Business Context and Reporting Period
This Form 8-K, filed on April 29, 2002, by CenturyTel, Inc. (now Lumen Technologies, Inc.), discloses material events regarding two major pending transactions expected to close in the second or third quarter of 2002. The filing provides unaudited pro forma financial information as of December 31, 2001, and for the years ended December 31, 1999, 2000, and 2001, reflecting the impact of these transactions.
Key Financial Metrics and Transactions
Pending Acquisitions and Divestitures
- Verizon Acquisition: CenturyTel agreed to purchase Verizon's local telephone operations in Missouri and Alabama for approximately $2.159 billion in cash. The assets include approximately 676,000 telephone access lines and 2,800 route miles of fiber optic cable.
- Wireless Divestiture: CenturyTel agreed to sell its wireless operations to an affiliate of ALLTEL Corporation for $1.65 billion in cash. Anticipated after-tax proceeds are approximately $1.3 billion.
- Financing Plan: The Verizon acquisition is expected to be financed by the wireless sale proceeds ($1.3 billion), the sale of $500 million in equity units, and $359 million in debt securities.
Pro Forma Financial Highlights (Year Ended Dec 31, 2001)
| Metric | Historical CenturyTel | Pro Forma Adjusted |
|---|---|---|
| Total Operating Revenues | $2,117,469,000 | $2,231,631,000 |
| Operating Income | $557,919,000 | $647,926,000 |
| Net Income | $343,031,000 | $238,951,000 |
| Diluted EPS | $2.41 | $1.68 |
| Total Assets | $6,318,684,000 | $7,718,404,000 |
| Long-Term Debt | $2,087,500,000 | $2,946,500,000 |
Note: The pro forma net income decrease is primarily due to the reclassification of wireless operations as discontinued operations and increased interest expense from new debt, despite higher operating income from the Verizon acquisition.
Material Changes vs. Prior Periods
- Revenue Composition: The pro forma statements remove wireless revenue (approx. $438 million in 2001) and add Verizon local telephone revenue (approx. $552 million in 2001).
- Debt Levels: Long-term debt is projected to increase by approximately $859 million to finance the net cost of the Verizon acquisition after accounting for wireless sale proceeds.
- Asset Base: Net property, plant, and equipment is expected to increase by approximately $634 million, and goodwill/intangible assets ("Excess cost of net assets acquired") will increase by approximately $1.485 billion.
Outlook, Risks, and Contingencies
Management Commentary and Outlook
Management intends to use the acquired Verizon properties to expand long-distance, Internet access (DSL), and advanced technology services. The pro forma information assumes the transactions occurred on January 1, 2001, for income statement purposes and December 31, 2001, for balance sheet purposes. It does not reflect potential synergies, cost reductions, or revenue enhancements from integrating the new assets.
Risks and Contingencies
- Regulatory Approvals: The Verizon acquisition is subject to FCC approvals, Missouri Public Service Commission approval, and third-party consents (including bondholder releases). The Alabama purchase has received state approval.
- Wireless Sale Conditions: The sale to Alltel requires FCC approval, waiver of certain FCC rules, and satisfaction of Hart-Scott-Rodino antitrust requirements. It also depends on resolving "first refusal" rights held by cellular partners.
- Financing Risk: The transactions are contingent on the Company's ability to finance the deal. If financing fails, CenturyTel must pay Verizon 10% of the transaction consideration as a penalty.
- Legal Proceedings: AT&T Corp. has filed a lawsuit seeking damages for alleged breach of a 1994 stock purchase agreement regarding environmental costs. CenturyTel believes it has defenses and potential third-party indemnification.
Investor Verification Checklist
- Verify the status of regulatory approvals from the FCC and the Missouri Public Service Commission for the Verizon acquisition.
- Confirm the resolution of "first refusal" rights with CenturyTel's cellular partners to ensure the Alltel sale can close.
- Monitor the Company's ability to secure the $500 million equity unit sale and $359 million debt issuance as planned.
- Review the potential impact of the AT&T litigation on future cash flows or indemnification obligations.
- Assess the integration risks and the timeline for realizing any projected synergies from the Verizon acquisition, which are not reflected in the pro forma data.