Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1998, for Century Telephone Enterprises, Inc. (trading as CenturyTel). The Company is a regional diversified communications provider offering local telephone and cellular services across 21 states. The reporting period reflects the significant impact of the December 1, 1997, acquisition of Pacific Telecom, Inc. (PTI), which added over 660,000 telephone access lines and 88,000 cellular subscribers.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 |
|---|---|---|
| Total Operating Revenues | $401.9 million | $1,162.0 million |
| Operating Income | $128.2 million | $359.8 million |
| Net Income | $54.7 million | $176.6 million |
| Diluted Earnings Per Share | $0.59 | $1.90 |
| Operating Cash Flow (9 months) | $317.2 million | |
| Capital Expenditures (9 months) | $204.6 million | |
| Total Debt (Long-term + Current) | $2,437.7 million | |
| Cash and Equivalents | $3.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 84% year-over-year for the quarter and 85% for the nine-month period, driven primarily by the PTI acquisition.
- Profitability: Net income rose 32% for the quarter and 12% for the nine-month period. Operating income increased 84% for the quarter and 90% for the nine-month period.
- Interest Expense: Interest expense surged 275% for the quarter and 278% for the nine-month period due to debt incurred for the PTI acquisition and the settlement of interest rate hedge contracts.
- Asset Sales: The Company recorded a net gain of $49.9 million on the sale or exchange of assets during the first nine months of 1998, compared to $70.1 million in the prior year. This included gains from converting Brooks Fiber stock to WorldCom stock and selling minority cellular interests.
- Wireless Metrics: Average monthly service revenue per customer declined to $59 (Q3) and $57 (9 months) due to a higher mix of lower-usage new subscribers and the inclusion of PTI properties with historically lower ARPU.
Guidance, Outlook, and Risks
- Pending Transactions: The Company agreed to sell its Alaska operations for $415 million (expected Q1 1999) to fund the pending $225 million acquisition of telephone assets from Ameritech in Wisconsin.
- Capital Expenditures: Revised 1998 budgeted capital expenditures total $327 million ($220M telephone, $65M wireless, $42M corporate).
- Year 2000 Compliance: The Company anticipates spending approximately $33.8 million in 1998 and 1999 for Y2K remediation. Risks include potential service interruptions if vendors or interconnecting carriers fail to remediate systems.
- Regulatory Risk: The FCC initiated a proceeding to potentially lower the authorized rate of return for interstate access services. Additionally, the discontinuance of SFAS 71 (regulated accounting) could result in a noncash extraordinary charge of $250–$300 million.
- Competition: Management notes intensifying competitive pressures in wireless markets, leading to price plan modifications and lower average revenue per customer.
Investor Verification Checklist
- Debt Servicing: Verify the Company's ability to service $2.4 billion in debt given the high interest expense and reliance on operating cash flow.
- Alaska Sale Closing: Confirm the regulatory approval and closing timeline for the $415 million Alaska sale, which is critical for funding the Wisconsin acquisition.
- Y2K Contingency: Assess the progress of third-party vendor and carrier remediation, as the Company's operations depend on external systems.
- Regulatory Assets: Monitor the FCC rate of return proceeding and the potential impact of SFAS 71 discontinuance on future earnings.
- Wireless Churn and ARPU: Track the trend of declining average revenue per customer and churn rates (2.3% in Q3) amidst competitive pricing.