LUMN

Business Context and Reporting Period

This Form 10-Q covers CenturyTel, Inc. (noting the metadata reference to Lumen Technologies, which is a successor entity) for the quarterly and nine-month periods ended September 30, 2000. CenturyTel is a regional diversified communications company providing local telephone and wireless services. The reporting period was significantly impacted by the acquisition of over 490,000 telephone access lines from Verizon Communications, Inc. in Arkansas, Missouri, and Wisconsin for approximately $1.5 billion, and the divestiture of remaining Alaska cellular operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 15.1% year-over-year for the quarter ($482.6M vs. $419.2M) and 5.5% for the nine-month period ($1,318.7M vs. $1,250.2M). The quarterly increase was driven primarily by $41.0 million in revenue from Verizon acquisitions.
• Profitability: Net income for the quarter rose 4.2% to $67.2 million. However, for the nine-month period, net income declined 2.6% to $174.4 million, largely due to a significant decrease in gains from asset sales compared to 1999.
• Asset Sales: Gains on sale of assets dropped from $51.2 million in the first nine months of 1999 to $20.6 million in 2000. The 1999 figure included a large gain from the sale of Texas cellular properties.
• Wireless Segment: Wireless operating income decreased 3.5% in the quarter and 17.7% for the nine-month period. This was attributed to reduced roaming rates, price reductions, and the sale of Alaska and Texas cellular properties.
• Debt Levels: Long-term debt increased significantly to $3.13 billion (plus $76.2 million current maturities) to finance the Verizon acquisitions, up from $2.08 billion at year-end 1999.

Outlook, Risks, and Management Commentary

• Acquisition Integration: Management is focused on integrating the Verizon properties. Pro forma information suggests that if acquisitions had occurred on Jan 1, 2000, operating revenues would have been $1.53 billion and net income $153.2 million for the nine-month period.
• Wireless Strategy: The company is shifting focus from prepaid to contract customers to stabilize average revenue per user (ARPU), which declined to $52 in Q3 2000 from $57 in Q3 1999 due to price competition.
• Regulatory Risk (SFAS 71): A material risk exists regarding the potential discontinuance of SFAS 71 (regulated accounting). If applied, management estimates a noncash, after-tax extraordinary charge between $320 million and $370 million.
• Future Transactions: The company agreed to sell 30 PCS operating licenses to Leap Wireless International for $205 million, expected to close in Q1 2001, generating an estimated pre-tax gain of $190 million.
• Capital Expenditures: Revised budgeted capex for 2000 is $425 million ($235M telephone, $65M wireless, $125M other). Anticipated 2001 capex is approximately $525 million.

Investor Verification Checklist

• Debt Servicing: Verify the impact of the $1.5 billion Verizon acquisition debt on future interest coverage ratios, noting the recent issuance of $900 million in senior notes to refinance credit facilities.
• Regulatory Accounting: Monitor FCC proceedings and the potential application of SFAS 101, which could trigger a massive one-time charge to earnings.
• Wireless Churn: Assess the sustainability of wireless growth given the decline in ARPU and the company's strategic pivot away from prepaid customers.
• Asset Sale Proceeds: Confirm the closing of the Leap Wireless license sale and the timing of the $205 million proceeds to ensure debt reduction plans are met.
• Goodwill Amortization: Review the amortization of goodwill associated with the Verizon acquisitions ($2.8 million noted in Q3) and its impact on future operating margins.