file10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended September 30, 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)
Louisiana
|
|
72-0651161
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
100
CenturyLink Drive, Monroe, Louisiana 71203
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone number, including area code: (318) 388-9000
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes
[X] No
[ ]
Indicate by check mark 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 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 whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes [ ] No [X]
As of October 30, 2009, there were
297,525,166 shares of common stock outstanding.
CenturyTel,
Inc.
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.
TABLE OF
CONTENTS
|
|
Page
No.
|
Part
I.
|
Financial
Information:
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Statements of Income--Three Months and Nine Months
|
|
|
Ended
September 30, 2009 and 2008
|
3
|
|
|
|
|
Consolidated
Statements of Comprehensive Income--
|
|
|
Three
Months and Nine Months Ended September 30, 2009 and 2008
|
4
|
|
|
|
|
Consolidated
Balance Sheets--September 30, 2009 and
|
|
|
December
31, 2008
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows--
|
|
|
Nine
Months Ended September 30, 2009 and 2008
|
6
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity--
|
|
|
Nine
Months Ended September 30, 2009 and 2008
|
7
|
|
|
|
|
Notes
to Consolidated Financial Statements*
|
8-17
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial
|
|
|
Condition
and Results of Operations
|
18-27
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
28
|
|
|
|
Item
4.
|
Controls
and Procedures
|
29
|
|
|
|
Part
II.
|
Other
Information:
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
30
|
|
|
|
Item
1A.
|
Risk
Factors
|
30-39
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
39
|
|
|
|
Item
6.
|
Exhibits
|
40-44
|
|
|
|
Signature
|
|
45
|
* All
references to “Notes” in this quarterly report refer to these Notes to
Consolidated Financial Statements.
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
|
|
Three
months
|
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
|
ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING REVENUES
|
|
$ |
1,874,325 |
|
|
|
650,073 |
|
|
|
3,145,179 |
|
|
|
1,956,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and products (exclusive of depreciation and
amortization)
|
|
|
684,865 |
|
|
|
242,243 |
|
|
|
1,155,228 |
|
|
|
719,681 |
|
Selling,
general and administrative
|
|
|
448,275 |
|
|
|
98,751 |
|
|
|
678,862 |
|
|
|
297,212 |
|
Depreciation and
amortization
|
|
|
362,202 |
|
|
|
128,352 |
|
|
|
618,326 |
|
|
|
394,990 |
|
Total operating expenses
|
|
|
1,495,342 |
|
|
|
469,346 |
|
|
|
2,452,416 |
|
|
|
1,411,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
378,983 |
|
|
|
180,727 |
|
|
|
692,763 |
|
|
|
544,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(140,422 |
) |
|
|
(49,483 |
) |
|
|
(237,391 |
) |
|
|
(148,771 |
) |
Other income
(expense)
|
|
|
9,362 |
|
|
|
4,569 |
|
|
|
15,179 |
|
|
|
26,436 |
|
Total other income (expense)
|
|
|
(131,060 |
) |
|
|
(44,914 |
) |
|
|
(222,212 |
) |
|
|
(122,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX EXPENSE
|
|
|
247,923 |
|
|
|
135,813 |
|
|
|
470,551 |
|
|
|
422,575 |
|
Income tax expense
|
|
|
99,876 |
|
|
|
50,624 |
|
|
|
185,796 |
|
|
|
155,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE NONCONTROLLING INTERESTS AND EXTRAORDINARY
ITEM
|
|
|
148,047 |
|
|
|
85,189 |
|
|
|
284,755 |
|
|
|
266,659 |
|
Noncontrolling interests
|
|
|
(412 |
) |
|
|
(456 |
) |
|
|
(936 |
) |
|
|
(999 |
) |
NET
INCOME BEFORE EXTRAORDINARY ITEM
|
|
|
147,635 |
|
|
|
84,733 |
|
|
|
283,819 |
|
|
|
265,660 |
|
Extraordinary
item, net of income tax expense and noncontrolling interests (see Note
12)
|
|
|
133,213 |
|
|
|
- |
|
|
|
133,213 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME ATTRIBUTABLE TO CENTURYTEL, INC.
|
|
$ |
280,848 |
|
|
|
84,733 |
|
|
|
417,032 |
|
|
|
265,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item
|
|
$ |
.49 |
|
|
|
.83 |
|
|
|
1.70 |
|
|
|
2.54 |
|
Extraordinary item
|
|
$ |
.44 |
|
|
|
- |
|
|
|
.80 |
|
|
|
- |
|
Basic earnings per share
|
|
$ |
.94 |
|
|
|
.83 |
|
|
|
2.50 |
|
|
|
2.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item
|
|
$ |
.49 |
|
|
|
.83 |
|
|
|
1.70 |
|
|
|
2.53 |
|
Extraordinary item
|
|
$ |
.44 |
|
|
|
- |
|
|
|
.80 |
|
|
|
- |
|
Diluted earnings per share
|
|
$ |
.94 |
|
|
|
.83 |
|
|
|
2.50 |
|
|
|
2.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER COMMON SHARE
|
|
$ |
.70 |
|
|
|
1.3325 |
|
|
|
2.10 |
|
|
|
1.4675 |
|
AVERAGE BASIC SHARES
OUTSTANDING
|
|
|
298,133 |
|
|
|
100,402 |
|
|
|
165,558 |
|
|
|
103,396 |
|
AVERAGE DILUTED SHARES
OUTSTANDING
|
|
|
298,403 |
|
|
|
100,647 |
|
|
|
165,666 |
|
|
|
103,774 |
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
Three
months
|
|
|
Nine
months
|
|
|
|
ended September 30,
|
|
|
ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME BEFORE NONCONTROLLING INTERESTS
|
|
$ |
282,805 |
|
|
|
85,189 |
|
|
|
419,513 |
|
|
|
266,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME, NET OF TAX:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding loss, net of ($332) tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(533 |
) |
Reclassification adjustment for gain included in net income,
net of ($1,730) tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,776 |
) |
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for losses included in net income, net of $67,
$67, $200 and $200 tax
|
|
|
107 |
|
|
|
107 |
|
|
|
321 |
|
|
|
321 |
|
Defined benefit pension and postretirement plans, net of $1,673, $91,
$7,161 and ($662) tax
|
|
|
2,684 |
|
|
|
147 |
|
|
|
11,487 |
|
|
|
(1,062 |
) |
Net change in other comprehensive income (loss), net of tax |
|
|
2,791 |
|
|
|
254 |
|
|
|
11,808 |
|
|
|
(4,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
285,596 |
|
|
|
85,443 |
|
|
|
431,321 |
|
|
|
262,609 |
|
Comprehensive
income attributable to noncontrolling interests
|
|
|
(1,957 |
) |
|
|
(456 |
) |
|
|
(2,481 |
) |
|
|
(999 |
) |
COMPREHENSIVE
INCOME ATTRIBUTABLE TO CENTURYTEL, INC. |
|
$ |
283,639 |
|
|
|
84,987 |
|
|
|
428,840 |
|
|
|
261,610 |
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
531,189 |
|
|
|
243,327 |
|
|
Accounts
receivable, less allowance of $35,668 and $16,290
|
|
|
670,732 |
|
|
|
230,292 |
|
|
Materials
and supplies, at average cost
|
|
|
43,371 |
|
|
|
8,862 |
|
|
Deferred
income tax asset |
|
|
105,232 |
|
|
|
29,421 |
|
|
Other
|
|
|
107,734 |
|
|
|
43,505 |
|
|
Total
current assets |
|
|
1,458,258 |
|
|
|
555,407 |
|
|
|
|
|
|
|
|
|
|
|
NET
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
15,608,553 |
|
|
|
8,868,451 |
|
|
Accumulated
depreciation
|
|
|
(6,245,366 |
) |
|
|
(5,972,559 |
) |
|
Net
property, plant and equipment |
|
|
9,363,187 |
|
|
|
2,895,892 |
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
AND OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
10,033,994 |
|
|
|
4,015,674 |
|
|
Other
intangible assets
|
|
|
|
|
|
|
|
|
|
Customer
list |
|
|
1,143,922 |
|
|
|
146,283 |
|
|
Other
|
|
|
326,934 |
|
|
|
42,750 |
|
|
Other
assets
|
|
|
630,768 |
|
|
|
598,189 |
|
|
Total goodwill and other assets
|
|
|
12,135,618 |
|
|
|
4,802,896 |
|
TOTAL
ASSETS
|
|
$ |
22,957,063 |
|
|
|
8,254,195 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
769,482 |
|
|
|
20,407 |
|
|
Accounts
payable
|
|
|
331,695 |
|
|
|
135,086 |
|
|
Accrued
expenses and other liabilities
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
300,150 |
|
|
|
99,648 |
|
|
Income taxes
|
|
|
95,925 |
|
|
|
- |
|
|
Other taxes
|
|
|
156,316 |
|
|
|
44,137 |
|
|
Interest
|
|
|
210,425 |
|
|
|
75,769 |
|
|
Other
|
|
|
66,301 |
|
|
|
26,773 |
|
|
Advance
billings and customer deposits
|
|
|
218,983 |
|
|
|
56,570 |
|
|
Total current liabilities
|
|
|
2,149,277 |
|
|
|
458,390 |
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
7,454,515 |
|
|
|
3,294,119 |
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
CREDITS AND OTHER LIABILITIES
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
2,157,468 |
|
|
|
854,102 |
|
Benefit plan obligations |
|
|
1,514,092 |
|
|
|
348,140 |
|
Other deferred credits |
|
|
317,682 |
|
|
|
131,636 |
|
Total
deferred credits and other liabilities |
|
|
3,989,242 |
|
|
|
1,333,878 |
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
Common
stock, $1.00 par value, authorized 800,000,000 shares, issued
and outstanding 297,467,054 and 100,277,216
shares
|
|
|
297,467 |
|
|
|
100,277 |
|
|
Paid-in
capital
|
|
|
5,958,950 |
|
|
|
39,961 |
|
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(111,681 |
) |
|
|
(123,489 |
) |
|
Retained
earnings
|
|
|
3,212,328 |
|
|
|
3,146,255 |
|
|
Preferred
stock - non-redeemable
|
|
|
236 |
|
|
|
236 |
|
|
Noncontrolling
interests
|
|
|
6,729 |
|
|
|
4,568 |
|
|
Total
stockholders’ equity
|
|
|
9,364,029 |
|
|
|
3,167,808 |
|
TOTAL
LIABILITIES AND EQUITY
|
|
$ |
22,957,063 |
|
|
|
8,254,195 |
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
417,968 |
|
|
|
266,659 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
618,326 |
|
|
|
394,990 |
|
Extraordinary
item
|
|
|
(133,213 |
) |
|
|
- |
|
Gain
on asset disposition and liquidation of marketable
securities
|
|
|
- |
|
|
|
(12,452 |
) |
Deferred
income taxes
|
|
|
38,237 |
|
|
|
23,957 |
|
Share-based
compensation
|
|
|
39,618 |
|
|
|
11,879 |
|
Income
from unconsolidated cellular entity
|
|
|
(15,353 |
) |
|
|
(8,204 |
) |
Distributions
from unconsolidated cellular entity
|
|
|
14,137 |
|
|
|
15,960 |
|
Changes
in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,782 |
) |
|
|
8,302 |
|
Accounts
payable
|
|
|
(93,283 |
) |
|
|
(22,307 |
) |
Accrued
income and other taxes
|
|
|
36,734 |
|
|
|
(25,216 |
) |
Other
current assets and other current liabilities, net
|
|
|
147,874 |
|
|
|
(14,468 |
) |
Retirement
benefits
|
|
|
(100,300 |
) |
|
|
21,346 |
|
Excess
tax benefits from share-based compensation
|
|
|
(1,105 |
) |
|
|
(787 |
) |
Increase
in other noncurrent assets
|
|
|
(547 |
) |
|
|
6,108 |
|
Decrease
in other noncurrent liabilities
|
|
|
(12,494 |
) |
|
|
(4,977 |
) |
Other, net
|
|
|
7,944 |
|
|
|
6,443 |
|
Net
cash provided by operating activities |
|
|
961,761 |
|
|
|
667,233 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments
for property, plant and equipment
|
|
|
(417,127 |
) |
|
|
(185,004 |
) |
Cash
acquired from Embarq acquisition
|
|
|
76,906 |
|
|
|
- |
|
Purchase
of wireless spectrum
|
|
|
- |
|
|
|
(148,964 |
) |
Proceeds
from liquidation of marketable securities
|
|
|
- |
|
|
|
34,945 |
|
Proceeds
from sales of assets, net of cash sold
|
|
|
- |
|
|
|
15,809 |
|
Other, net
|
|
|
3,025 |
|
|
|
(3,567 |
) |
Net cash used in investing
activities |
|
|
(337,196 |
) |
|
|
(286,781 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments
of debt
|
|
|
(626,616 |
) |
|
|
(255,304 |
) |
Net
proceeds from issuance of long-term debt
|
|
|
644,423 |
|
|
|
563,115 |
|
Proceeds
from issuance of common stock
|
|
|
12,672 |
|
|
|
10,672 |
|
Repurchase
of common stock
|
|
|
(8,774 |
) |
|
|
(347,261 |
) |
Net
proceeds from settlement of hedges
|
|
|
- |
|
|
|
20,745 |
|
Cash
dividends
|
|
|
(350,959 |
) |
|
|
(150,149 |
) |
Excess
tax benefits from share-based compensation
|
|
|
1,105 |
|
|
|
787 |
|
Other, net
|
|
|
(8,554 |
) |
|
|
1,498 |
|
Net cash used in financing
activities
|
|
|
(336,703 |
) |
|
|
(155,897 |
) |
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
287,862 |
|
|
|
224,555 |
|
Cash
and cash equivalents at beginning of period
|
|
|
243,327 |
|
|
|
34,402 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
531,189 |
|
|
|
258,957 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$ |
126,706 |
|
|
|
172,116 |
|
Interest paid (net of
capitalized interest of $909 and $1,958)
|
|
$ |
158,964 |
|
|
|
151,906 |
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
COMMON
STOCK
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
100,277 |
|
|
|
108,492 |
|
Issuance of common stock to acquire Embarq Corporation
|
|
|
196,083 |
|
|
|
- |
|
Issuance of common stock through dividend reinvestment, incentive and
benefit plans
|
|
|
1,417 |
|
|
|
938 |
|
Repurchase of common stock
|
|
|
- |
|
|
|
(9,626 |
) |
Shares withheld to satisfy tax withholdings
|
|
|
(310 |
) |
|
|
(50 |
) |
Conversion of preferred stock into common stock
|
|
|
- |
|
|
|
367 |
|
Balance at end of period
|
|
|
297,467 |
|
|
|
100,121 |
|
|
|
|
|
|
|
|
|
|
PAID-IN
CAPITAL
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
39,961 |
|
|
|
91,147 |
|
Issuance of common stock to acquire Embarq Corporation, including portion
of share-based compensation awards assumed by CenturyTel
|
|
|
5,873,904 |
|
|
|
- |
|
Issuance
of common stock through dividend reinvestment, incentive and
benefit plans
|
|
|
11,255 |
|
|
|
9,734 |
|
Repurchase of common stock
|
|
|
- |
|
|
|
(91,408 |
) |
Shares withheld to satisfy tax withholdings
|
|
|
(8,464 |
) |
|
|
(1,664 |
) |
Conversion of preferred stock into common stock
|
|
|
- |
|
|
|
6,368 |
|
Excess tax benefits from share-based compensation
|
|
|
1,105 |
|
|
|
787 |
|
Share-based compensation
|
|
|
39,618 |
|
|
|
11,879 |
|
Other
|
|
|
1,571 |
|
|
|
(503 |
) |
Balance at end of period
|
|
|
5,958,950 |
|
|
|
26,340 |
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS, NET OF TAX
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(123,489 |
) |
|
|
(42,707 |
) |
Change in other comprehensive loss (net of reclassification adjustment),
net of tax
|
|
|
11,808 |
|
|
|
(4,050 |
) |
Balance at end of period
|
|
|
(111,681 |
) |
|
|
(46,757 |
) |
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
3,146,255 |
|
|
|
3,245,302 |
|
Net income attributable to CenturyTel, Inc.
|
|
|
417,032 |
|
|
|
265,660 |
|
Repurchase of common stock
|
|
|
- |
|
|
|
(244,513 |
) |
Cash dividends declared
|
|
|
|
|
|
|
|
|
Common stock - $2.10 and $1.4675 per share,
respectively
|
|
|
(350,950 |
) |
|
|
(149,972 |
) |
Preferred stock
|
|
|
(9 |
) |
|
|
(177 |
) |
Balance at end of period
|
|
|
3,212,328 |
|
|
|
3,116,300 |
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK - NON-REDEEMABLE
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
236 |
|
|
|
6,971 |
|
Conversion of preferred stock into common stock
|
|
|
- |
|
|
|
(6,735 |
) |
Balance at end of period
|
|
|
236 |
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
NONCONTROLLING
INTERESTS
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
4,568 |
|
|
|
6,605 |
|
Net income attributable to noncontrolling interests
|
|
|
936 |
|
|
|
999 |
|
Extraordinary gain attributable to noncontrolling
interests
|
|
|
1,545 |
|
|
|
- |
|
Distributions to noncontrolling interests
|
|
|
(320 |
) |
|
|
(2,307 |
) |
Balance at end of period
|
|
|
6,729 |
|
|
|
5,297 |
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
$ |
9,364,029 |
|
|
|
3,201,537 |
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
(1)
|
Basis
of Financial Reporting
|
Our
consolidated financial statements include the accounts of CenturyTel, Inc. and
its majority-owned subsidiaries. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to rules and regulations of the Securities and Exchange Commission;
however, in the opinion of management, the disclosures made are adequate to make
the information presented not misleading. The consolidated financial statements
and footnotes included in this Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto included in our annual
report on Form 10-K for the year ended December 31, 2008. As
discussed in Note 2, these financial statements reflect the results of
operations of Embarq Corporation (“Embarq”) subsequent to our July 1, 2009
acquisition of Embarq. We have evaluated subsequent events through
November 9, 2009 for inclusion in this quarterly report on Form
10-Q.
The
financial information for the three months and nine months ended September 30,
2009 and 2008 has not been audited by independent certified public accountants;
however, in the opinion of management, all adjustments necessary to present
fairly the results of operations for the three-month and nine-month periods have
been included therein. The results of operations for the first nine months of
the year are not necessarily indicative of the results of operations which might
be expected for the entire year.
(2)
|
Events
Associated with the Acquisition of
Embarq
|
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, with Embarq surviving the merger
as a wholly-owned subsidiary of CenturyTel. The combined company has
an operating presence in 33 states with approximately 7.2 million access lines
and approximately 2.2 million broadband customers, based on operating data as of
September 30, 2009.
As a
result of the merger, each outstanding share of Embarq common stock was
converted into the right to receive 1.37 shares of our 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
will be deductible for income tax purposes.
The
results of operations of Embarq are included in our consolidated results of
operations beginning July 1, 2009. Approximately $1.299 billion of
operating revenues of Embarq are included in our consolidated results of
operations for the three and nine months ended September 30,
2009. CenturyTel is the accounting acquirer in this
transaction. We will recognize Embarq’s assets and liabilities at
their acquisition date fair values. 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) will require a
significant amount of judgment. Such fair value will be determined
based upon analysis to be performed by an independent valuation firm, which we
expect to be complete by the end of 2009. The following is a
preliminary assignment of the fair value of the assets acquired and liabilities
assumed based on currently available information. Such final
identification of all the intangible assets acquired and the fair value
assignment may be significantly different than that reflected below (dollars in
thousands).
Current
assets
|
$ |
700,106 |
|
Net
property, plant and equipment
|
|
6,369,026 |
|
Identifiable
intangible assets
|
|
|
|
Customer
list
|
|
1,055,900 |
|
Rights
of way
|
|
268,500 |
|
Other
(trademarks, internally developed software, licenses)
|
|
26,917 |
|
Other
non-current assets
|
|
37,751 |
|
Current
liabilities
|
|
(910,788 |
) |
Long-term
debt
|
|
(4,886,539 |
) |
Other
long-term liabilities
|
|
(2,608,748 |
) |
Goodwill
|
|
6,018,320 |
|
Total
purchase price
|
$ |
6,070,445 |
|
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.
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
5,816,000 |
|
|
|
6,260,000 |
|
Income
before extraordinary item
|
|
|
667,000 |
|
|
|
804,000 |
|
Basic
earnings per share before extraordinary item
|
|
|
2.24 |
|
|
|
2.61 |
|
Diluted
earnings per share before extraordinary item
|
|
|
2.24 |
|
|
|
2.60 |
|
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 elimination of
unrecognized actuarial losses, 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 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
the third quarter of 2009, we recognized an aggregate of approximately $195
million of integration, transaction and other costs related to the Embarq
acquisition. Of the $195 million, approximately $47 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 $148 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. Based on current plans and information, we expect
to incur approximately $190 million of additional non-recurring integration
related operating expenses subsequent to September 30, 2009. The
specific details of these additional integration activities will continue to be
refined.
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. Upon entering into and terminating
the commitment letter, we paid an aggregate of $8.0 million to the
lenders. Such amount has been reflected as an expense (in Other
income (expense)) in the first nine months of 2009.
(3)
|
Goodwill
and Other Intangible Assets
|
Goodwill
and other intangible assets as of September 30, 2009 and December 31, 2008 were
composed of the following:
|
|
Sept.
30,
|
|
|
Dec.
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
10,033,994 |
|
|
|
4,015,674 |
|
|
|
|
|
|
|
|
|
|
Intangible
assets subject to amortization
|
|
|
|
|
|
|
|
|
Customer
list |
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$ |
1,237,209 |
|
|
|
181,309 |
|
Accumulated amortization
|
|
|
(93,287 |
) |
|
|
(35,026 |
) |
Net carrying amount
|
|
$ |
1,143,922 |
|
|
|
146,283 |
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$ |
69,667 |
|
|
|
42,750 |
|
Accumulated amortization
|
|
|
(11,233 |
) |
|
|
- |
|
Net carrying amount
|
|
$ |
58,434 |
|
|
|
42,750 |
|
|
|
|
|
|
|
|
|
|
Other intangible assets not subject to
amortization
|
|
$ |
268,500 |
|
|
|
- |
|
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 preliminarily assigned to these assets. We
are amortizing our customer list intangible asset associated with our Embarq
acquisition over an average of 11 years using an accelerated method of
amortization (sum-of-the-years digits) to more closely match the estimated cash
flow generated by such asset. Effective July 1, 2009 we changed the
assessment of useful life for our franchise rights from indefinite to 20 years
(straight-line).
As of
September 30, 2009, we completed our annual impairment test of
goodwill. 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. We plan to perform an impairment test on the goodwill
established in connection with our Embarq acquisition during the fourth quarter
of 2009.
Total
amortization expense related to the intangible assets subject to amortization
for the first nine months of 2009 was $69.5 million (which includes $56.6
million of amortization related to intangible assets from our Embarq acquisition
based on preliminary allocations) and is expected to be $130.7 million annually
for 2009, $196.7 million for 2010, $177.2 million for 2011, $157.3 million in
2012 and $139.4 million in 2013 (based on the preliminary determination of fair
values related to Embarq’s assets acquired and liabilities assumed as discussed
further in Note 2).
(4)
|
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. Until such time as we
can integrate the pension, welfare and other benefit plans of Embarq with ours,
we plan to continue to operate those plans independently.
Net
periodic postretirement benefit cost for the third quarter of 2009 includes the
effects of our July 1, 2009 acquisition of Embarq. Net periodic
postretirement benefit cost for the three months and nine months ended September
30, 2009 and 2008 included the following components:
|
|
|
|
Nine
months
|
|
|
ended September 30,
|
|
|
ended September 30, |
|
|
2009
|
|
|
2008
|
|
|
2009 |
|
|
2008
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
$ |
3,175 |
|
|
|
1,239 |
|
|
|
5,701 |
|
|
|
3,732 |
|
Interest
cost
|
|
8,448 |
|
|
|
4,827 |
|
|
|
18,245 |
|
|
|
14,629 |
|
Expected
return on plan assets
|
|
(847 |
) |
|
|
(581 |
) |
|
|
(1,540 |
) |
|
|
(1,761 |
) |
Amortization of unrecognized prior service
cost |
|
(887 |
) |
|
|
(653 |
) |
|
|
(2,660 |
) |
|
|
(1,955 |
) |
Net periodic postretirement benefit
cost |
$ |
9,889 |
|
|
|
4,832 |
|
|
|
19,746 |
|
|
|
14,645 |
|
We contributed $16.7
million to our postretirement health care plans in the first nine months of 2009
and expect to contribute approximately $26.9 million for the full year.
(5)
|
Defined
Benefit Retirement Plans
|
Our
incumbent qualified defined benefit pension plans provide pension benefits for
substantially all legacy CenturyTel employees. The qualified defined
benefit pension plan we acquired as part of our acquisition of Embarq provides
pension benefits for substantially all legacy Embarq employees. 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.
In late
February 2008, our Board of Directors approved certain actions related to our
Supplemental Executive Retirement Plan, including (i) freezing benefit accruals
effective February 29, 2008 and (ii) amending the plan to permit participants to
receive in 2009 a lump sum distribution of the present value of their accrued
plan benefits based on their election, which occurred in the second quarter of
2008. 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, upon 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 the first
quarter of 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.
The
legacy Embarq pension plan contains a provision that grants early retirement
benefits for certain participants affected by workforce
reductions. During the third quarter of 2009, we recognized
approximately $14.7 million of additional pension expense related to these
contractual benefits.
Net
periodic pension expense for the third quarter of 2009 includes the effects of
our July 1, 2009 acquisition of Embarq. Net periodic pension expense
for the three months and nine months ended September 30, 2009 and 2008 included
the following components:
|
|
Three
months |
|
|
Nine
months
|
|
|
|
ended September 30, |
|
|
ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
14,373 |
|
|
|
2,096 |
|
|
|
21,360 |
|
|
|
10,855 |
|
Interest
cost
|
|
|
60,723 |
|
|
|
9,331 |
|
|
|
73,975 |
|
|
|
22,548 |
|
Expected
return on plan assets
|
|
|
(56,857 |
) |
|
|
(10,269 |
)
|
|
|
(70,785 |
) |
|
|
(26,964 |
)
|
Curtailment
loss
|
|
|
- |
|
|
|
- |
|
|
|
7,711 |
|
|
|
8,235 |
|
Settlement
loss
|
|
|
8,890 |
|
|
|
- |
|
|
|
8,890 |
|
|
|
- |
|
Contractual
retirement benefits
|
|
|
14,676 |
|
|
|
- |
|
|
|
14,676 |
|
|
|
- |
|
Net amortization and
deferral
|
|
|
4,101 |
|
|
|
794 |
|
|
|
12,453 |
|
|
|
2,382 |
|
Net periodic pension
expense
|
|
$ |
45,906 |
|
|
|
1,952 |
|
|
|
68,280 |
|
|
|
17,056 |
|
During
the third quarter of 2009, we contributed $115 million to the legacy Embarq
pension plan. Due principally to an accumulated positive “credit
balance” under our principal incumbent pension plan, we expect our required
minimum cash contributions for this plan for 2009 to be
minimal. Nonetheless, we may make further discretionary contributions
in the fourth quarter of 2009.
(6)
|
Debt
Tender Offer and Concurrent Debt
Offering
|
In
September 2009, CenturyTel, Inc. 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, Inc. 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. The aggregate amount of the debt repurchased in October 2009
($746.1 million) is reflected in current maturities of long-term debt on the
balance sheet as of September 30, 2009. Due primarily to the premiums
paid in connection with these debt extinguishments, we will record 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.
(7)
|
Stock-based
Compensation
|
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; and
performance shares. As of September 30, 2009, we had reserved
approximately 32.7 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.
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. During
the first nine months of 2009, 802,888 shares of restricted stock (substantially
all of which have a three-year vesting period) were granted to employees and
outside directors at an average grant date fair value of $27.21 per
share.
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. 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. We did not grant any options to employees
during the first nine months of 2009.
The total
compensation cost for all share-based payment arrangements for the first nine
months of 2009 and 2008 was $39.6 million and $11.9 million,
respectively. Upon the consummation of the acquisition of Embarq on
July 1, 2009, the vesting schedules of certain of our restricted stock and stock
option 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 $17.0 million in the third quarter of 2009
above amounts that would have been recognized absent the triggering of these
change of control and termination of employment provisions.
As of
September 30, 2009 there were 3.5 million shares of nonvested restricted stock
and restricted stock units outstanding at an average grant date fair value of
$30.67 per share.
Outstanding
and exercisable stock options as of September 30, 2009 were as
follows:
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Average
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
of options
|
|
|
price
|
|
|
term (in years)
|
|
|
value*
|
|
Outstanding
|
|
|
10,530,894 |
|
|
$ |
37.18 |
|
|
|
4.8 |
|
|
$ |
20,466,000 |
|
Exercisable
|
|
|
9,317,207 |
|
|
$ |
37.48 |
|
|
|
4.4 |
|
|
$ |
18,031,000 |
|
* Includes
only those options with intrinsic value (options where the exercise price is
below the market price).
As of
September 30, 2009, there was $63.3 million of total unrecognized compensation
cost related to the share-based payment arrangements, which we expect to
recognize over a weighted average period of 2.1 years. Compensation
expense for these awards will be recognized over a shorter period if the
employees’ service period is shorter than the vesting schedule of the respective
grants.
Our
effective income tax rate was 39.3% and 37.0% for the nine months ended
September 30, 2009 and 2008, respectively. The lump sum
distributions attributable to certain executive officers that were made in
connection with discontinuing the Supplemental Executive Retirement Plan (see
Note 5) are currently being reflected as non-deductible for income tax purposes
pursuant to Internal Revenue Code Section 162(m)
limitations. However, due to the consummation of the Embarq
acquisition on July 1, 2009, we believe the payments could potentially be
deductible. We have requested a Private Letter Ruling from the
Internal Revenue Service in relation to the treatment of these
distributions. If a favorable ruling is received, the distributions
will be treated as deductible and the income tax benefit will be recognized in
the period such ruling is received. The treatment of the
distributions as non-deductible resulted in the recognition of approximately
$6.7 million of income tax expense in the first quarter of 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 the first nine
months of 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 $5.8 million
reduction in income tax expense 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.
Our
operating revenues for our products and services included the following
components for the periods specified below:
|
|
Three
months
|
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
|
ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$ |
829,697 |
|
|
|
218,253 |
|
|
|
1,247,218 |
|
|
|
658,634 |
|
Network
access
|
|
|
352,759 |
|
|
|
205,385 |
|
|
|
735,969 |
|
|
|
621,987 |
|
Data
|
|
|
470,465 |
|
|
|
132,631 |
|
|
|
753,325 |
|
|
|
390,463 |
|
Fiber
transport and CLEC
|
|
|
43,685 |
|
|
|
38,006 |
|
|
|
126,947 |
|
|
|
120,805 |
|
Other
|
|
|
177,719 |
|
|
|
55,798 |
|
|
|
281,720 |
|
|
|
164,904 |
|
Total
operating revenues
|
|
$ |
1,874,325 |
|
|
|
650,073 |
|
|
|
3,145,179 |
|
|
|
1,956,793 |
|
We
derived our voice revenues by providing local exchange telephone and long
distance services to our customers in our local exchange service
areas.
We
derived our network access revenues primarily from (i) providing services to
various carriers and customers in connection with the use of our facilities to
originate and terminate their interstate and intrastate voice transmissions and
(ii) receiving universal support funds which allows us to recover a portion of
our costs under federal and state cost recovery mechanisms.
We
derived our data revenues primarily by providing high-speed Internet access
services (“DSL”) and data transmission services over special circuits and
private lines in our local exchange service areas.
Our fiber
transport and CLEC revenues include revenues from our fiber transport,
competitive local exchange carrier and security monitoring
businesses.
We
derived other revenues primarily by (i) leasing, selling, installing and
maintaining customer premise telecommunications equipment and wiring, (ii)
providing payphone services, (iii) participating in the publication of local
directories, (iv) providing network database services, and (v) providing
our video services, as well as other new product and service
offerings.
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 $52 million for the nine months ended September 30,
2009 (which includes the third quarter 2009 amounts related to the Embarq
properties) and $31 million for the nine months ended September 30,
2008.
(10)
|
Recent
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.
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 will account for our acquisition
of Embarq using this guidance. During the first nine months of 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 nine months ended September 30, 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 requires us to recast our previously
reported earnings per share. Our previously reported diluted earnings
per share for the first nine months 2008 ($2.55 per share) has been recast using
the new accounting guidance ($2.53 per share). If our diluted
earnings per share would have been calculated using the new accounting guidance
for the full year 2008, our diluted earnings per share would have been $3.52 per
share as compared to $3.56 per share.
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
nine months ended September 30, 2009 reflect our noncontrolling interests as
equity in our consolidated balance sheet. Prior periods have been
adjusted to reflect this presentation.
In April
2009, we adopted guidance issued by the Financial Accounting Standards Board
related to subsequent events, which formalizes the existing principles for
subsequent events and requires additional disclosures about the period being
evaluated and the nature and estimated financial effect of nonrecognized
subsequent events. The adoption of this new guidance did not have a
material impact on our financial position or results of operations.
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. Since we
use a year end measurement date to value plan assets, all disclosures required
will be initially required in our December 31, 2009 financial
statements.
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
September 30, 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 these assets held and the related
tier designation.
|
Balance
|
|
|
|
Description
|
Sept. 30,
2009
|
Level
1
|
Level
2
|
Level
3
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Cash
surrender value of life insurance contracts
|
$
100,887
|
100,887
|
-
|
-
|
(11)
|
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 allege that
we unjustly and unreasonably billed customers for inside wire maintenance
services, and seek unspecified monetary damages and injunctive relief under
various legal theories on behalf of a purported class of over two million
customers in our telephone markets. On March 10, 2006, the District
Court certified a class of plaintiffs and issued a ruling that the billing
descriptions we used for these services during an approximately 18-month period
between October 2000 and May 2002 were legally insufficient. Our
appeal of this class certification decision was denied. Our
preliminary analysis indicates that we billed less than $10 million for inside
wire maintenance services under the billing descriptions and time periods
specified in the District Court ruling described above. Should other
billing descriptions be determined to be inadequate or if claims are allowed for
additional time periods, the amount of our potential exposure could increase
significantly above amounts previously accrued. The District Court’s
order does not specify the award of damages, the scope and amounts of which, if
any, remain subject to additional fact-finding and resolution of what we believe
are valid defenses to plaintiff’s claims. Accordingly, we currently
cannot reasonably estimate the maximum amount of possible
loss. However, based on current circumstances we do not believe that
the ultimate outcome of this matter will have a material adverse effect on our
financial position or on-going results of operations.
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. Under
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. 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.
Beginning
in June 2009, Sprint Nextel notified CenturyTel and Embarq separately that it
was disputing its obligations to pay access charges for traffic it claims is
voice over Internet protocol (“VoIP”) traffic. The traffic being disputed is
subject to various intrastate and interstate access tariffs as well as
commercially negotiated interconnection agreements between the parties. Sprint
Nextel is claiming that the VoIP traffic is subject to rates substantially lower
than those billed. After the commencement of the dispute, Sprint
Nextel unilaterally withheld payments for VoIP traffic as well
as payment for other traffic unrelated to the dispute, in an effort
to recoup all amounts in dispute. To date, the amount in dispute with
respect to all CenturyTel and Embarq entities is approximately $26 million, and
to date the amount of payments withheld by Sprint Nextel approximates $16
million. The amount in dispute reflects Sprint Nextel’s attempt to apply their
compensation claims on a retroactive basis to amounts previously paid and
undisputed during the prior two years. Both CenturyTel and Embarq have denied
Sprint Nextel's disputes in their entirety, have demanded payment in full, and
have notified Sprint Nextel of their intention to pursue available remedies to
obtain full payment.
For a
description of a suit challenging the elimination of our time-phase voting
structure in mid-2009, please see Note 2 above.
From time
to time, we are involved in other proceedings incidental to our business,
including administrative hearings of state public utility commissions relating
primarily to rate making, 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 outcomes of these other proceedings are not
predictable. However, we do not believe that the ultimate resolution
of any 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.
(12)
|
Accounting
for the Effects of Regulation
|
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 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).
Upon the
discontinuance of regulatory accounting, we are 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, such
accumulated liability for removal costs included in accumulated depreciation was
removed and an asset retirement obligation was established. Upon the
discontinuance of regulatory accounting, we are 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.
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
|
|
|
(83,804 |
) |
Net
extraordinary gain before noncontrolling interests
|
|
|
134,758 |
|
Less:
extraordinary gain attributable to noncontrolling
interests
|
|
|
(1,545 |
) |
Extraordinary
gain attributable to CenturyTel, Inc.
|
|
$ |
133,213 |
|
Basic
earnings per share of extraordinary gain
|
|
$ |
.44 |
|
Diluted
earnings per share of extraordinary gain
|
|
$ |
.44 |
|
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 the lives of our property, plant and
equipment to reflect the economic estimated remaining useful lives of the
assets. 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 $16 million ($.03 per share) in the third quarter of 2009
compared to the second quarter of 2009 (for which depreciation expense was based
on depreciation rates established by regulators).
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 $53 million) in the third quarter of 2009 as compared to
the third quarter of 2008. For regulatory purposes, the
accounting and reporting of our telephone subsidiaries will not be affected by
the discontinued application of regulatory accounting.
Item
2.
CenturyTel,
Inc.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") included herein should be read in conjunction with MD&A and the
other information included in our annual report on Form 10-K for the year ended
December 31, 2008. The results of operations for the three months and nine
months ended September 30, 2009 are not necessarily indicative of the results of
operations which might be expected for the entire year. 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 three and nine
months ended September 30, 2009 with prior periods are less
meaningful. Where appropriate, the discussion below addresses trends
we believe are significant, separate and apart from the impact of our
acquisition of Embarq.
Subsequent
to the Embarq acquisition, we are now an integrated communications company
primarily engaged in providing an array of communications services in 33 states,
including local and long distance voice, data, wholesale, Internet access,
broadband, and satellite video services. In certain local and
regional markets, we also sell communications equipment and provide fiber
transport, competitive local exchange carrier, security monitoring, and other
communications, professional and business information services. We
operate approximately 7.2 million access lines and serve approximately 2.2
million broadband customers, based on operating data as of September 30,
2009. For additional information on our revenue sources, see
Note 9. For additional information on the merger, see
Note 2.
During
the third quarter and first nine months of 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.
|
|
Three
months
|
|
|
Nine
months
|
|
|
|
ended
|
|
|
ended
|
|
Description
|
|
Sept.
30, 2009
|
|
|
Sept.
30, 2009
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Severance
and retention costs due to workforce reductions, including
contractual early retirement pension benefits for certain
participants
|
|
$ |
97,450 |
|
|
|
97,450 |
|
Transaction
related costs associated with our acquisition of Embarq,
including investment banker and legal fees
|
|
|
47,154 |
|
|
|
47,154 |
|
Integration
related costs associated with our acquisition of
Embarq
|
|
|
25,055 |
|
|
|
54,482 |
|
Accelerated
recognition of share-based compensation expense due to change
of control provisions and terminations of employment
|
|
|
16,967 |
|
|
|
16,967 |
|
Settlement
and curtailment expenses related to certain executive retirement
plans (see Note 5)
|
|
|
8,900 |
|
|
|
16,611 |
|
Charge
incurred in connection with our $800 million bridge
facility
|
|
|
- |
|
|
|
8,000 |
|
|
|
$ |
195,526 |
|
|
|
240,664 |
|
All of
the above items are included in operating expenses except for 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 by Embarq prior to the effective time of the
merger.
In
addition, due to Internal Revenue Code Section 162(m) limitations, a portion of
the lump sum distributions related to the termination of an executive retirement
plan made in the first quarter of 2009 are currently being reflected as
non-deductible for income tax purposes and thus increased our effective income
tax rate. Certain merger-related costs incurred during the first nine
months of 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 reduction to our
deferred tax asset valuation allowance associated with state net operating loss
carryforwards. See Note 8 and “Income Tax Expense” below for
additional information.
Upon the
discontinuance of regulatory accounting, we recorded a one-time, non-cash
extraordinary gain that aggregated approximately $218.6 million before income
tax expense and noncontrolling interests ($133.2 million after-tax
and noncontrolling interests). See Note 12 for additional
information.
During
the last several years (exclusive of acquisitions and certain non-recurring
favorable adjustments), we have experienced revenue declines in our voice and
network access revenues primarily due to declines in access lines, intrastate
access rates and 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 the FCC’s proposed rules
regarding intercarrier compensation and the Universal Service Fund described in
our prior filings with the Securities and Exchange Commission (“SEC”)); 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 $2.80 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; the effects of adverse weather; other risks referenced from time to
time in this report or other of our filings with the SEC; 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 of Part I of our Annual Report on Form 10-K for the year ended December 31,
2008, as updated and supplemented by Item 1A of Part II of this report. You
should be aware that new factors may emerge from time to time and it is not
possible for us to identify all such factors nor can we predict the impact of
each such factor on the business or the extent to which any one or more factors
may cause actual results to differ from those reflected in any forward-looking
statements. You are further cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. We undertake no obligation to update any of our
forward-looking statements for any reason.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2009 Compared
to
Three Months Ended September 30, 2008
Net
income attributable to CenturyTel, Inc. was $280.8 million and $84.7 million for
the third quarter of 2009 and 2008, respectively. Net income before
extraordinary item was $147.6 million and $84.7 million for the third quarter of
2009 and 2008, respectively. Diluted earnings per share for the third
quarter of 2009 and 2008 was $.94 and $.83, respectively. Diluted
earnings per share before extraordinary item for the third quarter of 2009 was
$.49. As mentioned in the “Overview” section above, we incurred a
significant amount of one-time expenses in the third quarter of 2009 related to
our acquisition of Embarq. The increase in the number of average
diluted shares outstanding is primarily attributable to the common stock issued
in connection with our acquisition of Embarq on July 1, 2009.
|
|
Three
months
|
|
|
|
ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars,
except per share amounts,
|
|
|
|
and
shares in thousands)
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
378,983 |
|
|
|
180,727 |
|
Interest
expense
|
|
|
(140,422 |
) |
|
|
(49,483 |
) |
Other
income (expense)
|
|
|
9,362 |
|
|
|
4,569 |
|
Income
tax expense
|
|
|
(99,876 |
) |
|
|
(50,624 |
) |
Income
before noncontrolling interests and extraordinary item
|
|
|
148,047 |
|
|
|
85,189 |
|
Noncontrolling
interests
|
|
|
(412 |
) |
|
|
(456 |
) |
Net
income before extraordinary item
|
|
|
147,635 |
|
|
|
84,733 |
|
Extraordinary
item, net of income tax expense and noncontrolling
interests
|
|
|
133,213 |
|
|
|
- |
|
Net
income attributable to CenturyTel, Inc.
|
|
$ |
280,848 |
|
|
|
84,733 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
Before extraordinary item
|
|
$ |
.49 |
|
|
|
.83 |
|
Extraordinary item
|
|
$ |
.44 |
|
|
|
- |
|
Basic earnings per share
|
|
$ |
.94 |
|
|
|
.83 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
Before extraordinary item
|
|
$ |
.49 |
|
|
|
.83 |
|
Extraordinary item
|
|
$ |
.44 |
|
|
|
- |
|
Diluted
earnings per share
|
|
$ |
.94 |
|
|
|
.83 |
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
298,133 |
|
|
|
100,402 |
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
298,403 |
|
|
|
100,647 |
|
Operating
income increased $198.3 million due to a $1.224 billion increase in operating
revenues and a $1.026 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.
As
mentioned in Note 12, we discontinued the application of regulatory accounting
effective July 1, 2009. As a result of such discontinuance, 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 $53 million) in the third quarter of
2009 as compared to the third quarter of 2008.
Operating
Revenues
|
|
Three
months |
|
|
|
ended
September 30, |
|
|
|
2009 |
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Voice
|
|
$ |
829,697 |
|
|
|
218,253 |
|
Network
access
|
|
|
352,759 |
|
|
|
205,385 |
|
Data
|
|
|
470,465 |
|
|
|
132,631 |
|
Fiber
transport and CLEC
|
|
|
43,685 |
|
|
|
38,006 |
|
Other
|
|
|
177,719 |
|
|
|
55,798 |
|
|
|
$ |
1,874,325 |
|
|
|
650,073 |
|
The
$611.4 million increase in voice revenues is primarily due to $630.8 million of
revenues attributable to the Embarq properties acquired July 1,
2009. The remaining $19.3 million decrease is primarily due to (i) an
$8.1 million decrease due to a 6.9% decline in the average number of access
lines in our incumbent markets; (ii) a $3.8 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) a $3.8 million
reduction due to the elimination of all intercompany transactions due to the
discontinuance of regulatory accounting.
Total access
lines declined 170,000 in the third quarter of 2009, adjusted to exclude
the number of access lines we acquired from Embarq on July 1,
2009. We believe the decline in the number of access lines during the
third quarter of 2009 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 140,000 and 180,000 lines for the
fourth quarter of 2009.
Network
access revenues increased $147.4 million in the third quarter of 2009 due to
$171.2 million of revenues attributable to Embarq. Excluding Embarq,
network access revenues decreased $23.8 million (11.6%) in the third quarter of
2009 primarily due to (i) a $13.7 million reduction due to the elimination of
all intercompany transactions due to the discontinuance of regulatory
accounting; (ii) a $7.1 million decrease as a result of lower intrastate
revenues due to a reduction in intrastate access rates and minutes (principally
due to the loss of access lines and the displacement of minutes by wireless,
electronic mail and other optional calling services); and (iii) a $3.4 million
reduction in revenues from the federal Universal Service Fund primarily due to
an increase in the nationwide average cost per loop factor used by the FCC to
allocate funds among all recipients. Such decreases were partially
offset by a $6.4 million increase in prior year revenue settlements recorded in
the third quarter of 2009. We believe that intrastate access rates
and minutes will continue to decline in 2009, although we cannot precisely
estimate the magnitude of such decrease. Complaints filed by interexchange
carriers in several of our operating states could, if successful, place further
downward pressure on our intrastate access rates. In addition, we expect
intrastate minutes to decline at a faster rate in our recently acquired Embarq
markets as compared to our incumbent markets.
Data
revenues increased $337.8 million in the third quarter of 2009 due to $355.5
million of revenues attributable to Embarq. Excluding Embarq, data
revenues decreased $17.7 million (13.3%) substantially due to a $24.8 million
reduction due to the elimination of all intercompany transactions due to the
discontinuance of regulatory accounting. The remaining $7.1 million
increase is primarily attributable to an increase in DSL-related revenues
principally due to growth in the number of DSL customers.
Fiber
transport and CLEC revenues increased $5.7 million primarily due to $4.1 million
of revenues attributable to Embarq and a $1.7 million increase in our incumbent
CLEC revenues.
Other
revenues increased $121.9 million in the third quarter of 2009 due to $137.3
million of revenues attributable to Embarq. Excluding Embarq, other
revenues decreased $15.4 million (27.6%) primarily due to a $9.0 million
reduction due to the elimination of all intercompany transactions as a result of
the discontinuance of regulatory accounting and a $4.0 million decrease in
certain non-regulated product sales and service offerings.
|
|
Three
months
|
|
|
|
ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$ |
684,865 |
|
|
|
242,243 |
|
Selling,
general and administrative
|
|
|
448,275 |
|
|
|
98,751 |
|
Depreciation
and amortization
|
|
|
362,202 |
|
|
|
128,352 |
|
|
|
$ |
1,495,342 |
|
|
|
469,346 |
|
Cost of
services and products increased $442.6 million primarily due to $487.2 million
of expenses attributable to the Embarq properties acquired on July 1,
2009. The remaining $44.6 million decrease is primarily due to a
$43.7 million reduction in expenses due to the elimination of all intercompany
transactions due to the discontinuance of regulatory accounting.
Selling,
general and administrative expenses increased $349.5 million primarily due to
$288.9 million of expenses incurred by Embarq (which includes approximately
$104.2 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 employee
terminations). The remaining $60.6 million increase is primarily due
to (i) $47.2 million of transaction related merger costs, including investment
banker and legal fees associated with our acquisition of Embarq; (ii) $25.1
million of integration costs incurred associated with our acquisition of Embarq,
primarily related to system conversion efforts, and (iii) $8.9 million of a
settlement expense associated with the triggering of change of control
provisions upon our acquisition of Embarq under our frozen supplemental
executive retirement plan. Such increases in expenses were partially
offset by a $9.5 million reduction in expenses due to the elimination of all
intercompany transactions due to the discontinuance of regulatory accounting and
a $6.0 million decrease due to the favorable resolution of certain transaction
tax audit issues.
Depreciation
and amortization increased $233.9 million primarily due to $250.1 million of
depreciation and amortization attributable to Embarq (including $56.6 million of
amortization expense related to the customer list and other intangible assets
associated with the Embarq acquisition). The remaining decrease was
primarily due to a decrease in depreciation expense due to a reduction in
certain depreciation rates effective July 1, 2009 upon the discontinuance of
regulatory accounting (see Note 12).
Interest
Expense
Interest
expense increased $90.9 million in the third quarter of 2009 compared to the
third quarter of 2008 primarily due to $96.3 million of interest expense
attributable to Embarq’s indebtedness assumed in connection with our acquisition
of Embarq.
Other
Income (Expense)
Other
income (expense) includes the effects of certain items not directly related to
our core operations, including gains and losses from nonoperating asset
dispositions and impairments, our share of income from our 49% interest in a
cellular partnership, interest income and allowance for funds used during
construction. Other income (expense) was $9.4 million for the third
quarter of 2009 compared to $4.6 million for the third quarter of
2008. Our share of income from our 49% interest in a cellular
partnership increased $5.9 million in the third quarter of 2009 compared to the
third quarter of 2008.
Income
Tax Expense
Our
effective income tax rate was 39.5% and 37.4% for the three months ended
September 30, 2009 and September 30, 2008, respectively. Such
increase in the effective tax rate was primarily caused by certain of our Embarq
merger-related integration costs which are considered non-deductible for income
tax purposes.
Extraordinary
Item
Upon the
discontinuance of regulatory accounting, we recorded a one-time extraordinary
gain of approximately $133.2 million after-tax. See Note 12 for
additional information related to this extraordinary gain.
Nine
Months Ended September 30, 2009 Compared
to
Nine Months Ended September 30, 2008
Net
income attributable to CenturyTel, Inc. was $417.0 million and $265.7 million
for the first nine months of 2009 and 2008, respectively. Net income
before extraordinary item was $283.8 million and $265.7 million for the nine
months ended September 30, 2009 and 2008, respectively. Diluted
earnings per share for the first nine months of 2009 and 2008 was $2.50 and
$2.53, respectively. Diluted earnings per share before
extraordinary item for the first nine months of 2009 was
$1.70. As mentioned in the “Overview” section above, we incurred a
significant amount of one-time expenses in the first nine months of 2009 related
to our acquisition of Embarq. The increase in the number
of average diluted shares outstanding is primarily attributable to the common
stock issued in connection with our acquisition of Embarq on July 1,
2009.
|
|
Nine
months
|
|
|
|
ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars,
except per share amounts,
and
shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
692,763 |
|
|
|
544,910 |
|
Interest
expense
|
|
|
(237,391 |
) |
|
|
(148,771 |
) |
Other
income (expense)
|
|
|
15,179 |
|
|
|
26,436 |
|
Income
tax expense
|
|
|
(185,796 |
) |
|
|
(155,916 |
) |
Income
before noncontrolling interests and extraordinary item
|
|
|
284,755 |
|
|
|
266,659 |
|
Noncontrolling interests
|
|
|
(936 |
) |
|
|
(999 |
) |
Net
income before extraordinary item
|
|
|
283,819 |
|
|
|
265,660 |
|
Extraordinary
item, net of income tax expense and noncontrolling
interests
|
|
|
133,213 |
|
|
|
- |
|
Net
income attributable to CenturyTel, Inc.
|
|
$ |
417,032 |
|
|
|
265,660 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
Before extraordinary item
|
|
$ |
1.70 |
|
|
|
2.54 |
|
Extraordinary item
|
|
$ |
.80 |
|
|
|
- |
|
Basic earnings per share
|
|
$ |
2.50 |
|
|
|
2.54 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
Before extraordinary item
|
|
$ |
1.70 |
|
|
|
2.53 |
|
Extraordinary item
|
|
$ |
.80 |
|
|
|
- |
|
Diluted
earnings per share
|
|
$ |
2.50 |
|
|
|
2.53 |
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
165,558 |
|
|
|
103,396 |
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
165,666 |
|
|
|
103,774 |
|
Operating
income increased $147.9 million due to a $1.188 billion increase in operating
revenues and a $1.041 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.
As
mentioned in Note 12, we discontinued the application of regulatory accounting
effective July 1, 2009. As a result of such discontinuance, we are
eliminating all intercompany transactions with regulated affiliates that
previously were not eliminated under the application of regulatory accounting
beginning in the third quarter of 2009. This has caused our revenues
and operating expenses to be lower by equivalent amounts (approximately $53
million) in the first nine months of 2009 as compared to the first nine months
of 2008.
Operating
Revenues
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Voice
|
|
$ |
1,247,218 |
|
|
|
658,634 |
|
Network
access
|
|
|
735,969 |
|
|
|
621,987 |
|
Data
|
|
|
753,325 |
|
|
|
390,463 |
|
Fiber
transport and CLEC
|
|
|
126,947 |
|
|
|
120,805 |
|
Other
|
|
|
281,720 |
|
|
|
164,904 |
|
|
|
$ |
3,145,179 |
|
|
|
1,956,793 |
|
The
$588.6 million increase in voice revenues is primarily due to $630.8 of revenues
attributable to the Embarq properties acquired July 1, 2009. The
remaining $42.2 million decrease in voice revenues is primarily due to (i) a
$23.4 million decrease due to a 6.6% decline in the average number of access
lines in our incumbent markets; (ii) a $10.3 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) a $3.8 million
reduction due to the elimination of all intercompany transactions due to the
discontinuance of regulatory accounting.
Total
access lines declined 234,300 in the first nine months of 2009, adjusted to
exclude the number of access lines we acquired from Embarq on July 1,
2009. 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 140,000 and 180,000 for the
fourth quarter of 2009.
Network
access revenues increased $114.0 million in the first nine months of 2009 due to
$171.2 million of revenues attributable to Embarq. Excluding Embarq,
network access revenues decreased $57.2 million in the first nine months of 2009
primarily due to (i) a $24.5 million decrease as a result of lower intrastate
revenues due to a reduction in intrastate access rates and minutes (principally
due to the loss of access lines and the displacement of minutes by wireless,
electronic mail and other optional calling services); (ii) a $13.7 million
reduction due to the elimination of all intercompany transactions due to the
discontinuance of regulatory accounting; (iii) a $10.6 million decrease in
interstate revenues primarily due to reductions in our partial recovery of
lower operating costs through revenue sharing arrangements and return on rate
base; and (iv) a $10.0 million reduction in revenues from the federal Universal
Service Fund primarily due to an increase in the nationwide average cost per
loop factor used by the FCC to allocate funds among all
recipients. Such decreases were partially offset by a $7.7 million
increase in prior year revenue settlements recorded in the first nine months of
2009. We believe that intrastate access rates and minutes will
continue to decline in 2009, although we cannot precisely estimate the magnitude
of such decrease. Complaints filed by interexchange carriers in several of
our operating states could, if successful, place further downward pressure on
our intrastate access rates. In addition, we expect intrastate minutes to
decline at a faster rate in our recently acquired Embarq markets as compared to
our incumbent markets.
Data
revenues increased $362.9 million due to $355.5 million of revenues attributable
to Embarq. Excluding Embarq, data revenues increased $7.4 million
substantially due to a $28.8 million increase in DSL-related revenues primarily
due to growth in the number of DSL customers in our incumbent
markets. Such increase was substantially offset by a $24.8 million
reduction due to the elimination of all intercompany transactions due to the
discontinuance of regulatory accounting.
Fiber
transport and CLEC revenues increased $6.1 million primarily due to $4.1 million
of revenues attributable to Embarq and a $4.9 million increase in fiber
transport revenues. Such increases were partially offset by a $3.6
million decrease in CLEC revenues primarily due to the divestiture of six CLEC
markets in mid-2008.
Other
revenues increased $116.8 million, of which approximately $137.3 million related
to our acquisition of Embarq. Excluding Embarq, other revenues
decreased $20.5 million primarily as a result of a $9.0 million reduction due to
the elimination of all intercompany transactions due to the discontinuance of
regulatory accounting and an $8.7 million decrease in certain non-regulated
product sales and service offerings.
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$ |
1,155,228 |
|
|
|
719,681 |
|
Selling,
general and administrative
|
|
|
678,862 |
|
|
|
297,212 |
|
Depreciation and
amortization
|
|
|
618,326 |
|
|
|
394,990 |
|
|
|
$ |
2,452,416 |
|
|
|
1,411,883 |
|
Cost of
services and products increased $435.5 million primarily due to $487.2 million
of expenses attributable to the Embarq properties acquired on July 1,
2009. The remaining $51.7 million decrease is primarily due to (i) a
$43.7 million reduction in expenses resulting from the elimination of all
intercompany transactions due to the discontinuance of regulatory accounting;
(ii) a $4.6 million decrease in CLEC expenses as a result of the divestiture of
six CLEC markets in 2008, (iii) a $4.2 million decrease in access expense, and
(iv) a $3.4 million decrease in customer service related
expenses. Such decreases were partially offset by a $10.3 million
increase in DSL-related expenses due to growth in the number of DSL
customers.
Selling,
general and administrative expenses increased $381.7 million primarily due to
$288.9 million of expenses attributable to Embarq (which includes approximately
$104.2 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 employee
terminations). The remaining $92.8 million increase is primarily due
to (i) $54.5 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 (due to an $8.9
million settlement expense due to change of control provisions triggered upon
our acquisition of Embarq) and share-based compensation expense (due to the
accelerated vesting of certain employee’s equity grants upon the acquisition of
Embarq). Such increases were partially offset by a $9.5 million
reduction in expenses due to the elimination of all intercompany transactions
due to the discontinuance of regulatory accounting and a $6.9 million decrease
due to the favorable resolution of certain transaction tax audit
issues.
Depreciation
and amortization increased $223.3 million primarily due to $250.1 million of
depreciation and amortization attributable to Embarq (including $56.6 million of
amortization expense related to the customer list and other intangible
assets). The remaining $26.8 million decrease was primarily due to a
$39.7 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 12) and due to certain assets becoming fully
depreciated. Such decreases were partially offset by a $14.3 million
increase due to higher levels of plant in service.
Interest
Expense
Interest
expense increased $88.6 million in the first nine months of 2009 compared to the
first nine months of 2008 primarily due to $96.3 million of interest expense
attributable to Embarq’s indebtedness assumed in connection with our acquisition
of Embarq. The remaining $7.7 million decrease is primarily
attributable to a $6.0 million decrease in interest expense due to favorable
resolution of certain transaction tax audit issues.
Other
Income (Expense)
Other
income (expense) includes the effects of certain items not directly related to
our core operations, including gains and losses from nonoperating asset
dispositions and impairments, our share of income from our 49% interest in a
cellular partnership, interest income and allowance for funds used during
construction. Other income (expense) was $15.2 million for the first
nine months of 2009 compared to $26.4 million for the first nine months of 2008.
Included in the first nine months of 2009 is an $8.0 million pre-tax charge
associated with our $800 million bridge credit facility (see Note 2 for
additional information). Included in the first nine months of 2008 is
(i) a pre-tax gain of $4.5 million upon the liquidation of our investments in
marketable securities in our SERP trust, (ii) a pre-tax gain of approximately
$7.3 million from the sale of certain nonoperating investments, and (iii) and a
$3.4 million pre-tax charge related to terminating all of our existing
derivative instruments in the first quarter of 2008. Our share of
income from our 49% interest in a cellular partnership increased $7.1 million in
the first nine months of 2009 compared to the first nine months of
2008.
Income
Tax Expense
Our
effective income tax rate was 39.3% and 37.0% for the nine months ended
September 30, 2009 and September 30, 2008, respectively. The lump sum
distributions attributable to certain executive officers that were made in the
first quarter of 2009 in connection with discontinuing the Supplemental
Executive Retirement Plan (see Note 5) are currently being reflected as
non-deductible for income tax purposes pursuant to Internal Revenue Code Section
162(m) limitations. However, due to the consummation of the Embarq
acquisition on July 1, 2009, we believe the payments could potentially be
deductible. We have requested a Private Letter Ruling from the
Internal Revenue Service in relation to the treatment of these
distributions. If a favorable ruling is received, the
distributions will be treated as deductible and the income tax benefit will be
recognized in the period such ruling is received. The treatment of
the distributions as non-deductible resulted in the recognition of approximately
$6.7 million of income tax expense in the first quarter of 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 the first nine
months of 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 $5.8 million
reduction in income tax expense 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.
Other
Matters
We
currently expect our 2010 operating results to be negatively impacted 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 expect these items will
negatively impact diluted earnings per share for 2010 by $.12 to $.15 per
share.
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. Our cash and cash equivalents
balance as of September 30, 2009 increased substantially due to cash proceeds we
received in late September 2009 from the issuance of long-term debt (as more
fully described below). Such cash proceeds were used to repurchase
debt in October 2009. Our operations have historically provided a
stable source of cash flow which has helped us continue our long-term program of
capital improvements.
Net cash
provided by operating activities was $961.8 million during the first nine months
of 2009 compared to $667.2 million during the first nine months of
2008. Payments for income taxes decreased to $126.7 million during
the first nine months of 2009 from $172.1 million during the first nine months
of 2008 due to overpayments of 2008 taxes that enabled us to lower our first
quarter 2009 estimated tax payments. Lump sum distributions paid 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 were paid in 2009 and aggregated approximately $54
million. We also contributed $115 million to the legacy Embarq
pension plan during the third quarter 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.
Net cash
used in investing activities was $337.2 million and $286.8 million for the nine
months ended September 30, 2009 and 2008, respectively. Payments for
property, plant and equipment were $417.1 million in the first nine months of
2009 (which includes $185 million of capital expenditures attributable to the
Embarq operations subsequent to our July 1, 2009 acquisition of Embarq) and
$185.0 million in the first nine month of 2008. Capital expenditures
for the first nine months of 2009 include approximately $47.0 million of
one-time capital expenditures related to the integration of
Embarq. Based on current plans and information, our budgeted capital
expenditures for the fourth quarter of 2009 are expected to be between
$280-300 million.
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 are still in the planning stages regarding the
use of this spectrum. However, based on our preliminary analysis, we
are considering developing wireless voice and data service capabilities based on
equipment using LTE (Long-Term Evolution) technology. Given that data
devices are not expected to be commercially available until 2010 and voice
devices are not expected to be available until 2012, we do not expect our
deployment to result in any material impact to our capital and operating budgets
for 2009. We do anticipate conducting trials in 2010, followed by
selective market deployments in late 2010 and early 2011.
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.
Net cash
used in financing activities was $336.7 million during the first nine months of
2009 compared to $155.9 million during the first nine months of
2008. We made $626.6 million of debt payments (substantially all of
which related to our revolving credit facility) in the first nine months of 2009
primarily from cash on hand. In the first nine months of 2008, we
paid our $240 million Series F Senior Notes at maturity primarily using
borrowings from our credit facility. 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 existing
indebtedness (see Note 6 for additional information). In accordance
with previously announced stock repurchase programs, we repurchased 9.6 million
shares (for $345.5 million) in the first nine months of 2008. We
suspended our share repurchase program pending completion of our
acquisition of Embarq.
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. 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” below 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. For further information, see Part I,
Item 3, of this report.
As
previously announced, Embarq amended its credit facility to enable the facility
to remain in place as an $800 million unsecured 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 revolving credit facilities, (i) a five-year, $728 million
revolving credit facility of CenturyTel which expires in December 2011 and (ii)
an $800 million unsecured revolving credit facility of Embarq which expires in
May 2011. 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. 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 October 31, 2009, we had approximately $281.5
million outstanding under our credit facilities (all of which relates to
CenturyTel’s facility) and no amounts outstanding under our commercial paper
program.
Item
3.
CenturyTel,
Inc.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES
ABOUT 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 on 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.
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
September 30, 2009, we estimated the fair value of our long-term debt to be $8.7
billion based on the overall weighted average rate of our debt of 7.3% and an
overall weighted maturity of 11 years compared to terms and rates currently
available in long-term financing markets. As of September 30, 2009,
all 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 73 basis points in interest rates (ten
percent of our overall weighted average borrowing rate). Such an
increase in interest rates would result in approximately an $382.3 million
decrease in fair value of our fixed-rate long-term debt at September 30, 2009,
but would have no impact on our results of operations or cash
flows. A 100 basis point change in variable interest
rates would have had a pre-tax impact of approximately $2.2 million on our
results of operations and cash flows for the nine months ended September 30,
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 September 30, 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 have been positive for
the first nine months of 2009, the loss on our incumbent pension plan assets was
approximately 28% for 2008. If our actual return on plan assets
continues to be 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 near
future. The pension plan we assumed in our acquisition of Embarq was
substantially underfunded as of the acquisition date. During the
third quarter 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.
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 September 30, 2009.
Item
4.
CenturyTel,
Inc.
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 September 30,
2009. Based on that 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 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 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.
PART II.
OTHER INFORMATION
CenturyTel,
Inc.
Item
1.
|
Legal
Proceedings.
|
See Note
11 to the financial statements included in Part I, Item 1, of this
report.
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.
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 continue to be
significantly lower than our expected return assumption, our net periodic
pension expense and our required cash contribution to our pension plan will
increase in future periods. Such events would negatively impact our
results of operations and cash flow.
We
face competition, which we expect to intensify and which may reduce market share
and lower profits.
As a
result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive. We
face competition from (i)
wireless telephone services, which we expect to increase if wireless providers
continue to expand and improve their network coverage, offer fixed-rate calling
plans, lower their prices and offer enhanced services, and (ii) cable television operators,
competitive local exchange carriers and voice-over-Internet protocol, or VoIP,
providers. Over time, we expect to face additional local exchange
competition from electric utility and satellite communications providers,
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.
Many of
our current and potential competitors (i) have market presence,
engineering, technical and marketing capabilities and financial, personnel and
other resources substantially greater than ours, (ii) own larger and more diverse
networks, (iii) conduct
operations or raise capital at a lower cost than us, (iv) are subject to less
regulation, (v) offer
greater online content services or (vi) have substantially stronger
brand names. Consequently, these competitors may be better equipped to charge
lower prices for their products and services, to provide more attractive
offerings, to develop and expand their communications and network
infrastructures more quickly, to adapt more swiftly to new or emerging
technologies and changes in customer requirements, and to devote greater
resources to the marketing and sale of their products and services.
Competition
could adversely impact us in several ways, including (i) the loss of customers and
market share, (ii) the
possibility of customers reducing their usage of our services or shifting to
less profitable services, (iii) reduced traffic on our
networks, (iv) our need to
expend substantial time or money on new capital improvement projects, (v) our need to lower prices or
increase marketing expenses to remain competitive and (vi) our inability to diversify
by successfully offering new products or services.
We
could be harmed by rapid changes in technology.
The
communications industry is experiencing significant technological changes,
particularly in the areas of VoIP, data transmission and wireless
communications. Several large electric utilities have announced plans
to offer communications services that will compete with local exchange
companies, or LECs. Some of our competitors may enjoy network
advantages that will enable them to provide services more efficiently or at
lower cost. Rapid changes in technology could result in the
development of additional products or services that compete with or displace
those offered by traditional LECs, or that enable current customers to reduce or
bypass use of our networks. We cannot predict with certainty which
technological changes will provide the greatest threat to our competitive
position. We may not be able to obtain timely access to new
technology on satisfactory terms or incorporate new technology into our systems
in a cost effective manner, or at all. If we cannot develop new
products to keep pace with technological advances, or if such products are not
widely embraced by our customers, we could be adversely impacted.
We
cannot assure you that our diversification efforts will be
successful.
The
telephone industry has recently experienced a decline in access lines and
intrastate minutes of use, which, coupled with the other changes resulting from
competitive, technological and regulatory developments, could materially
adversely affect our core business and future prospects. As explained
in greater detail in our Annual Report on Form 10-K for the year ended
December 31, 2008, 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 and other optional
calling services). We believe that our intrastate minutes of use will
continue to decline, although the magnitude of such decrease is
uncertain.
We have
traditionally sought growth largely through acquisitions of properties similar
to those currently operated by us. However, we cannot assure you that
properties will be available for purchase on terms attractive to us,
particularly if they are burdened by regulations, pricing plans or competitive
pressures that are new or different from those historically applicable to our
incumbent properties. Moreover, we cannot assure you that we will be
able to arrange additional financing on terms acceptable to us or to obtain
timely federal and state governmental approvals on terms acceptable to us, or at
all.
Recently,
we broadened our services and products by offering satellite television 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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software
and hardware defects or
malfunctions
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breaches
of security, including sabotage, tampering, computer viruses and
break-ins, and
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other
disruptions that are beyond our
control.
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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 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) is important to the
operation of our current business, which would suffer in the event of system
failures. Likewise, our ability to expand and update our information
technology infrastructure in response to our growth and changing needs is
important to the continued implementation of our new service offering
initiatives. Our inability to expand or upgrade our technology
infrastructure could have adverse consequences, which could include the delayed
implementation of new service offerings, service or billing interruptions, and
the diversion of development resources.
We
rely on a limited number of key suppliers and vendors to operate our
business.
We depend
on a limited number of suppliers and vendors for equipment and services relating
to our network infrastructure. Our local exchange carrier networks
consist of central office and remote sites, all with advanced digital
switches. Some of the digital switches were manufactured by Nortel,
which recently declared bankruptcy. If any of these suppliers
experience interruptions or other problems delivering or servicing these network
components on a timely basis, our operations could suffer
significantly. To the extent that proprietary technology of a
supplier is an integral component of our network, we may have limited
flexibility to purchase key network components from alternative
suppliers. We also rely on a limited number of other communications
companies in connection with reselling long distance, wireless and satellite
entertainment services to our customers. In addition, we rely on a
limited number of software vendors to support our business management
systems. In the event it becomes necessary to seek alternative
suppliers and vendors, we may be unable to obtain satisfactory replacement
supplies or services on economically attractive terms, on a timely basis, or at
all, which could increase costs or cause disruptions in our
services.
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.
Our
relationships with other communications companies are material to our operations
and their financial difficulties may adversely affect us.
We
originate and terminate calls for long distance carriers and other interexchange
carriers over our network in exchange for access charges that represent a
significant portion of our revenues. Should these carriers go
bankrupt or experience substantial financial difficulties, our inability to
timely collect access charges from them could have a negative effect on our
business and results of operations.
In
addition, certain of our operations carry a significant amount of voice and data
traffic for larger communications companies. As these larger
communications companies consolidate or expand their networks, it is possible
that they could transfer a significant portion of this traffic from our network
to their networks, which could negatively impact our business
and results of operations.
We
depend on key members of our senior management team.
Our
success depends largely on the skills, experience and performance of a limited
number of senior officers. 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
July 1, 2009, over 30% of our employees were members of 47 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 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 large number of systems that still must be
integrated, including management information, purchasing, accounting and
finance, sales, billing, payroll and benefits, fixed asset and lease
administration systems and regulatory compliance. 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.
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.
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 will incur substantial capital and operating costs in
rebranding 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 Federal Communications Commission
issued a publicly-available order that imposed a comprehensive set of conditions
on our operations over the next one to three years. 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 Federal Communications
Commission 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 the July
1, 2009 acquisition date 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 the periodic reports filed by
Embarq with the Securities and Exchange Commission through the date of the
merger, as well as Note 11.
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 are derived from access charge revenues that are paid to
us by long distance carriers based largely on rates set by federal and state
regulatory bodies. 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 ongoing.
Although in most instances state public service commissions have phased
in intrastate access rate reductions over multiple years while providing
the company an option to recover revenue reductions by increasing retail rates,
there is no assurance that such commissions will continue to do so in the
future.
The
FCC regulates tariffs for interstate access and subscriber line charges, both of
which are components of our revenues. The FCC has been considering
comprehensive reform of its intercarrier compensation rules for several
years. Any reform eventually adopted by the FCC will likely involve
significant changes in the access charge system and could potentially result in
a significant decrease or elimination of access charges
altogether. In addition, our financial results could be harmed if
carriers that use our access services become financially distressed or bypass
our networks, either due to changes in regulation or other
factors. Furthermore, access charges currently paid to us could be
diverted to competitors who enter our markets or expand their operations, either
due to changes in regulation or otherwise.
We
receive a substantial portion of our revenues from the federal Universal Service
Fund (“USF”), and, to a lesser extent, intrastate support
funds. These governmental programs are reviewed and amended from time
to time, and we cannot assure you that they will not be changed or impacted in a
manner adverse to us. For several years, the FCC and a federal-state
joint board established by Congress have considered comprehensive reforms of the
federal USF contribution and distribution rules. During this period,
various parties have objected to the size of the USF or questioned the continued
need to maintain the program in its current form. Over the past few
years, our high cost support fund revenues have decreased due to increases in
the nationwide average cost per loop factor used to determine payments to
program participants, as well as declines in the overall size of the high cost
support fund. Pending judicial appeals and congressional proposals
create additional uncertainty regarding our future receipt of support
payments. In addition, the number of eligible telecommunications
carriers receiving support payments from this program has increased
substantially in recent years, which, coupled with other factors, has placed
additional financial pressure on the amount of money that is available to
provide support payments to all eligible recipients, including us.
On
November 5, 2008, the FCC issued a document that, among other things,
requested public comment on the USF reform proposal, including a draft proposal
circulated by the previous FCC chairman designed to comprehensively
redefine and reform the FCC’s intercarrier compensation rules and the federal
USF rules. The draft proposes to reduce intrastate and interstate
access rates and local reciprocal compensation rates to levels substantially
below those currently charged by us. The draft also proposes changes
to USF rules that would mandate broadband deployment, freeze the level of
certain USF support payments, and expand various USF programs, the combined
effect of which would adversely impact local exchange carriers by limiting the
amount of USF revenues available to them and increasing their operating
costs. It is currently unclear what action the FCC may take with
respect to the draft proposals. Adoption of the previous FCC
chairman’s original proposal could result in a material adverse impact on the
results of our operations.
Risks posed by state regulations.
We are also subject to the authority of state regulatory commissions
which have the power to regulate intrastate rates and services, including local,
in-state long-distance and network access services. Our LECs 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. LECs governed by alternative
regulatory plans could also under certain circumstances be ordered to reduce
rates or could experience rate reductions following the lapse of plans currently
in effect. Our business could also be materially adversely affected by the
adoption of new laws, policies and regulations or changes to existing state
regulations. In particular, we cannot assure you that we will succeed in
obtaining or maintaining all requisite state regulatory approvals for our
operations without the imposition of 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
assisting law enforcement, bolstering homeland security, minimizing
environmental impacts, or addressing other issues that impact our business
(including local number portability and customer proprietary network information
requirements). For example, existing provisions of the Communications
Assistance for Law Enforcement Act require communications carriers to ensure
that their equipment, facilities, and services are able to facilitate authorized
electronic surveillance. We expect our compliance costs to increase
if future laws or regulations continue to increase our obligations to assist
other governmental agencies.
Regulatory
changes in the communications industry could adversely affect our business by
facilitating greater competition against us.
The 1996
Act provides for significant changes and increased competition in the
communications industry, including the local communications and long distance
industries. This Act and the FCC’s implementing regulations remain
subject to judicial review and additional rulemakings, thus making it difficult
to predict what effect the legislation will ultimately have on us and our
competitors. Several regulatory and judicial proceedings have
recently concluded, are underway or may soon be commenced, which address issues
affecting our operations and those of our competitors. Moreover,
certain communities nationwide have expressed an interest in establishing
municipal telephone utilities that would compete for customers. We
cannot predict the outcome of these developments, nor can we assure that these
changes will not have a material adverse effect on us or our
industry.
We
are subject to significant regulations that limit our flexibility.
As a
diversified full service incumbent local exchange carrier, or ILEC, we have
traditionally been subject to significant regulation that does not apply to many
of our competitors. For instance, unlike many of our competitors, we
are subject to federal mandates to share facilities, file and justify tariffs,
maintain certain accounts and file reports, and state requirements that obligate
us to maintain service standards and limit our ability to change tariffs in a
timely manner. This regulation imposes substantial compliance costs
on us and restricts our ability to change rates, to compete and to respond
rapidly to changing industry conditions. Although newer alternative
forms of regulation permit us greater freedoms in several states in which we
operate, they nonetheless typically impose caps on the rates that we can charge
our customers. As our business becomes increasingly competitive,
regulatory disparities between us and our competitors could impede our ability
to compete. Litigation and different objectives among federal and
state regulators could create uncertainty and impede our ability to respond to
new regulations. Moreover, changes in tax laws, regulations or
policies could increase our tax rate, particularly if state regulators continue
to search for additional revenue sources to address budget
shortfalls. We are unable to predict the future actions of the
various regulatory bodies that govern us, but such actions could materially
affect our business.
We
are subject to franchising requirements that could impede our expansion
opportunities.
We may be
required to obtain from municipal authorities operating franchises to install or
expand facilities. Some of these franchises may require us to pay
franchise fees. These franchising requirements generally apply to our
fiber transport and CLEC operations, and to our emerging switched digital
television and wireless broadband businesses. These requirements
could delay us in expanding our operations or increase the costs of providing
these services.
We
will be exposed to risks relating to evaluations of controls required by Section
404 of the Sarbanes-Oxley Act.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act and related regulations implemented
by the SEC, the New York Stock Exchange and the Public Company Accounting
Oversight Board, are increasing legal and financial compliance costs and making
some activities more time consuming. The annual evaluation of our
internal controls required by Section 404 of the Sarbanes-Oxley Act may result
in identifying material weaknesses in our internal
controls. Any future failure to successfully or timely complete
these annual assessments could subject us to sanctions or investigation by
regulatory authorities. Any such action could adversely affect our
financial results or investors’ confidence in us, and could cause our stock
price to fall. If we fail to maintain effective controls and
procedures, we may be unable to provide financial information in a timely and
reliable manner, which could in certain instances limit our ability to borrow or
raise capital.
For a
more thorough discussion of the regulatory issues that may affect our business,
see Item 1 of the Annual Reports on Form 10-K for the year ended
December 31, 2008 that we and Embarq filed with the Securities and Exchange
Commission.
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.
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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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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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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the
amount of dividends that we may distribute is subject to restrictions
under Louisiana law.
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Our Board
is free to change or suspend our dividend practices at any time. Our
common shareholders should be aware that they have no contractual or other legal
right to dividends.
Our
current dividend practices could limit our ability to pursue growth
opportunities.
The
current practice of our Board of Directors to pay an annual $2.80 per common
share dividend reflects an intention to distribute to our shareholders a
substantial portion of our free cash flow. As a result, we may not
retain a sufficient amount of cash to finance a material expansion of our
business in the future. In addition, our ability to pursue any
material expansion of our business, through acquisitions or increased capital
spending, will depend more than it otherwise would on our ability to obtain
third party financing. We cannot assure you that such financing will
be available to us at all, or at an acceptable cost.
As
a holding company, we rely on payments from our operating companies to meet our
obligations.
As a
holding company, substantially all of our income and operating cash flow is
dependent upon the earnings of our subsidiaries and the distribution of those
earnings to, or upon loans or other payments of funds by those subsidiaries to,
us. As a result, we rely upon our subsidiaries to generate the funds
necessary to meet our obligations, including the payment of amounts owed under
our long-term debt. Our subsidiaries are separate and distinct legal
entities and have no obligation to pay any amounts owed by us or, subject to
limited exceptions for tax-sharing purposes, to make any funds available to us
to repay our obligations, whether by dividends, loans or other
payments. Certain of our subsidiaries may be restricted under loan
agreements or regulatory orders from transferring funds to us, including certain
loan provisions that restrict the amount of dividends that may be paid to
us. Moreover, our rights to receive assets of any subsidiary upon its
liquidation or reorganization will be effectively subordinated to the claims of
creditors of that subsidiary, including trade creditors. The
footnotes to our consolidated financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2008 describe these
matters in additional detail.
Our
agreements and organizational documents and applicable law could limit another
party’s ability to acquire us.
Our
articles of incorporation provide for a classified board of directors, which
limits the ability of an insurgent to rapidly replace the board. In
addition, a number of other provisions in our agreements and organizational
documents and various provisions of applicable law may delay, defer or prevent a
future takeover of CenturyTel unless the takeover is approved by our Board of
Directors. This could deprive our shareholders of any related
takeover premium.
We
face other risks.
The list
of risks above is not exhaustive, and you should be aware that we face various
other risks discussed in this or other reports filed by us or Embarq with the
Securities and Exchange Commission.
Item
2.
|
Unregistered Sales of
Equity Securities and Use of
Proceeds
|
In August
2007, our Board of Directors authorized a $750 million share repurchase program
which expired on August 31, 2009. Through the Fall of 2008,
we had repurchased approximately 13.2 million shares for $503.9 million under
this program. In the Fall of 2008, we suspended repurchases pending
completion of the Embarq merger, which we completed on July 1,
2009. We did not purchase any additional shares under this program
between July 1, 2009 and the expiration of the program on August 31,
2009.
During
the third quarter of 2009, we withheld 129,875 shares of stock at an
average price of $30.71 per share to pay taxes due upon vesting of restricted
stock and restricted stock units for certain of our employees.
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 August 24,
2009 (incorporated by reference to Exhibit 99.2 to the Current
Report on Form 8-K filed by CenturyTel, Inc. (File No. 1-7784)
with the Securities and Exchange Commission on August 31,
2009).
|
3.4
|
Charter
of the Nominating and Corporate Governance Committee of the Board of
Directors of CenturyTel, Inc., as amended through July 1, 2009
(incorporated by reference to Exhibit 3.4 to the Quarterly Report on Form
10-Q filed by CenturyTel, Inc. for the period ended June 30,
2009).
|
4.1
|
$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).
|
4.2
|
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).
|
|
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).
|
4.3
|
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
4.2(f)).
|
|
h.
|
Fourth
Supplemental Indenture dated as of March 26, 2007 between CenturyTel and
Regions Bank, as Trustee, designating and outlining the terms and
conditions of CenturyTel’s 6.0% Senior Notes, Series N, due 2017 and 5.5%
Senior Notes, Series O, due 2013 (incorporated by reference to Exhibit 4.1
of our Current Report on Form 8-K dated March 29,
2007).
|
|
i.
|
Form
of 6.0% Senior Notes, Series N, due 2017 and 5.5% Senior Notes, Series O,
due 2013 (included in Exhibit
4.2(h)).
|
|
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
4.3(j)).
|
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).
|
|
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).
|
|
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).
|
10.2
|
Stock-based
Incentive Plans and Agreements of CenturyTel,
Inc.
|
|
a.
|
1983
Restricted Stock Plan, as amended and restated through May 28, 2009
(incorporated by reference to Exhibit 10.2(a) to the Quarterly Report on
Form 10-Q filed by CenturyTel, Inc. for the period ended June 30,
2009).
|
|
b.
|
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).
|
|
c.
|
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).
|
|
d.
|
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).
|
|
e.
|
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).
|
10.3
|
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).
|
10.4
|
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).
|
10.5
|
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).
|
10.6
|
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.
|
Embarq
Corporation 2008 Equity Incentive Plan (incorporated by reference to
Exhibit 99.2 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).
|
|
i.
|
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).
|
|
j.
|
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).
|
|
k.
|
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).
|
|
l.
|
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).
|
|
m.
|
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).
|
|
n.
|
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).
|
|
o.
|
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).
|
|
p.
|
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).
|
11*
|
Computations
of Earnings Per Share.
|
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).
|
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.
SIGNATURE
Pursuant
to the requirements 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:
November 9, 2009
|
/s/ Neil A.
Sweasy
|
|
Neil
A. Sweasy
|
|
Vice
President and Controller
|
|
(Principal
Accounting Officer)
|