Business Context and Reporting Period
Company: CenturyTel, Inc. (Note: The filing text identifies the registrant as CenturyTel, Inc., though the metadata provided in the prompt lists "Lumen Technologies, Inc." which is a later name for the entity).
Filing Type: Form 8-K (Current Report)
Date of Report: August 31, 2002
Reporting Period: The report details significant corporate transactions occurring in the third quarter of 2002, specifically the sale of wireless operations and the acquisition of local exchange telephone properties in Alabama and Missouri. Financial data provided includes historical results for the acquired Verizon properties for the six months ended June 30, 2002, and pro forma consolidated results for CenturyTel for the year ended December 31, 2001, and the six months ended June 30, 2002.
Key Financial Metrics
Transaction Values
- Wireless Disposition: Sold substantially all wireless operations to an affiliate of Alltel Corporation for approximately $1.593 billion in cash (expected after-tax proceeds: $1.268 billion). A potential additional $68 million is contingent on FCC waiver of a cross-ownership restriction.
- Alabama Acquisition: Purchased Verizon's local exchange operations in Alabama for approximately $1.020 billion cash (closed July 1, 2002).
- Missouri Acquisition: Purchased Verizon's local exchange operations in Missouri for approximately $1.177 billion cash (closed August 31, 2002). Assets include ~354,000 access lines and ~1,400 route miles of fiber.
- Total Acquisition Cost: Aggregate purchase price for Verizon assets was $2.197 billion.
Acquired Assets Performance (Verizon Properties)
| Metric (Dollars in Thousands) | Alabama Operations (6 Months Ended June 30, 2002) | Missouri Operations (6 Months Ended June 30, 2002) |
|---|---|---|
| Total Operating Revenues | $124,988 | $141,326 |
| Operating Income | $60,670 | $56,594 |
| Net Income | $33,896 | $32,685 |
| Net Cash Provided by Operating Activities | $55,790 | $56,310 |
| Capital Expenditures | ($24,635) | ($23,667) |
Pro Forma Consolidated Results (CenturyTel)
Reflects the Verizon acquisitions and wireless divestiture as if they occurred on January 1, 2001 (for income statement) and June 30, 2002 (for balance sheet).
- Pro Forma Net Income (Year Ended Dec 31, 2001): $235,360,000 (Basic EPS: $1.67).
- Pro Forma Net Income (Six Months Ended June 30, 2002): $132,663,000 (Basic EPS: $0.94).
- Pro Forma Total Assets (June 30, 2002): $7,783,974,000.
- Pro Forma Long-Term Debt (June 30, 2002): $3,405,188,000.
Material Changes vs. Prior Period
- Strategic Shift: The company has exited the wireless business entirely, classifying it as discontinued operations, and has significantly expanded its wireline footprint in Alabama and Missouri.
- Revenue Composition: Pro forma operating revenues for the six months ended June 30, 2002, increased to $1.128 billion (from $861.6 million historical) due to the inclusion of Verizon assets.
- Debt Structure: To finance the $2.197 billion acquisition, CenturyTel incurred approximately $929 million in net new indebtedness. This includes $494 million in senior notes (7.875%), $161 million in convertible debentures (4.75%), and the utilization of $274 million from equity unit proceeds previously held as cash.
- Asset Base: The acquisition added approximately 654,000 telephone access lines and significant fiber optic infrastructure to the company's portfolio.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook
Management intends to provide long-distance, Internet access (including DSL), and other communications services in the acquired markets. The pro forma financial information does not reflect potential revenue enhancements or cost reductions expected from integrating the new operations.
Risks and Contingencies
- Regulatory Approval: An additional $68 million in proceeds from the wireless sale is contingent upon the FCC waiving a cross-ownership restriction by February 1, 2003. No assurance is given that this sale will occur.
- Integration Risk: The company faces risks related to effectively integrating the new businesses, introducing new offerings, and managing the transition of operations under a different management structure.
- Valuation Uncertainty: The allocation of the purchase price for the Verizon acquisitions is preliminary. Final allocations of identifiable intangible assets (e.g., customer base) could impact future depreciation and amortization expenses. Management estimates that a $2.4 million difference in annual depreciation/amortization would affect earnings per share by $0.01.
- Financial Assumptions: Pro forma results assume a weighted average interest rate of 7.0% on the new net indebtedness. A change of 0.125% in this rate would alter net income by approximately $697,000 (annualized) or $348,000 (six-month).
- Accounting Estimates: The special-purpose financial statements for the acquired Verizon properties rely on significant allocations and estimates for indirect expenses and assets, which may not reflect the actual financial position post-acquisition.
Investor Verification Checklist
- Wireless Sale Contingency: Verify the status of the FCC waiver regarding the minority-owned market to confirm the potential $68 million additional proceeds.
- Debt Servicing: Review the specific terms and maturity dates of the new $929 million in debt (senior notes, convertible debentures, and equity units) to assess future cash flow obligations.
- Intangible Asset Allocation: Monitor the final purchase price allocation for the Verizon acquisitions, specifically the valuation of customer base and other intangibles, as this will impact future amortization expenses and net income.
- Integration Progress: Assess the company's ability to realize the projected cost synergies and revenue enhancements from the new Alabama and Missouri operations, which are not reflected in the pro forma data.
- Regulatory Environment: Review ongoing regulatory proceedings in Alabama and Missouri that could impact pricing or service offerings for the acquired local exchange operations.