth a summary of changes in the fair value of our defined
benefit pension plans’ Level 3 assets for the year ended December 31,
2009:
|
Hedge
|
All
|
|||||||||||||||
|
Real
estate
|
funds
|
other
|
Total
|
|||||||||||||
|
(Dollars
in thousand)
|
||||||||||||||||
|
Balance,
beginning of year
|
$ | - | - | - | - | |||||||||||
|
Level
3 assets acquired in the Embarq acquisition
|
182,819 | 146,335 | (4,875 | ) | 324,279 | |||||||||||
|
Transfers
to (from) Level 3
|
- | - | (3,458 | ) | (3,458 | ) | ||||||||||
|
Realized
gain (loss) in investments, net
|
21 | - | 70 | 91 | ||||||||||||
|
Unrealized
gain (loss) in investments, net
|
(24,223 | ) | 13,551 | 31 | (10,641 | ) | ||||||||||
|
Purchases
and sales, net
|
2,719 | - | 8,101 | 10,820 | ||||||||||||
|
Balance,
end of year
|
$ | 161,336 | 159,886 | (131 | ) | 321,091 | ||||||||||
Our plans
invest in various securities, some of which are exposed to various risks such as
interest rate, market and credit risks. Due to the level of risk
associated with certain investment securities, it is at least reasonably
possible that changes in the values of investment securities will occur in the
near term and that those changes could materially affect the value of our
pension plan assets.
Some of
our plans' investment securities have contractual cash flows, such as asset
backed securities, collateralized mortgage obligations, and commercial and
government mortgage backed securities, including securities backed by sub-prime
mortgage loans. The value, liquidity, and related income of these
securities are sensitive to changes in economic conditions, including real
estate values, delinquencies or defaults, or both, and may be adversely affected
by shifts in the market’s perception of the issuers and changes in interest
rates.
108
During
the last half of 2009, we contributed $115 million to the legacy Embarq pension
plan. We expect to contribute approximately $300 million to the
legacy Embarq pension plan in March 2010.
Our
estimated future projected benefit payments under our defined benefit pension
plans are as follows: 2010 - $256.2 million; 2011 - $258.7 million; 2012 -
$264.0 million; 2013 - $272.1 million; 2014 - $279.3 million; and 2015-2019 -
$1.5 billion.
We also sponsor qualified profit sharing plans pursuant to Section 401(k) of the
Internal Revenue Code (the “401(k) Plans”) which are available to substantially
all employees. Our matching contributions to the 401(k) Plans were
$13.8 million in 2009, $10.5 million in 2008 and $10.6 million in
2007.
(12) INCOME
TAXES
Income
tax expense included in the Consolidated Statements of Income was as
follows:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Federal
|
||||||||||||
|
Current
|
$ | 158,248 | 141,604 | 192,424 | ||||||||
|
Deferred
|
210,202 | 59,669 | 2,220 | |||||||||
|
State
|
||||||||||||
|
Current
|
2,285 | (14,765 | ) | 7,130 | ||||||||
|
Deferred
|
12,206 | 7,849 | (1,202 | ) | ||||||||
| $ | 382,941 | 194,357 | 200,572 | |||||||||
Income
tax expense was allocated as follows:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Income
tax expense in the consolidated statements of income:
|
||||||||||||
| Attributable to income before extraordinary item | $ | 301,881 | 194,357 | 200,572 | ||||||||
| Attributable to extraordinary item | 81,060 | - | - | |||||||||
|
Stockholders’
equity:
|
||||||||||||
|
Compensation expense for tax purposes in excess
|
||||||||||||
|
of amounts recognized for financial reporting purposes
|
(4,194 | ) | (1,123 | ) | (6,427 | ) | ||||||
|
Tax effect of the change in accumulated other
|
||||||||||||
|
comprehensive
loss
|
29,460 | (47,581 | ) | (34,985 | ) | |||||||
109
The
following is a reconciliation from the statutory federal income tax rate to our
effective income tax rate:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Percentage
of pre-tax income)
|
||||||||||||
|
Statutory
federal income tax rate
|
35.0 | % | 35.0 | 35.0 | ||||||||
|
State
income taxes, net of federal income tax benefit
|
2.0 | 2.0 | 2.8 | |||||||||
|
Nondeductible
acquisition related costs
|
0.7 | 0.3 | - | |||||||||
|
Nondeductible
compensation pursuant to executive
|
||||||||||||
|
compensation limitations
|
0.9 | 0.2 | 0.1 | |||||||||
|
Recognition
of previously unrecognized tax benefits
|
(1.5 | ) | (2.3 | ) | (5.3 | ) | ||||||
|
Other,
net
|
0.1 | (0.5 | ) | (0.2 | ) | |||||||
|
Effective
income tax rate
|
37.2 | % | 34.7 | 32.4 | ||||||||
Certain
executive compensation amounts, including the lump sum distributions paid to
certain executive officers upon discontinuing the Supplemental Executive
Retirement Plan (see Note 11), are reflected as nondeductible for income tax
purposes pursuant to executive compensation limitations of the Internal Revenue
Code. The treatment of these amounts as non-deductible resulted in
the recognition of approximately $9.2 million of income tax expense in 2009
above amounts that would have been recognized had such payments been deductible
for income tax purposes. Our 2009 effective tax rate is also higher
because a portion of our merger-related transaction costs incurred during 2009
are nondeductible for income tax purposes (with such treatment resulting in a
$6.9 million increase to income tax expense). Such increases in
income tax expense were partially offset by a $7.0 million reduction in income
tax expense primarily caused by a reduction to our deferred tax asset valuation
allowance associated with state net operating loss carryforwards due to a law
change in one of our operating states that we believe will allow us to utilize
our net operating loss carryforwards in the future. Prior to the law
change, such net operating loss carryforwards were fully reserved as it was more
likely than not that these carryforwards would not be utilized prior to
expiration.
During
2009, 2008 and 2007, we recognized net after-tax benefits of approximately $15.7
million, $12.8 million and $32.7 million, respectively, which includes (i)
related interest and is net of federal benefit, related to the recognition of
previously unrecognized tax benefits primarily due to certain issues being
effectively settled through examinations or the lapse of statute of limitations
and (ii) other adjustments needed upon finalization of tax returns.
110
The tax
effects of temporary differences that gave rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008
were as follows:
|
December
31,
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
||||||||
|
Deferred
tax assets
|
||||||||
|
Postretirement and pension benefit costs
|
$ | 479,163 | 155,772 | |||||
|
Net state operating loss carryforwards
|
64,782 | 35,548 | ||||||
|
Other employee benefits
|
67,048 | 24,474 | ||||||
|
Other
|
127,306 | 37,946 | ||||||
|
Gross deferred tax assets
|
738,299 | 253,740 | ||||||
|
Less valuation allowance
|
(41,533 | ) | (33,858 | ) | ||||
|
Net deferred tax assets
|
696,766 | 219,882 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Property, plant and equipment, primarily due to
|
||||||||
|
depreciation differences
|
(1,573,986 | ) | (343,812 | ) | ||||
|
Goodwill and other intangible assets
|
(1,189,141 | ) | (688,765 | ) | ||||
|
Other
|
(106,900 | ) | (11,986 | ) | ||||
|
Gross deferred tax liabilities
|
(2,870,027 | ) | (1,044,563 | ) | ||||
|
Net
deferred tax liability
|
$ | (2,173,261 | ) | (824,681 | ) | |||
Of the
$2.173 billion net deferred tax liability as of December 31, 2009, approximately
$2.257 billion is reflected as a long-term liability and approximately $83.3
million is reflected as a net current deferred tax asset.
We
establish valuation allowances when necessary to reduce the deferred tax assets
to amounts we expect to realize. As of December 31, 2009, we had
available tax benefits associated with net state operating loss carryforwards,
which expire through 2029, of $64.8 million. The ultimate realization
of the benefits of the carryforwards is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. We consider our scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. As a result of such assessment, we reserved
$41.5 million through the valuation allowance as of December 31, 2009 as it is
more likely than not that this amount of net operating loss carryforwards will
not be utilized prior to expiration.
In June
2006, the Financial Accounting Standards Board issued guidance which clarifies
the accounting for uncertainty in income taxes recognized in financial
statements and required us, effective January 1, 2007, to recognize and measure
tax benefits taken or expected to be taken in a tax return and disclose
uncertainties in income tax positions. We recorded a cumulative
effect adjustment to retained earnings as of January 1, 2007 (which increased
retained earnings by approximately $478,000 as of such date) related to certain
previously unrecognized tax benefits that did not meet the criteria for
liability recognition upon the adoption of this guidance.
111
The following table reflects the activity of our gross unrecognized tax benefits
(excluding both interest and any related federal benefit) during 2009 (amounts
expressed in thousands).
|
Unrecognized
tax benefits at January 1, 2009
|
$ | 19,994 | ||
|
Unrecognized
tax benefits assumed in the Embarq acquisition
|
322,072 | |||
|
Increase
in tax positions taken in the current year
|
12,477 | |||
|
Decrease
due to the reversal of tax positions taken in a prior year
|
(13,529 | ) | ||
|
Decrease from the lapse of statute of
limitations
|
(13,787 | ) | ||
|
Unrecognized tax benefits at December 31,
2009
|
$ | 327,227 |
The total
amount of unrecognized tax benefits was primarily related to the treatment of
universal service fund receipts of certain subsidiaries acquired as a part of
the Embarq acquisition. While the ultimate recognition of universal
service receipts in taxable income is highly certain, there is uncertainty about
the timing and nature of such recognition. As of December 31, 2009,
approximately $17 million represented uncertain tax positions that could result
in a potential future obligation. Additionally, approximately $246
million represents refund claims. Due to the uncertainty of these
refund claims, we have not recognized the impact of these claims to current or
deferred taxes in our consolidated financial statements.
Of the
above remaining gross balance of $81.7 million, approximately $79.0 million is
included as a component of “Deferred credits and other liabilities” and the
remainder is included in “Accrued income taxes”. If we were to
prevail on all unrecognized tax benefits recorded on our balance sheet, we would
recognize approximately $36.2 million (including interest and net of federal
benefit), which would lower our effective tax rate.
Our
policy is to reflect interest expense associated with unrecognized tax benefits
in income tax expense. We had accrued interest (presented before
related tax benefits) of approximately $9.9 million and $5.3 million as of
December 31, 2009 and December 31, 2008.
We file
income tax returns, including returns for our subsidiaries, with federal, state
and local jurisdictions. Our uncertain income tax positions are
related to tax years that are currently under or remain subject to examination
by the relevant taxing authorities. Our open income tax years by
major jurisdiction are as follows.
|
Jurisdiction
|
Open tax years
|
|
Federal
|
2005-current
|
|
State
|
|
|
Florida
|
2003-current
|
|
Georgia
|
2002-current
|
|
Louisiana
|
2005-current
|
|
North Carolina
|
1990-current
|
|
Oregon
|
2002-current
|
|
Texas
|
2000-current
|
|
Wisconsin
|
2003-current
|
|
Other states
|
2002-current
|
112
Additionally,
Embarq Corporation and its subsidiaries and the IRS have agreed that Embarq
may file amended returns on a specific tax issue relating to years as early as
1990. These amended returns would be subject to IRS
examination.
Since the
period for assessing additional liability typically begins upon the filing of a
return, it is possible that certain jurisdictions could assess tax for years
prior to the open tax years disclosed above. Additionally, it is
possible that certain jurisdictions in which we do not believe we have an income
tax filing responsibility, and accordingly did not file a return, may attempt to
assess a liability, or that other jurisdictions to which we pay taxes may
attempt to assert that we owe additional taxes.
Based on (i) the potential outcomes of these ongoing examinations, (ii) the
expiration of statute of limitations for specific jurisdictions, (iii) the
negotiated settlement of certain disputed issues, or (iv) a jurisdiction’s
administrative practices, it is reasonably possible that the related
unrecognized tax benefits for tax positions previously taken may decrease by up
to $41.5 million within the next 12 months. The actual amount of such
decrease, if any, will depend on several future developments and events, many of
which are outside our control.
113
(13) EARNINGS
PER SHARE
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars,
except per share amounts,
and
shares in thousands)
|
||||||||||||
|
Income
(Numerator):
|
||||||||||||
|
Net
income before extraordinary item
|
$ | 511,254 | 365,732 | 418,370 | ||||||||
|
Extraordinary
item, net of income tax expense and
|
||||||||||||
|
noncontrolling
interests
|
135,957 | - | - | |||||||||
|
Net
income attributable to CenturyTel, Inc.
|
647,211 | 365,732 | 418,370 | |||||||||
|
Dividends
applicable to preferred stock
|
(12 | ) | (155 | ) | (368 | ) | ||||||
|
Earnings
applicable to unvested restricted stock awards:
|
||||||||||||
|
Income
before extraordinary item
|
(3,559 | ) | (4,240 | ) | (3,125 | ) | ||||||
|
Extraordinary
item
|
(946 | ) | - | - | ||||||||
|
Net
income as adjusted for purposes of
|
||||||||||||
|
computing
basic earnings per share
|
642,694 | 361,337 | 414,877 | |||||||||
|
Interest
on convertible debentures, net of tax
|
- | - | 2,832 | |||||||||
|
Dividends
applicable to preferred stock
|
12 | 155 | 368 | |||||||||
|
Net
income as adjusted for purposes of computing
|
||||||||||||
|
diluted
earnings per share
|
$ | 642,706 | 361,492 | 418,077 | ||||||||
|
Shares
(Denominator):
|
||||||||||||
|
Weighted
average number of shares:
|
||||||||||||
|
Outstanding
during period
|
199,177 | 103,467 | 110,183 | |||||||||
|
Unvested
restricted stock
|
(1,387 | ) | (1,199 | ) | (823 | ) | ||||||
|
Unvested
restricted stock units
|
1,023 | - | - | |||||||||
|
Weighted
average number of shares outstanding during
|
||||||||||||
|
period
for computing basic earnings per share
|
198,813 | 102,268 | 109,360 | |||||||||
|
Incremental
common shares attributable to
|
||||||||||||
|
dilutive
securities:
|
||||||||||||
|
Shares
issuable under convertible securities
|
13 | 169 | 2,951 | |||||||||
|
Shares
issuable under incentive compensation plans
|
231 | 123 | 476 | |||||||||
|
Number
of shares as adjusted for purposes of
|
||||||||||||
|
computing
diluted earnings per share
|
199,057 | 102,560 | 112,787 | |||||||||
|
Basic
earnings per share
|
||||||||||||
|
Income
before extraordinary item
|
$ | 2.55 | 3.53 | 3.79 | ||||||||
|
Extraordinary
item
|
$ | .68 | - | - | ||||||||
|
Basic
earnings per share
|
$ | 3.23 | 3.53 | 3.79 | ||||||||
|
Diluted
earnings per share
|
||||||||||||
|
Income
before extraordinary item
|
$ | 2.55 | 3.52 | 3.71 | ||||||||
|
Extraordinary
item
|
$ | .68 | - | - | ||||||||
|
Diluted
earnings per share
|
$ | 3.23 | 3.52 | 3.71 | ||||||||
In July
2007, we called for redemption on August 14, 2007 all of our $165 million
aggregate principal amount 4.75% convertible senior debentures, Series K, due
2032. In accordance with the indenture, holders could elect to
convert their debentures into shares of CenturyTel common stock at a conversion
price of $40.455 per share prior to August 10, 2007. In lieu of cash
redemption, holders of approximately $149.6 million aggregate principal amount
of the debentures elected to convert their holdings into approximately 3.7
million shares of CenturyTel common stock.
114
The
weighted average number of shares of common stock subject to issuance under
outstanding options that were excluded from the computation of diluted earnings
per share (because the exercise price of the option was greater than the average
market price of the common stock) was 4.1 million for 2009, 2.1 million for 2008
and 792,000 for 2007.
In June
2008, the Financial Accounting Standards Board issued guidance in determining
whether instruments granted in share-based payment transactions are
participating securities. Based on this guidance, we have concluded
that our outstanding non-vested restricted stock is a participating security and
therefore should be included in the earnings allocation in computing earnings
per share using the two-class method. The guidance was effective for
us beginning in first quarter 2009 and required us to recast our previously
reported earnings per share.
(14) STOCK
COMPENSATION PROGRAMS
We
recognize as compensation expense our cost of awarding employees with equity
instruments by allocating the fair value of the award on the grant date over the
period during which the employee is required to provide service in exchange for
the award.
We
currently maintain programs which allow the Board of Directors, through its
Compensation Committee, to grant incentives to certain employees and our outside
directors in any one or a combination of several forms, including incentive and
non-qualified stock options; stock appreciation rights; restricted stock;
restricted stock units and performance shares. As of December 31,
2009, we had reserved approximately 30.9 million shares of common stock
which may be issued in connection with awards under our current incentive
programs. We also offer an Employee Stock Purchase Plan whereby
employees can purchase our common stock at a 15% discount based on the lower of
the beginning or ending stock price during recurring six-month periods
stipulated in such program.
Upon the
consummation of the Embarq acquisition on July 1, 2009 (see Note 2), outstanding
Embarq stock options and restricted stock units were converted to 7.2 million
CenturyTel stock options and 2.4 million restricted stock units based on the
exchange ratio stipulated in the Merger Agreement. The fair value of
the former Embarq stock option awards that were converted to CenturyTel stock
options was estimated as of the July 1, 2009 conversion date using a
Black-Scholes option pricing model using the following assumptions: dividend
yield – 9.12%; expected volatility – 27-50%; weighted average risk free interest
rate – 0.5-2.6% and expected term -.3 - 6 years. Other than in
connection with converting the former Embarq stock options into CenturyTel stock
options, we did not grant any stock options to employees in 2009.
In late
February 2008, the Compensation Committee authorized all long-term incentive
grants for 2008 to be in the form of restricted stock instead of a mix of stock
options and restricted stock as had been granted in recent
years. During 2008, prior to this authorization, 25,700 options were
granted with a weighted average grant date fair value of $8.85 per share using a
Black-Scholes option pricing model using the following
assumptions: dividend yield - .6%; expected volatility - 25%;
weighted average risk free interest rate - 2.9%; and expected term - 4.5
years.
115
During
2007 we granted 983,920 stock options with exercise prices at market
value. The weighted average fair value of each option was
estimated as of the date of grant to be $14.57 using a Black-Scholes option
pricing model using the following assumptions: dividend yield - .6%;
expected volatility - 28% (for executive officers) and 25% (for all other
employees); weighted average risk free interest rate - 4.6% (with rates ranging
from 3.5% to 5.1%); and expected term - 6.5 years (for executive officers) and
4.5 years (for all other employees).
The
expected volatility was based on the historical volatility of our common stock
over the 6.5- and 4.5- year terms mentioned above. The expected term
was determined based on the historical exercise and forfeiture rates for similar
grants.
Our
outstanding stock options have been granted with an exercise price equal to the
market price of CenturyTel’s shares at the date of grant. The
exercise price of former Embarq stock options were converted by applying the
exchange ratio stipulated in the Merger Agreement. Our outstanding
options generally have a three-year vesting period and all of them expire ten
years after the date of grant. The fair value of each stock option
award is estimated as of the date of grant using a Black-Scholes option pricing
model.
116
Stock option transactions during 2009 were as follows:
|
Average
|
Remaining
|
Aggregate
|
||||||||
|
Number
|
exercise
|
contractual
|
intrinsic
|
|||||||
|
of
options
|
price
|
term
(in years)
|
value
|
|||||||
|
Outstanding
December 31, 2008
|
3,527,147 | $ | 36.71 | |||||||
|
Conversion
of former Embarq
|
||||||||||
|
stock
options into CenturyTel
|
||||||||||
|
stock
options
|
7,240,142 | 37.18 | ||||||||
|
Exercised
|
(1,293,579 | ) | 30.86 | |||||||
|
Forfeited/Cancelled
|
(155,157 | ) | 39.33 | |||||||
|
Outstanding
December 31, 2009
|
9,318,553 | $ | 37.85 |
4.82
|
$32,142,000
|
|||||
|
Exercisable
December 31, 2009
|
8,154,525 | $ | 38.29 |
4.38
|
$27,645,000
|
|||||
Our
outstanding restricted stock awards generally vest over a three- or five-year
period (for employees) or a three-year period (for outside
directors). Certain restricted stock units issued to certain
legacy Embarq employees vest over a period of less than one
year. Upon the consummation of the Embarq acquisition on July 1, 2009
(see Note 2), outstanding Embarq restricted stock units were converted to 2.4
million restricted stock units based on the exchange ratio stipulated in the
Merger Agreement.
During
2009, we issued 820,234 shares of restricted stock to certain employees and our
outside directors at a weighted-average price of $27.34 per
share. During 2008, we issued 643,397 shares of restricted stock to
certain employees and our outside directors at a weighted-average price of
$34.86 per share. During 2007, we issued 288,896 shares of restricted
stock to certain employees and our outside directors at a weighted-average price
of $45.89 per share. Such restricted stock vests over a five-year
period (for employees) and a three-year period (for outside
directors). Nonvested restricted stock and restricted stock
unit transactions during 2009 were as follows:
|
Number
|
Average
grant
|
|||||||
|
of
shares
|
date
fair value
|
|||||||
|
Nonvested
at January 1, 2009
|
1,289,617 | $ | 35.67 | |||||
|
Conversion
of former Embarq restricted
|
||||||||
|
stock
units into CenturyTel restricted
|
||||||||
|
stock
units
|
2,414,357 | 30.70 | ||||||
|
Granted
|
820,234 | 27.34 | ||||||
|
Vested
|
(1,446,254 | ) | 32.50 | |||||
|
Forfeited
|
(155,099 | ) | 31.07 | |||||
|
Nonvested
at December 31, 2009
|
2,922,855 | $ | 31.04 | |||||
The total
compensation cost for all share-based payment arrangements in 2009, 2008 and
2007 was $55.2 million, $16.4 million and $20.0 million,
respectively. Upon the consummation of the acquisition of Embarq on
July 1, 2009, the vesting schedules of certain of our equity-based grants issued
prior to 2009 were accelerated due to change of control provisions in the
respective share-based compensation plans (with the exception of grants to
certain officers who waived such acceleration right). In addition,
the vesting of certain other awards was accelerated upon the termination of
employment of certain employees. As a result of accelerating the
vesting schedules of these awards, we recorded share-based compensation expense
of approximately $21.2 million in 2009 above amounts that would have been
recognized absent the triggering of these change of control and termination of
employment provisions.
We
recognized a tax benefit related to such arrangements of approximately $20.5
million in 2009, $5.8 million in 2008 and $7.5 million in 2007. As of
December 31, 2009, there was $47.6 million of total unrecognized compensation
cost related to the share-based payment arrangements, which is expected to be
recognized over a weighted-average period of 2.0 years.
We
received net cash proceeds of $39.9 million during 2009 in connection with
option exercises. The total intrinsic value of options exercised (the
amount by which the market price of the stock on the date of exercise exceeded
the market price of the stock on the date of grant) was $6.0 million during
2009, $208,000 during 2008 and $17.2 million during 2007. The excess
tax benefit realized from share-based compensation transactions during 2009 was
$4.2 million. The total fair value of restricted stock that vested during 2009,
2008, and 2007 was $45.2 million, $6.2 million, and $6.4 million,
respectively.
117
(15) DISCONTINUANCE
OF REGULATORY ACCOUNTING
Through
June 30, 2009, CenturyTel accounted for its regulated telephone operations
(except for its properties acquired from Verizon in 2002) in accordance with the
provisions of regulatory accounting under which actions by regulators can
provide reasonable assurance of the recognition of an asset, reduce or eliminate
the value of an asset and impose a liability on a regulated
enterprise. Such regulatory assets and liabilities were required to
be recorded and, accordingly, reflected in the balance sheet of an entity
subject to regulatory accounting.
As we previously disclosed, on July 1,
2009, we discontinued the accounting requirements of regulatory accounting upon
the conversion of substantially all of our rate-of-return study areas to federal
price cap regulation (based on the FCC’s approval of our petition to convert our
study areas to price cap regulation).
Upon the
discontinuance of regulatory accounting, we were required to reverse previously
established regulatory assets and liabilities. Depreciation rates of
certain assets established by regulatory authorities for our telephone
operations subject to regulatory accounting have historically included a
component for removal costs in excess of the related salvage
value. Notwithstanding the adoption of accounting guidance related to
the accounting for asset retirement obligations, regulatory accounting required
us to continue to reflect this accumulated liability for removal costs in excess
of salvage value even though there was no legal obligation to remove the
assets. Therefore, we did not adopt the asset retirement obligation
provisions for our telephone operations that were subject to regulatory
accounting. Upon the discontinuance of regulatory accounting, we
eliminated such accumulated liability for removal costs included in accumulated
depreciation and established an asset retirement obligation in a much smaller
amount. Upon the discontinuance of regulatory accounting, we were
required to adjust the carrying amounts of property, plant and equipment only to
the extent the assets are impaired, as judged in the same manner applicable to
nonregulated enterprises. We did not record an impairment charge related to the
carrying value of the property, plant and equipment of our regulated telephone
operations as a result of the discontinuance of regulatory
accounting.
118
In the
third quarter of 2009, upon the discontinuance of regulatory accounting, we
recorded a non-cash extraordinary gain in our consolidated statements of income
comprised of the following components (dollars, except per share amounts, in
thousands):
|
Gain
(loss)
|
||||
|
Elimination
of removal costs embedded in
|
||||
|
accumulated
depreciation
|
$ | 222,703 | ||
|
Establishment
of asset retirement obligation
|
(1,556 | ) | ||
|
Elimination
of other regulatory assets and liabilities
|
(2,585 | ) | ||
|
Net
extraordinary gain before income tax expense and
|
||||
|
noncontrolling
interests
|
218,562 | |||
|
Income
tax expense associated with extraordinary gain
|
(81,060 | ) | ||
|
Net
extraordinary gain before noncontrolling interests
|
137,502 | |||
|
Less:
extraordinary gain attributable to noncontrolling
interests
|
(1,545 | ) | ||
|
Extraordinary
gain attributable to CenturyTel, Inc.
|
$ | 135,957 | ||
|
Basic
earnings per share of extraordinary gain
|
$ | .68 | ||
|
Diluted
earnings per share of extraordinary gain
|
$ | .68 | ||
Historically,
the depreciation rates we utilized for our telephone operations were based on
rates established by regulatory authorities. Upon the discontinuance
of regulatory accounting, we revised prospectively the lives of our property,
plant and equipment to reflect the economic estimated remaining useful lives of
the assets in accordance with generally accepted accounting
principles. In general, the estimated remaining useful lives of our
telephone property were lengthened as compared to the rates used that were
established by regulatory authorities. Such lengthening of remaining useful
lives reflects our expectations of future network utilization and capital
expenditure levels required to provide service to our customers. Such
revisions in remaining useful lives of our assets reduced depreciation expense
by approximately $35 million in the last half of 2009 compared to what it would
have been absent the change in remaining useful lives.
Upon the
discontinuance of regulatory accounting, we also are eliminating certain
intercompany transactions with regulated affiliates that previously were not
eliminated under the application of regulatory accounting. This has
caused our operating revenues and operating expenses to be lower by equivalent
amounts (approximately $108 million) in the last half of 2009 as compared to the
first half of 2009. For regulatory purposes, the accounting and
reporting of our telephone subsidiaries will not be affected by the discontinued
application of regulatory accounting.
(16) GAIN
ON ASSET DISPOSITIONS
In third
quarter 2008, we sold our interest in a non-operating investment for
approximately $7.2 million and recorded a pre-tax gain of approximately $3.2
million. In anticipation of making lump sum plan distributions in
early 2009, we liquidated our investments in marketable securities in the SERP
trust and recognized a $4.5 million pre-tax gain in the second quarter of
2008. In first quarter 2008, we sold a non-operating investment for
approximately $4.2 million and recorded a pre-tax gain of approximately $4.1
million.
119
In the
third quarter of 2007, we recorded a pre-tax gain of approximately $10.4 million
related to the sale of our interest in a real estate partnership. In
November 2007, upon final distribution of all funds related to the dissolution
of the Rural Telephone Bank in 2006, we received a supplemental cash payment of
$5.2 million and recorded a pre-tax gain of such amount.
Such
gains are included in “Other income (expense)” on our Consolidated Statements of
Income.
(17) SUPPLEMENTAL
CASH FLOW AND OTHER DISCLOSURES
The
amount of interest actually paid, net of amounts capitalized of $3.5 million,
$2.4 million, and $1.3 million during 2009, 2008 and 2007, respectively, was
$391.8 million, $204.1 million, and $205.2 million during 2009, 2008 and 2007,
respectively. Income taxes paid were $258.9 million in 2009, $208.8
million in 2008, and $185.3 million in 2007. Income tax refunds totaled
$2.1 million in 2009, $4.6 million in 2008, and $1.1 million in
2007.
We have
consummated the acquisitions of various operations, along with certain other
assets, during the three years ended December 31, 2009. In connection
with these acquisitions, the following assets were acquired and liabilities
assumed:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Property,
plant and equipment, net
|
$ | 6,077,672 | - | 208,317 | ||||||||
|
Goodwill
|
6,236,084 | - | 579,780 | |||||||||
|
Long-term
debt, deferred credits and other liabilities
|
(7,508,066 | ) | - | (654,694 | ) | |||||||
|
Other
assets and liabilities, excluding
|
||||||||||||
|
cash
and cash equivalents
|
1,187,849 | - | 173,402 | |||||||||
|
Common
equity issued for acquisition
|
(6,070,445 | ) | - | - | ||||||||
|
(Increase)
decrease in cash due to acquisitions
|
$ | (76,906 | ) | - | 306,805 | |||||||
See Note
2 for additional information related to our acquisition of Embarq in 2009 and
Madison River in 2007.
We
collect various taxes from our customers and subsequently remit such funds to
governmental authorities. Substantially all of these taxes are
recorded through the balance sheet. We are required to contribute to
several universal service fund programs and generally include a surcharge amount
on our customers’ bills which is designed to recover our contribution
costs. Such amounts are reflected on a gross basis in our statement
of income (included in both operating revenues and expenses) and aggregated
approximately $84 million for 2009, $42 million for 2008 and $41 million for
2007.
120
(18) FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
following table presents the carrying amounts and estimated fair values of
certain of our financial instruments at December 31, 2009 and 2008.
|
Carrying
|
Fair
|
|||||||
|
Amount
|
value
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
December
31, 2009
|
||||||||
|
Financial
assets
|
||||||||
|
Other
|
$ | 111,809 | 111,809 | (2) | ||||
|
Financial
liabilities
|
||||||||
|
Long-term debt (including current maturities)
|
$ | 7,753,718 | 8,408,943 | (1) | ||||
|
Other
|
$ | 182,374 | 182,374 | (2) | ||||
|
December
31, 2008
|
||||||||
|
Financial
assets
|
||||||||
|
Other
|
$ | 129,981 | 129,981 | (2) | ||||
|
Financial
liabilities
|
||||||||
|
Long-term debt (including current maturities)
|
$ | 3,314,526 | 2,720,227 | (1) | ||||
|
Other
|
$ | 56,570 | 56,570 | (2) | ||||
|
(1)
|
Fair
value was estimated by discounting the scheduled payment streams to
present value based upon
|
|
|
rates
currently available to us for similar
debt.
|
(2) Fair value was estimated by us to approximate carrying value or
is based on current market information.
We
believe the carrying amount of cash and cash equivalents, accounts receivable,
short-term debt, accounts payable and accrued expenses approximates the fair
value due to the short maturity of these instruments, which have not been
reflected in the above table.
We are
subject to certain accounting standards that define fair value, establish a
framework for measuring fair value and expand the disclosures about fair value
measurements required or permitted under other accounting
pronouncements. The fair value accounting guidance establishes a
three-tier fair value hierarchy, which prioritizes the inputs used to measure
fair value. These tiers include: Level 1 (defined as observable
inputs such as quoted market prices in active markets); Level 2 (defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable); and Level 3 (defined as unobservable inputs in which
little or no market data exists).
As of
December 31, 2009, we held life insurance contracts with cash surrender value
that are required to be measured at fair value on a recurring
basis. The following table depicts those assets held and the related
tier designation pursuant to the accounting guidance related to fair value
disclosure.
121
|
Balance
|
||||||||||||||||
|
Description
|
Dec.
31, 2009
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Cash
surrender value of life insurance contracts
|
$ | 100,945 | 100,945 | - | - | |||||||||||
See Notes
10 and 11 for the tier designation related to our postretirement and pension
plan assets.
(19) BUSINESS
SEGMENTS
We are an
integrated communications company engaged primarily in providing an array of
communications services to our customers, including local exchange, long
distance, Internet access and broadband services. We strive to
maintain our customer relationships by, among other things, bundling our service
offerings to provide our customers with a complete offering of integrated
communications services. Because of the similar economic
characteristics of our operations, we have utilized the aggregation criteria
specified in the segment accounting guidance and concluded that we operate as
one reportable segment.
Our
operating revenues for our products and services include the following
components:
|
Year
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Voice
|
$ | 1,827,063 | 874,041 | 889,960 | ||||||||
|
Network
access
|
1,269,322 | 820,383 | 941,506 | |||||||||
|
Data
|
1,202,284 | 524,194 | 460,755 | |||||||||
|
Fiber
transport and CLEC
|
172,541 | 162,050 | 159,317 | |||||||||
|
Other
|
503,029 | 219,079 | 204,703 | |||||||||
|
Total
operating revenues
|
$ | 4,974,239 | 2,599,747 | 2,656,241 | ||||||||
Interexchange
carriers and other accounts receivable on the balance sheets are primarily
amounts due from various long distance carriers, principally AT&T, and
several large local exchange operating companies.
(20) COMMITMENTS
AND CONTINGENCIES
In Barbrasue Beattie and James
Sovis, on behalf of themselves and all others similarly situated, v. CenturyTel,
Inc., filed on October 28, 2002, in the United States District Court for
the Eastern District of Michigan (Case No. 02-10277), the plaintiffs alleged
that we unjustly and unreasonably billed customers for inside wire maintenance
services, and sought unspecified monetary damages and injunctive relief under
various legal theories on behalf of a purported class of over two million
customers in our telephone markets. On March 10, 2006, the Court
certified a class of plaintiffs and issued a ruling that the billing
descriptions we used for these services during an approximately 18-month period
between October 2000 and May 2002 were legally insufficient. In
February 2010, subject to court approval and agreement on other terms and
conditions, we settled this case in principle in an amount that exceeded our
previously established reserves by $8 million and such amount was reflected as
an expense in the fourth quarter of 2009.
122
Over 60 years ago, one of our
indirect subsidiaries, Centel Corporation, acquired entities that may have owned
or operated seven former plant sites that produced “manufactured gas” under a
process widely used through the mid-1900s. Centel has been a
subsidiary of Embarq since being spun-off in 2006 from Sprint Nextel, which
acquired Centel in 1993. None of these plant sites are currently
owned or operated by either Sprint Nextel, Embarq or their
subsidiaries. On three sites, Embarq and the current landowners are
working with the Environmental Protection Agency (“EPA”) pursuant to
administrative consent orders. Remediation expenditures pursuant to
the orders are not expected to be material. On five sites, including the three
sites where the EPA is involved, Centel has entered into agreements with other
potentially responsible parties to share remediation costs. Further, Sprint
Nextel has agreed to indemnify Embarq for most of any eventual liability arising
from all seven of these sites. Based upon current circumstances, we
do not expect this issue to have a material adverse impact on our results of
operations or financial condition.
In William Douglas Fulghum, et
al. v. Embarq Corporation, et al., filed on December 28, 2007 in the
United States District Court for the District of Kansas (Civil Action No.
07-CV-2602), a group of retirees filed a putative class action lawsuit in the
United States District Court for the District of Kansas, challenging the
decision to make certain modifications to Embarq’s retiree benefits programs
generally effective January 1, 2008. Defendants include Embarq, certain of
its benefit plans, its Employee Benefits Committee and the individual plan
administrator of certain of its benefits plans. Additional defendants include
Sprint Nextel and certain of its benefit plans. In addition, a complaint in
arbitration has been filed by 15 former Centel executives, similarly challenging
the benefits changes. A ruling in Embarq’s favor was recently entered
in the arbitration proceeding. Embarq and other defendants continue
to vigorously contest these claims and charges. Given that this
litigation is still in the initial stages of discovery, it is premature to
estimate the impact this lawsuit could have to our results of operation or
financial condition.
In Robert M. Garst, Sr. et al.
v. CenturyTel, Inc. et al., filed March 13, 2009 in the 142nd
Judicial District Court of Texas, Midland County (Case No. CV-46861), certain of
our former ten-vote shareholders challenged the effectiveness of the vote to
eliminate our time-phase voting structure. We believe we followed all
necessary steps to properly effect the amendments described above and are
defending the case accordingly.
In
December 2009, subsidiaries of CenturyTel filed two lawsuits against
subsidiaries of Sprint Nextel (“Sprint”) to recover approximately $26 million in
access charges for VoIP traffic owed under various interconnection agreements
and tariffs. One lawsuit, filed on behalf of all legacy Embarq
operating entities, is pending in federal court in Virginia, and the other,
filed on behalf of all legacy CenturyTel operating entities, is pending in
federal court in Louisiana. The lawsuits allege that Sprint has
breached contracts, violated tariffs, and violated the Federal Communications
Act by failing to pay these charges.
123
From time to time, we are involved in
other proceedings or investigations incidental to our business, including
administrative hearings of state public utility commissions relating primarily
to rate making, disputes with other communications companies and service
providers, actions relating to employee claims, occasional grievance hearings
before labor regulatory agencies and miscellaneous third party tort
actions. The outcome of these other proceedings is not
predictable. However, we do not expect that the ultimate resolution
of these other proceedings, after considering available insurance coverage, will
have a material adverse effect on our financial position, results of operations
or cash flows.
(21) SUBSEQUENT
EVENTS
In
February 2010, our board of directors approved an increase to our quarterly
dividend rate from $.70 per share to $.725 per share.
Our board
of directors also approved a $300 million contribution to the legacy Embarq
pension plan that we will make in early March 2010 using cash on hand and
borrowings under our credit facility.
CENTURYTEL,
INC.
Consolidated
Quarterly Income Statement Information
(Unaudited)
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
quarter
|
quarter
|
quarter
|
quarter
|
|||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||||||
|
2009
|
(unaudited)
|
|||||||||||||||
|
Operating
revenues
|
$ | 636,385 | 634,469 | 1,874,325 | 1,829,060 | |||||||||||
|
Operating
income
|
$ | 164,337 | 149,443 | 378,983 | 540,338 | |||||||||||
|
Net
income before extraordinary item
|
$ | 67,154 | 69,030 | 147,635 | 227,436 | |||||||||||
|
Basic
earnings per share before extraordinary item
|
$ | .67 | .68 | .49 | .76 | |||||||||||
|
Diluted
earnings per share before extraordinary item
|
$ | .67 | .68 | .49 | .76 | |||||||||||
|
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
Operating
revenues
|
$ | 648,614 | 658,106 | 650,073 | 642,954 | |||||||||||
|
Operating
income
|
$ | 183,493 | 180,690 | 180,727 | 176,442 | |||||||||||
|
Net
income attributable to CenturyTel
|
$ | 88,760 | 92,167 | 84,733 | 100,072 | |||||||||||
|
Basic
earnings per share
|
$ | .83 | .88 | .83 | 1.00 | |||||||||||
|
Diluted
earnings per share
|
$ | .82 | .88 | .83 | 1.00 | |||||||||||
|
|
||||||||||||||||
|
2007
|
||||||||||||||||
|
Operating
revenues
|
$ | 600,855 | 689,991 | 708,833 | 656,562 | |||||||||||
|
Operating
income
|
$ | 168,083 | 231,836 | 224,185 | 168,974 | |||||||||||
|
Net
income attributable to CenturyTel
|
$ | 77,870 | 112,265 | 113,202 | 115,033 | |||||||||||
|
Basic
earnings per share
|
$ | .70 | 1.03 | 1.03 | 1.05 | |||||||||||
|
Diluted
earnings per share
|
$ | .68 | .99 | 1.01 | 1.04 | |||||||||||
124
The
results of operations of Embarq are reflected subsequent to its July 1, 2009
acquisition date.
During
the third and fourth quarters of 2009, we incurred a significant amount of
one-time expenses related to our acquisition of Embarq. Such expenses
included (i) severance, retention and early retirement pension benefit costs due
to workforce reductions, (ii) transaction related costs, including legal and
investment banker costs, (iii) integration related costs associated with our
acquisition of Embarq, (iv) accelerated recognition of share-based compensation
expense due to change of control provisions and terminations of employment and
(v) settlement expenses related to certain executive retirement
plans. Such expenses aggregated approximately $195.5 million
(pre-tax) in the third quarter of 2009 and approximately $37.6 million (pre-tax)
in the fourth quarter of 2009.
During
the fourth quarter of 2009, we recognized a pre-tax charge of approximately
$60.8 million due primarily to the premiums paid in connection with certain debt
extinguishments consummated in October 2009.
In the
first quarter of 2008, we recognized a $4.1 million pre-tax gain upon the sale
of a non-operating investment. In the second quarter of 2008, we
recognized an $8.2 million curtailment loss in connection with amending our
SERP. We also recognized a $4.5 million pre-tax gain upon liquidation
of our investments in marketable securities in the SERP trust in the second
quarter of 2008. In the third quarter of 2008, we recorded a one-time
pre-tax gain of approximately $3.2 million related to the sale of a
non-operating investment. In the fourth quarter of 2008, we
recognized (i) a net benefit of approximately $12.8 million after-tax related to
the recognition of previously unrecognized tax benefits, (ii) a pre-tax benefit
of approximately $10.0 million related to the recognition of previously accrued
transaction and other contingencies and (iii) a $5.0 million charge associated
with costs associated with our then pending acquisition of Embarq.
In
the third quarter of 2007, we recorded a one-time pre-tax gain of approximately
$10.4 million related to the sale of our interest in a real estate
partnership. The results of operations of the Madison River
properties are reflected in the above table subsequent to the April 30, 2007
acquisition date. In second quarter 2007, we recorded $49 million of
revenues upon the settlement of a dispute with a carrier. In third
quarter 2007, we recognized $42.2 million of revenues upon the expiration of a
regulatory monitoring period. In fourth quarter 2007, we recognized a
net benefit of approximately $32.7 million after-tax related to the release of
previously unrecognized tax benefits. In fourth quarter 2007, we
recorded a pre-tax charge of approximately $16.6 million related to the
impairment of certain of our CLEC assets.
|
Item
9.
|
Changes
in and Disagreements With Accountants on
Accounting
|
|
|
and
Financial Disclosure
|
None.
125
Item
9A. Controls
and Procedures
Evaluation of Disclosure Controls
and Procedures. We maintain disclosure controls and procedures
designed to provide reasonable assurances that information required to be
disclosed by us in the reports we file under the Securities Exchange Act of 1934
is timely recorded, processed, summarized and reported as
required. Our Chief Executive Officer, Glen F. Post, III, and our
Chief Financial Officer, R. Stewart Ewing, Jr., have evaluated our disclosure
controls and procedures as of December 31, 2009. Based on the
evaluation, Messrs. Post and Ewing concluded that our disclosure controls and
procedures have been effective in providing reasonable assurance that they have
been timely alerted of material information required to be filed in this annual
report. On July 1, 2009, we completed the acquisition of
Embarq. We have extended our internal control oversight and
monitoring processes to include Embarq’s operations. Except for the
extension of such processes to the Embarq operations, we did not make any change
to our internal control over financial reporting that materially affected, or
that we believe is reasonably likely to materially affect, our internal control
over financial reporting. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events and
contingencies, and there can be no assurance that any design will succeed in
achieving its stated goals. Because of inherent limitations in any
control system, misstatements due to error or fraud could occur and not be
detected.
Reports on Internal Control Over
Financial Reporting. We incorporate by reference into this
Item 9A the reports appearing at the forefront of Item 8, “Financial Statements
and Supplementary Data”.
Item
9B. Other
Information
Not
applicable.
PART
III
Item
10. Directors,
Executive Officers and Corporate Governance
The name,
age and office(s) held by each of our executive officers are shown
below. Each of the executive officers listed below serves at the
pleasure of the Board of Directors.
|
Name
|
Age
|
Office(s) held with
CenturyTel
|
|
Glen
F. Post, III
|
57
|
Chief
Executive Officer and President
|
|
Thomas
A. Gerke
|
53
|
Executive
Vice Chairman of the Board,
Regulatory and Governmental Affairs and Human
Resources
|
|
Karen
A. Puckett
|
49
|
Executive
Vice President and Chief
Operating Officer
|
|
R.
Stewart Ewing, Jr.
|
58
|
Executive
Vice President and Chief Financial Officer
|
|
|
||
|
Stacey
W. Goff
|
44
|
Executive
Vice President, General Counsel and Secretary
|
|
|
||
|
William
E. Cheek
|
54
|
President
– Wholesale Operations
|
|
David
D. Cole
|
52
|
Senior
Vice President – Operations Support
|
|
|
||
|
Dennis
G. Huber
|
49
|
Executive
Vice President, Network and Information
Technology
|
126
With the
exception of Mr. Gerke, Mr. Cheek and Mr. Huber, each of our executive officers
has served as an officer of CenturyTel and one or more of its subsidiaries in
varying capacities for more than the past five years.
Prior
to CenturyTel’s acquisition of Embarq, Mr. Gerke previously served as President
and Chief Executive Officer of Embarq since March 2008, after serving the same
role in an interim capacity since December 2007. He held the position
of General Counsel—Law and External Affairs from May 2006 until December 2007
and from January 2007 to December 2007, had additional responsibility for
Embarq’s Wholesale Markets business unit. Mr. Gerke served as General
Counsel—Law and External Affairs at Sprint Nextel’s local telecommunications
division from August 2005 until May 2006. He served as Executive Vice
President—General Counsel and External Affairs of Sprint Corporation (“Sprint”)
from May 2003 until August 2005.
Prior to
CenturyTel’s acquisition of Embarq, Mr. Cheek previously served as Embarq’s
President - Wholesale Markets since May 2006. He served in this role
at Sprint Nextel’s local telecommunications division from August 2005 until May
2006. He served as Assistant Vice President—Strategic Sales and Account
Management in Sprint Business Solutions from January 2004 until July
2005.
Prior to
CenturyTel’s acquisition of Embarq, Mr. Huber previously served as Embarq’s
Chief Technology Officer and Senior Vice President since July 2008. He served as
Senior Vice President - Corporate Strategy and Development from December
2007 through June 2008. Mr. Huber served as Senior Vice President of
Product Development from October 2006 until December 2007. Before that, he
served as Senior Vice President of Wireless Solutions from August 2006 until
October 2006. From January 2003 to August 2005 he served as President of Sprint
North Supply Company, a Sprint subsidiary that procured and distributed
materials to the communications industry.
The
balance of the information required by Item 10 is incorporated by reference to
our definitive proxy statement relating to our 2010 annual meeting of
stockholders (the "Proxy Statement"), which Proxy Statement will be filed
pursuant to Regulation 14A within the first 120 days of 2010.
127
Item
11. Executive
Compensation
The
information required by Item 11 is incorporated by reference to the Proxy
Statement.
Item
12. Security
Ownership of Certain Beneficial Owners and Management
The
information required by Item 12 is incorporated by reference to the Proxy
Statement.
Item
13. Certain
Relationships and Related Transactions
The
information required by Item 13 is incorporated by reference to the Proxy
Statement.
Item
14. Principal
Accountant Fees and Services
The
information required by Item 14 is incorporated by reference to the Proxy
Statement.
128
PART
IV
Item
15. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K
(a). Documents
filed as a part of this report
|
|
(1)
|
The
following Consolidated Financial Statements are included in Part II, Item
8:
|
|
|
Report
of Management, including its assessment of the effectiveness of its
internal control over financial
reporting
|
|
|
Reports
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements, Financial Statement Schedule and Effectiveness of the
Company’s Internal Control over Financial
Reporting
|
|
|
Consolidated
Statements of Income for the years ended December 31, 2009, 2008 and
2007
|
|
|
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2009,
2008 and 2007
|
|
|
Consolidated
Balance Sheets - December 31, 2009 and
2008
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007
|
|
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2009,
2008 and 2007
|
|
|
Notes
to Consolidated Financial
Statements
|
|
|
Consolidated
Quarterly Income Statement Information
(unaudited)
|
|
|
(2)
|
The
attached Schedule II, Valuation and Qualifying Accounts, is the only
applicable schedule that we are required to
file.
|
|
(3)
|
Exhibits:
|
|
2.1
|
Agreement
and Plan of Merger, dated as of October 26, 2008, among CenturyTel, Inc.,
Embarq Corporation and Cajun Acquisition Company (incorporated by
reference to Exhibit 99.1 of the Current Report on Form 8-K filed by
CenturyTel, Inc. (File No. 001-07784) with the Securities and Exchange
Commission on October 30, 2008).
|
|
3.1
|
Amended
and Restated Articles of Incorporation of CenturyTel, Inc., dated as of
July 1, 2009 (incorporated by reference to Exhibit 3.1 of Amendment No. 3
to the Registration Statement on Form 8-A filed by CenturyTel, Inc. (File
No. 001-07784) with the Securities and Exchange Commission on July 1,
2009).
|
|
3.2
|
Bylaws
of CenturyTel, Inc., as amended and restated through July 1, 2009
(incorporated by reference to Exhibit 3.2 of Amendment No. 3 to the
Registration Statement on Form 8-A filed by CenturyTel, Inc. (File No.
001-07784) with the Securities and Exchange Commission on July 1,
2009).
|
|
3.3*
|
Corporate
Governance Guidelines of CenturyTel, Inc., as amended through February 23,
2010.
|
|
3.4*
|
Charters
of Committees of Board of Directors
|
|
|
(a)
|
Charter
of the Audit Committee of the Board of Directors of CenturyTel, Inc., as
amended through November 17, 2009.
|
|
|
(b)
|
Charter
of the Compensation Committee of the Board of Directors of CenturyTel,
Inc., as amended through February 23,
2010.
|
|
|
(c)
|
Charter
of the Nominating and Corporate Governance Committee of the Board of
Directors of CenturyTel, Inc., as amended through November 17,
2009.
|
|
|
(d)
|
Charter
of the Risk Evaluation Committee of the Board of Directors of CenturyTel,
Inc., as amended through February 23,
2010.
|
|
4.1
|
Form
of common stock certificate (incorporated by reference to Exhibit 4.3 of
our Annual Report on Form 10-K for the year ended December 31,
2000).
|
|
4.2
|
$750
Million Five-Year Revolving Credit Facility, dated December 14, 2006,
between CenturyTel, Inc. and the lenders named therein (incorporated by
reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q filed by
CenturyTel, Inc. for the period ended June 30,
2009).
|
4.3 Indebtedness
of Embarq Corporation.
|
|
a.
|
Indenture,
dated as of May 17, 2006, by and between Embarq Corporation and J.P.
Morgan Trust Company, National Association, a national banking
association, as trustee (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed by Embarq Corporation (File No.
001-32732) with the Securities and Exchange Commission on May 18,
2006).
|
|
|
b.
|
6.738%
Global Note due 2013 of Embarq Corporation (incorporated by reference to
Exhibit 4.2 to the Annual Report on Form 10-K for the year ended December
31, 2006 filed by Embarq Corporation (File No. 001-32372) with the
Securities and Exchange Commission on March 9,
2007).
|
|
|
c.
|
7.082%
Global Note due 2016 of Embarq Corporation (incorporated by reference to
Exhibit 4.3 to the Annual Report on Form 10-K for the year ended December
31, 2006 filed by Embarq Corporation (File No. 001-32372) with the
Securities and Exchange Commission on March 9,
2007).
|
130
|
|
d.
|
7.995%
Global Note due 2036 of Embarq Corporation (incorporated by reference to
Exhibit 4.4 to the Annual Report on Form 10-K for the year ended December
31, 2006 filed by Embarq Corporation (File No. 001-32372) with the
Securities and Exchange Commission on March 9,
2007).
|
|
|
e.
|
Credit
Agreement, dated May 10, 2006, by and among Embarq Corporation (as
borrower), Citibank, N.A. (as administrative agent), and the other parties
named therein (incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K filed by Embarq Corporation (File No. 001-32372) with
the Securities and Exchange Commission on May 11,
2006).
|
|
|
f.
|
Amendment
No. 1, dated January 23, 2009, to Credit Agreement, dated May 10, 2006, by
and among Embarq Corporation, Citibank, N.A. (as administrative agent),
and the other parties named therein (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed by Embarq Corporation (File
No. 001-32372) with the Securities and Exchange Commission on January 23,
2009).
|
|
4.4
|
Instruments
relating to CenturyTel’s public senior
debt.
|
|
|
a.
|
Indenture
dated as of March 31, 1994 between CenturyTel and Regions Bank (formerly
First American Bank & Trust of Louisiana), as Trustee (incorporated by
reference to Exhibit 4.1 of our Registration Statement on Form S-3,
Registration No. 33-52915).
|
|
|
b.
|
Form
of CenturyTel’s 7.2% Senior Notes, Series D, due 2025 (incorporated by
reference to Exhibit 4.27 to our Annual Report on Form 10-K for the year
ended December 31, 1995).
|
|
|
c.
|
Form
of CenturyTel’s 6.875% Debentures, Series G, due 2028, (incorporated by
reference to Exhibit 4.9 to our Annual Report on Form 10-K for the year
ended December 31, 1997).
|
|
|
d.
|
Form
of 8.375% Senior Notes, Series H, Due 2010, issued October 19, 2000
(incorporated by reference to Exhibit 4.2 of our Quarterly Report on Form
10-Q for the quarter ended September 30,
2000).
|
|
|
e.
|
Form
of CenturyTel’s 7.875% Senior Notes, Series L, due 2012 (incorporated by
reference to Exhibit 4.2 of our Registration Statement on Form S-4, File
No. 333-100480).
|
|
|
f.
|
Third
Supplemental Indenture dated as of February 14, 2005 between CenturyTel
and Regions Bank, as Trustee, designating and outlining the terms and
conditions of CenturyTel’s 5% Senior Notes, Series M, due 2015
(incorporated by reference to Exhibit 4.1 of our Current Report on Form
8-K dated February 15, 2005).
|
|
|
g.
|
Form
of 5% Senior Notes, Series M, due 2015 (included in Exhibit
4.4(f)).
|
|
|
h.
|
Fourth
Supplemental Indenture dated as of March 26, 2007 between CenturyTel and
Regions Bank, as Trustee, designating and outlining the terms and
conditions of CenturyTel’s 6.0% Senior Notes, Series N, due 2017 and 5.5%
Senior Notes, Series O, due 2013 (incorporated by reference to Exhibit 4.1
of our Current Report on Form 8-K dated March 29,
2007).
|
|
|
i.
|
Form
of 6.0% Senior Notes, Series N, due 2017 and 5.5% Senior Notes, Series O,
due 2013 (included in Exhibit
4.4(h)).
|
|
|
j.
|
Fifth
Supplemental Indenture dated as of September 21, 2009 between CenturyTel
and Regions Bank, as Trustee, designating and outlining the terms and
conditions of CenturyTel’s 7.60% Senior Notes, Series P, due 2039 and
6.15% Senior Notes, Series Q, due 2019 (incorporated by reference to
Exhibit 4.1 of our Current Report on Form 8-K dated September 21,
2009).
|
|
|
k.
|
Form
of 7.60% Senior Notes, Series P, due 2019 and 6.15% Senior Notes, Series
Q, due 2019 (included in Exhibit
4.4(j)).
|
131
|
10.1**
|
Qualified
Employee Benefit Plans of CenturyTel, Inc. (excluding several narrow-based
qualified plans that cover union employees or other limited groups of
employees).
|
|
|
a.
|
CenturyTel
Dollars & Sense 401(k) Plan and Trust, as amended and restated through
December 31, 2006 (incorporated by reference to Exhibit 10.1(a) of the
Annual Report on Form 10-K for the year ended December 31, 2006 filed by
CenturyTel, Inc. (File No. 001-07784) with the Securities and Exchange
Commission on March 1, 2007), as amended by the First Amendment and the
Second Amendment thereto, each dated December 31, 2007 (incorporated by
reference to Exhibit 10.1(a) of the Annual Report on Form 10-K for the
year ended December 31, 2007 filed by CenturyTel, Inc. (File No.
001-07784) with the Securities and Exchange Commission on February 29,
2008), as amended by the Third Amendment thereto dated November 20, 2008
(incorporated by reference to Exhibit 10.1(a) to the Annual Report on Form
10-K for the year ended December 31, 2008 filed by CenturyTel, Inc. (File
No. 001-07784) with the Securities and Exchange Commission on February 27,
2009), as amended by the Fourth Amendment thereto dated June 30, 2009
(incorporated by reference to Exhibit 10.1(a) to the Quarterly Report on
Form 10-Q filed by CenturyTel, Inc. for the period ended June 30, 2009),
as amended by the Fifth Amendment thereto dated September 15, 2009
(included herein), as amended by the Sixth Amendment thereto, dated
December 30, 2009 (included
herein).
|
|
|
b.
|
CenturyTel
Union 401(k) Plan and Trust, as amended and restated through December 31,
2006 (incorporated by reference to Exhibit 10.1(b) of the Annual Report on
Form 10-K for the year ended December 31, 2006 filed by CenturyTel, Inc.
(File No. 001-07784) with the Securities and Exchange Commission on March
1, 2007), as amended by the First Amendment thereto dated May 29, 2007
(incorporated by reference to Exhibit 10.1(b) of the Quarterly Report on
Form 10-Q filed by CenturyTel, Inc. (File No. 001-07784) with the
Securities and Exchange Commission on May 7, 2008), as amended by the
Second Amendment thereto dated December 31, 2007 (incorporated by
reference to Exhibit 10.1(b) of the Annual Report on Form 10-K for the
year ended December 31, 2007 filed by CenturyTel, Inc. (File No.
001-07784) with the Securities and Exchange Commission on February 29,
2008), as amended by the Third Amendment thereto dated November 20, 2008
(incorporated by reference to the Annual Report on Form 10-K for the year
ended December 31, 2008 filed by CenturyTel, Inc. (File No. 001-07784)
with the Securities and Exchange Commission on February 27, 2009), as
amended by the Fourth Amendment thereto dated June 30, 2009 (incorporated
by reference to Exhibit 10.1(b) to the Quarterly Report on Form 10-Q filed
by CenturyTel, Inc. for the period ended June 30, 2009), as amended by the
Fifth Amendment thereto dated September 15, 2009 (included herein), as
amended by the Sixth Amendment thereto, dated December 30, 2009 (included
herein).
|
|
|
c.
|
CenturyTel
Retirement Plan, as amended and restated through December 31, 2006
(incorporated by reference to Exhibit 10.1(c) of the Annual Report on Form
10-K for the year ended December 31, 2006 filed by CenturyTel, Inc. (File
No. 001-07784) with the Securities and Exchange Commission on March 1,
2007), as amended by Amendment No. 1 thereto dated April 2, 2007
(incorporated by reference to Exhibit 10.1(c) of the Quarterly Report on
Form 10-Q filed by CenturyTel, Inc. (File No. 001-07784) with the
Securities and Exchange Commission on May 7, 2008), as amended by
Amendment No. 2 thereto dated as of December 31, 2007 (incorporated by
reference to Exhibit 10.1(c) of the Annual Report on Form 10-K for the
year ended December 31, 2007 filed by CenturyTel, Inc. (File No.
001-07784) with the Securities and Exchange Commission on February 29,
2008), as amended by Amendment No. 3 thereto dated October 24, 2008
(incorporated by reference to the Annual Report on Form 10-K for the year
ended December 31, 2008 filed by CenturyTel, Inc. (File No. 001-07784)
with the Securities and Exchange Commission on February 27, 2009), as
amended by Amendment No. 4 dated June 30, 2009 (incorporated by reference
to Exhibit 10.1(c) to the Quarterly Report on Form 10-Q filed by
CenturyTel, Inc. for the period ended June 30, 2009), as amended by
Amendment No. 5 thereto dated September 15, 2009 (included herein), as
amended by Amendment No. 6 thereto, dated December 30, 2009 (included
herein).
|
132
|
10.2**
|
Stock-based
Incentive Plans and Agreements of CenturyTel,
Inc.
|
|
|
a.
|
Amended
and Restated 1983 Restricted Stock Plan, as amended and restated through
February 23, 2010, included herein.
|
|
|
b.
|
1995
Incentive Compensation Plan approved by CenturyTel’s shareholders on May
11, 1995 (incorporated by reference to Exhibit 4.4 to Registration No.
33-60061) and amendment thereto dated November 21, 1996 (incorporated by
Reference to Exhibit 10.1 (l) of our Annual Report on Form 10-K for the
year ended December 31, 1996), and amendment thereto dated February 25,
1997 (incorporated by reference to Exhibit 10.1 of our Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997) and amendment thereto
dated May 29, 2003 (incorporated by reference to Exhibit 10.1 of our
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
|
|
|
(i)
|
Form
of Stock Option Agreement, pursuant to 1995 Incentive Compensation Plan
and dated as of February 21, 2000, entered into by CenturyTel and its
officers (incorporated by reference to Exhibit 10.1 (t) of our Annual
Report on Form 10-K for the year ended December 31,
1999).
|
|
|
c.
|
Amended
and Restated 2000 Incentive Compensation Plan, as amended through May 23,
2000 (incorporated by reference to Exhibit 10.2 of our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000) and amendment thereto dated
May 29, 2003 (incorporated by reference to Exhibit 10.2 of our Quarterly
Report on Form 10-Q for the quarter ended June 30,
2003).
|
|
|
(i)
|
Form
of Stock Option Agreement, pursuant to the 2000 Incentive Compensation
Plan and dated as of May 21, 2001, entered into by CenturyTel and its
officers (incorporated by reference to Exhibit 10.2(e) of our Annual
Report on Form 10-K for the year ended December 31,
2001).
|
|
|
(ii)
|
Form
of Stock Option Agreement, pursuant to the 2000 Incentive Compensation
Plan and dated as of February 25, 2002, entered into by CenturyTel and its
officers (incorporated by reference to Exhibit 10.2(d)(ii) of our Annual
Report on Form 10-K for the year ended December 31,
2002).
|
|
|
d.
|
Amended
and Restated 2002 Directors Stock Option Plan, dated as of February 25,
2004 (incorporated by reference to Exhibit 10.2(e) of our Annual Report on
Form 10-K for the year ended December 31, 2003) and amendment thereto
dated October 24, 2008 (incorporated by reference to Exhibit 10.2(d) of
our Annual Report on Form 10-K for the year ended December 31,
2008).
|
|
|
(i)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into by
CenturyTel in connection with options granted to the outside directors as
of May 10, 2002 (incorporated by reference to Exhibit 10.2 of Registrant’s
Quarterly Report on Form 10-Q for the period ended September 30,
2002).
|
|
|
(ii)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into by
CenturyTel in connection with options granted to the outside directors as
of May 9, 2003 (incorporated by reference to Exhibit 10.2(e)(ii) of our
Annual Report on Form 10-K for the year ended December 31,
2003).
|
|
|
(iii)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into by
CenturyTel in connection with options granted to the outside directors as
of May 7, 2004 (incorporated by reference to Exhibit 10.2(d)(iii) of our
Annual Report on Form 10-K for the year ended December 31,
2005).
|
|
|
e.
|
Amended
and Restated 2002 Management Incentive Compensation Plan, dated as of
February 25, 2004 (incorporated by reference to Exhibit 10.2(f) of our
Annual Report on Form 10-K for the year ended December 31, 2003) and
amendment thereto dated October 24, 2008 (incorporated by reference to
Exhibit 10.2(e) of our Annual Report on Form 10-K for the year ended
December 31, 2008).
|
133
|
|
(i)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into
between CenturyTel and certain of its officers and key employees at
various dates since May 9, 2002 (incorporated by reference to Exhibit 10.4
of our Quarterly Report on Form 10-Q for the period ended September 30,
2002).
|
|
|
(ii)
|
Form
of Stock Option Agreement, pursuant to foregoing plan and dated as of
February 24, 2003, entered into be CenturyTel and its officers
(incorporated by reference to Exhibit 10.2(f)(ii) of our Annual Report on
Form 10-K for the year ended December 31,
2002).
|
|
|
(iii)
|
Form
of Stock Option Agreement, pursuant to foregoing plan and dated as of
February 25, 2004, entered into be CenturyTel and its officers
(incorporated by reference to Exhibit 10.2(f)(iii) of our Annual Report on
Form 10-K for the year ended December 31,
2003).
|
|
|
(iv)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 24, 2003, entered into by CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.1 of our Quarterly
Report on Form 10-Q for the period ended March 31,
2003).
|
|
|
(v)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 25, 2004, entered into by CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.2(f)(v) of our Quarterly
Report on Form 10-Q for the period ended March 31,
2004).
|
|
|
(vi)
|
Form
of Stock Option Agreement, pursuant to foregoing plan and dated as of
February 17, 2005, entered into be CenturyTel and its executive officers
(incorporated by reference to Exhibit 10.2(e)(v) of our Annual Report on
Form 10-K for the year ended December 31,
2004).
|
|
|
(vii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 17, 2005, entered into by CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.2(e)(vi) of our Annual
Report on Form 10-K for the period ended December 31,
2004).
|
|
|
f.
|
Amended
and Restated 2005 Directors Stock Plan, as amended and restated through
February 23, 2010, included herein.
|
|
|
(i)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and each of its outside directors as of May 13,
2005 (incorporated by reference to Exhibit 10.4 of our Current Report on
Form 8-K dated May 13, 2005).
|
|
|
(ii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and each of its outside directors as of May 12,
2006 (incorporated by reference to Exhibit 10.1 of our Quarterly Report on
Form 10-Q for the period ended June 30,
2006).
|
|
|
(iii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and each of its outside directors as of May 11,
2007 (incorporated by reference to Exhibit 10.2(f)(iii) of our Annual
Report on Form 10-K for the period ended December 31,
2008).
|
|
|
(iv)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and each of its outside directors as of May 9,
2008 (incorporated by reference to Exhibit 10.2(f)(iv) of our Annual
Report on Form 10-K for the period ended December 31,
2008).
|
134
|
|
(v)
|
Form
of Restricted Stock Agreement, pursuant to the 2005 Directors Stock Plan
and dated as of May 8, 2009, entered into between CenturyTel, Inc. and
each of its outside directors on such date who remain on the Board as of
the date hereof (incorporated by reference to Exhibit 10.2(b) to the
Quarterly Report on Form 10-Q filed by CenturyTel, Inc. for the period
ended June 30, 2009).
|
|
|
(vi)
|
Form
of Restricted Stock Agreement, pursuant to the 2005 Directors Stock Plan
and dated as of May 8, 2009, entered into between CenturyTel, Inc. and
each of its outside directors who retired on July 1, 2009 (incorporated by
reference to Exhibit 10.2(c) to the Quarterly Report on Form 10-Q filed by
CenturyTel, Inc. for the period ended June 30,
2009).
|
|
|
(vii)
|
Form
of Restricted Stock Agreement, pursuant to the 2005 Directors Stock Plan
and dated as of July 2, 2009, entered into between CenturyTel, Inc. and
each of its outside directors named to the Board on July 1, 2009
(incorporated by reference to Exhibit 10.1(d) to the Quarterly Report on
Form 10-Q filed by CenturyTel, Inc. for the period ended June 30,
2009).
|
|
|
(viii)
|
Restricted
Stock Agreement, pursuant to the 2005 Directors Stock Plan and dated as of
July 2, 2009, entered into between CenturyTel, Inc. and William A. Owens
in payment of Mr. Owens’ 2009 supplemental chairman’s fees (incorporated
by reference to Exhibit 10.2(e) to the Quarterly Report on Form 10-Q filed
by CenturyTel, Inc. for the period ended June 30,
2009).
|
|
|
g.
|
Amended
and Restated 2005 Management Incentive Compensation Plan, as amended and
restated through February 23, 2010, included
herein.
|
|
|
(i)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan, entered into
between CenturyTel and certain officers and key employees at various dates
since May 12, 2005 (incorporated by reference to Exhibit 10.2 of our
Quarterly Report on Form 10-Q for the period ended September 30,
2005).
|
|
|
(ii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan, entered
into between CenturyTel and certain officers and key employees at various
dates since May 12, 2005 (incorporated by reference to Exhibit 10.3 of our
Quarterly Report on Form 10-Q for the period ended September 30,
2005).
|
|
|
(iii)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan and dated as of
February 21, 2006, entered into between CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.2(g)(iii) of our Annual
Report on Form 10-K for the year ended December 31,
2005).
|
|
|
(iv)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 21, 2006, entered into between CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.2(g)(iv) of our Annual
Report on Form 10-K for the year ended December 31,
2005).
|
|
|
(v)
|
Form
of Stock Option Agreement, pursuant to the foregoing plan and dated as of
February 26, 2007, entered into between CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.1of our Quarterly Report
on Form 10-Q for the quarter ended March 31,
2007).
|
|
|
(vi)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 26, 2007, entered into between CenturyTel and its executive
officers (incorporated by reference to Exhibit 10.2 of our Quarterly
Report on Form 10-Q for the quarter ended March 31,
2007).
|
|
|
(vii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 21, 2008, entered into between CenturyTel and its executive
officers ((incorporated by reference to Exhibit 10.2 of our Quarterly
Report on Form 10-Q for the quarter ended March 31,
2008).
|
135
|
|
(viii)
|
Form
of Restricted Stock Agreement, pursuant to the foregoing plan and dated as
of February 26, 2009 (incorporated by reference to Exhibit 10.2(g) of our
Quartely Report on Form 10-Q for the quarter ended March 31,
2009).
|
|
|
h.
|
Amended
and Restated CenturyLink Legacy Embarq 2008 Equity Incentive Plan, as
amended and restated through February 23, 2010, included
herein.
|
|
10.3
|
Key
Employee Incentive Compensation Plan, dated January 1, 1984, as amended
and restated as of November 16, 1995 (incorporated by reference to Exhibit
10.1(f) of our Annual Report on Form 10-K for the year ended December 31,
1995) and amendment thereto dated November 21, 1996
(incorporated by reference to Exhibit 10.1(f) of our Annual Report on Form
10-K for the year ended December 31, 1996), amendment thereto dated
February 25, 1997 (incorporated by reference to Exhibit 10.2 of our
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997),
amendment thereto dated April 25, 2001 (incorporated by
reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001), amendment thereto dated April 17, 2000
(incorporated by reference to Exhibit 10.3(a) of our Annual Report on Form
10-K for the year ended December 31, 2001) and amendment thereto dated
February 27, 2007 (incorporated by reference to Exhibit 10.1 of our
Quarterly Report on Form 10-Q for the quarter ended June 30,
2007).
|
|
10.4
|
Supplemental
Dollars & Sense Plan, 2008 Restatement, effective January 1, 2008,
(incorporated by reference to Exhibit 10.3(c) of our Annual Report on Form
10-K for the year ended December 31, 2007) and amendment thereto dated
October 24, 2008 (incorporated by reference to Exhibit 10.3(c) of our
Annual Report on Form 10-K for the year ended December 31,
2008).
|
|
10.5
|
Supplemental
Defined Benefit Plan, 2008 Restatement, effective as of January 1, 2008,
(incorporated by reference to Exhibit 10.3(d) of our Annual Report on Form
10-K for the year ended December 31, 2007) and amendment thereto dated
October 24, 2008 (incorporated by reference to Exhibit 10.3(d) of our
Annual Report on Form 10-K for the year ended December 31,
2008).
|
|
10.6
|
Amended
and Restated Salary Continuation (Disability) Plan for Officers, dated
November 26, 1991 (incorporated by reference to Exhibit 10.16 of our
Annual Report on Form 10-K for the year ended December 31,
1991).
|
|
10.7
|
2005
Executive Officer Short-Term Incentive Program (incorporated by reference
to our 2005 Proxy Statement filed April 5,
2005).
|
|
10.8
|
Amended
and Restated CenturyTel 2001 Employee Stock Purchase Plan, dated as of
June 30, 2009 (incorporated by reference to Exhibit 10.3 to the Quarterly
Report on Form 10-Q filed by CenturyTel, Inc. for the period ended June
30, 2009).
|
|
10.9
|
Form
of Indemnification Agreement entered into by CenturyTel, Inc. and each of
its directors as of July 1, 2009 (incorporated by reference to Exhibit
99.3 of the Current Report on Form 8-K filed by CenturyTel, Inc. (File No.
001-07784) with the Securities and Exchange Commission on July 1,
2009).
|
|
10.10
|
Form
of Indemnification Agreement entered into by CenturyTel, Inc. and each of
its officers as of July 1, 2009 (incorporated by reference to Exhibit 10.5
to the Quarterly Report on Form 10-Q filed by CenturyTel, Inc. for the
period ended June 30, 2009).
|
|
10.11
|
Amended
and Restated Change of Control Agreement, effective January 1, 2008, by
and between Glen F. Post, III and CenturyTel (incorporated by reference to
Exhibit 10.4(a) of our Annual Report on Form 10-K for the year ended
December 31, 2007).
|
|
10.12
|
Form
of Amended and Restated Change of Control Agreement, effective January 1,
2008 by and between CenturyTel and each of its other executive officers
(incorporated by reference to Exhibit 10.4(b) of our Annual Report on Form
10-K for the year ended December 31,
2007).
|
136
|
10.13
|
Amended
and Restated CenturyTel, Inc. Bonus Life Insurance Plan for Executive
Officers, dated as of April 3, 2008 (incorporated by reference to Exhibit
10.4 of our Quarterly Report on Form 10-Q for the quarter ended March 31,
2008).
|
|
10.14
|
Certain
Material Agreements and Plans of Embarq
Corporation.
|
|
|
a.
|
Employment
Agreement, dated as of March 3, 2008, between Thomas A. Gerke and Embarq
Corporation (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed by Embarq Corporation (File No. 001-32372) with
the Securities and Exchange Commission on March 4,
2008).
|
|
|
b.
|
Amendment
to the Employment Agreement among Thomas A. Gerke, Embarq Corporation and
CenturyTel, Inc. dated October 26, 2008 (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed by Embarq Corporation
(File No. 001-32372) with the Securities and Exchange Commission on
October 26, 2008).
|
|
|
c.
|
Amendment
2008-2 to the Employment Agreement between Embarq Corporation and Thomas
A. Gerke, dated December 20, 2008 (incorporated by reference to Exhibit
10.9 to the Annual Report on Form 10-K for the year ended December 31,
2008 filed by Embarq Corporation (File No. 001-32372) on February 13,
2009).
|
|
|
d.
|
Agreement
Regarding Special Compensation and Post Employment Restrictive Covenants,
dated December 12, 1995, by and between Sprint Corporation and Dennis G.
Huber (incorporated by reference to Exhibit 10.4 to the Quarterly Report
on Form 10-Q filed by Embarq Corporation (File No. 001-32372) with the
Securities and Exchange Commission on October 30,
2008).
|
|
|
e.
|
Amendment
2008-1 to the Employment Agreement between Embarq Corporation and Dennis
G. Huber, dated December 22, 2008 (incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-K for the year ended December 31,
2008 filed by Embarq Corporation (File No. 001-32372) on February 13,
2009).
|
|
|
f.
|
Embarq
Corporation 2006 Equity Incentive Plan, as amended and restated
(incorporated by reference to Exhibit 99.1 to the Registration Statement
on Form S-8 filed by CenturyTel, Inc. (File No. 001-07784) with the
Securities and Exchange Commission on July 1,
2009).
|
|
|
g.
|
Form
of 2007 Award Agreement for executive officers of Embarq Corporation
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed by Embarq Corporation (File No. 001-32372) with the Securities
and Exchange Commission on February 27,
2007).
|
|
|
h.
|
Form
of 2008 Restricted Stock Unit Award Agreement (incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K filed by Embarq
Corporation (File No. 001-32372) with the Securities and Exchange
Commission on March 4, 2008).
|
|
|
i.
|
Form
of 2009 Restricted Stock Unit Award Agreement (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K filed by Embarq
Corporation (File No. 001-32732) with the Securities and Exchange
Commission on March 5, 2009).
|
|
|
j.
|
Form
of Stock Option Award Agreement (incorporated by reference to Exhibit 10.3
to the Current Report on Form 8-K filed by Embarq Corporation (File No.
001-32372) with the Securities and Exchange Commission on March 4,
2008).
|
|
|
k.
|
Amendment
to Outstanding RSUs granted in 2007 and 2008 under the Embarq Corporation
2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.16 to
the Annual Report on Form 10-K for the year ended December 31, 2008 filed
by Embarq Corporation (File No. 001-32372) on February 13,
2009).
|
|
|
l.
|
Form
of 2006 Award Agreement between Embarq Corporation and Richard A. Gephardt
(incorporated by reference to Exhibit 10.3 to the Current Report on Form
8-K filed by Embarq Corporation (File No. 001-32372) with the Securities
and Exchange Commission on August 1, 2006), as amended by the amendment
thereto dated June 26, 2009 (incorporated by reference to Exhibit 10.6 (m)
to the Quarterly Report on Form 10-Q filed by CenturyTel, Inc. for the
period ended June 30, 2009).
|
137
|
|
m.
|
Amended
and Restated Executive Severance Plan, including Form of Participation
Agreement entered into between Embarq Corporation and William E. Cheek
(incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form
10-Q filed by Embarq Corporation (File No. 001-32372) with the Securities
and Exchange Commission on October 30,
2008).
|
|
|
n.
|
Embarq
Supplemental Executive Retirement Plan, as amended and restated as of
January 1, 2009 (incorporated by reference to Exhibit 10.27 to the Annual
Report on Form 10-K for the year ended December 31, 2008 filed by Embarq
Corporation (File No. 001-32372) on February 13,
2009).
|
|
|
o.
|
Summary
of Embarq Corporation 2009 Short-Term Incentive Program (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by
Embarq Corporation (File No. 001-32732) with the Securities and Exchange
Commission on May 7, 2009).
|
|
12*
|
Ratio
of Earnings to Fixed Charges and Preferred Stock
Dividends.
|
|
21
|
Subsidiaries
of CenturyTel, Inc. (incorporated by reference to Exhibit 21 to the
Quarterly Report on Form 10-Q filed by CenturyTel, Inc. for the period
ended June 30, 2009).
|
|
23*
|
Independent
Registered Public Accounting Firm
Consent.
|
|
31.1*
|
Certification
of the Chief Executive Officer of CenturyTel, Inc. pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
31.2*
|
Certification
of the Chief Financial Officer of CenturyTel, Inc. pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
32*
|
Certification
of the Chief Executive Officer and Chief Financial Officer of CenturyTel,
Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
______________
|
*
|
Exhibit
filed herewith.
|
|
**
|
Portions
of Exhibits 10.1 and 10.2 filed herewith.
|
138
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
| CenturyTel, Inc. | |||
|
Date: March
1, 2010
|
By:
|
/s/ Glen F. Post, III
|
|
|
Glen
F. Post, III
|
|||
|
Chief
Executive Officer and President
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
|
Chief
Executive Officer,
|
|||
|
/s/ Glen F. Post, III
|
President
and Director
|
||
|
Glen
F. Post, III
|
March
1, 2010
|
||
|
/s/ William A. Owens
|
Chairman
of the Board
|
||
|
William
A. Owens
|
March
1, 2010
|
||
|
Executive
Vice President and
|
|||
|
/s/ R. Stewart Ewing, Jr.
|
Chief
Financial Officer
|
||
|
R.
Stewart Ewing, Jr.
|
March
1, 2010
|
||
|
/s/ Neil A. Sweasy
|
Vice
President and Controller
|
||
|
Neil
A. Sweasy
|
March
1, 2010
|
||
|
/s/ Virginia Boulet
|
Director
|
||
|
Virginia
Boulet
|
March
1, 2010
|
||
|
/s/ Peter C. Brown
|
Director
|
||
|
Peter
C. Brown
|
March
1, 2010
|
||
|
/s/ Richard A. Gephardt
|
Director
|
||
|
Richard
A. Gephardt
|
March
1, 2010
|
||
|
/s/ Thomas A. Gerke
|
Director
|
||
|
Thomas
A. Gerke
|
March
1, 2010
|
139
|
/s/ W. Bruce Hanks
|
Director
|
||
|
W.
Bruce Hanks
|
March
1, 2010
|
||
|
/s/ Gregory J. McCray
|
Director
|
||
|
Gregory
J. McCray
|
March
1, 2010
|
||
|
/s/ C. G. Melville, Jr.
|
Director
|
||
|
C.
G. Melville, Jr.
|
March
1, 2010
|
||
|
/s/ Fred R. Nichols
|
Director
|
||
|
Fred
R. Nichols
|
March
1, 2010
|
||
|
/s/ Harvey P. Perry
|
Director
|
||
|
Harvey
P. Perry
|
March
1, 2010
|
||
|
/s/ Stephanie M. Shern
|
Director
|
||
|
Stephanie
M. Shern
|
March
1, 2010
|
||
|
/s/ Laurie A. Siegel
|
Director
|
||
|
Laurie
A. Siegel
|
March
1, 2010
|
||
|
/s/ Joseph R. Zimmel
|
Director
|
||
|
Joseph
R. Zimmel
|
March
1, 2010
|
140
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
CENTURYTEL,
INC.
For the
years ended December 31, 2009, 2008 and 2007
|
Additions
|
||||||||||||||||||||
|
Balance
at
|
charged
to
|
Deductions
|
Balance
|
|||||||||||||||||
|
beginning
|
costs
and
|
from
|
Other
|
at
end
|
||||||||||||||||
|
Description
|
of period
|
expenses
|
allowance
|
changes
|
of period
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Year
ended December 31, 2009
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 16,290 | 56,609 | (25,449 | ) (1) | - | 47,450 | |||||||||||||
|
Valuation
allowance for deferred tax assets
|
$ | 33,858 | 3,886 | (6,329 | ) | 10,118 | (2) | 41,533 | ||||||||||||
|
Year
ended December 31, 2008
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 20,361 | 9,866 | (13,524 | ) (1) | (413 | ) (2) | 16,290 | ||||||||||||
|
Valuation
allowance for deferred tax assets
|
$ | 30,907 | 1,603 | - | 1,348 | 33,858 | ||||||||||||||
|
Year
ended December 31, 2007
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 20,905 | 14,466 | (16,617 | ) (1) | 1,607 | (2) | 20,361 | ||||||||||||
|
Valuation
allowance for deferred tax assets
|
$ | 61,049 | 3,744 | (33,886 | ) | - | 30,907 | |||||||||||||
|
(1)
|
Customers’
accounts written-off, net of
recoveries.
|
|
(2)
|
Allowances
at the date of acquisition of purchased subsidiaries, net of allowances at
the date of disposition of subsidiaries sold.
|
141