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| EQ > SEC Filings for EQ > Form 10-Q on 30-Oct-2008 | All Recent SEC Filings |
30-Oct-2008
Quarterly Report
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this document. These forward-looking statements relate to our outlook or expectations for earnings, revenues, expenses, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business, results of operations or financial condition. Specifically, forward-looking statements may include:
• statements relating to our plans, intentions, expectations, objectives or goals;
• statements relating to our future economic performance, business prospects, revenue, income and financial condition, and any underlying assumptions relating to those statements; and
• statements preceded by, followed by or that include the words "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions.
These statements reflect our management's judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, our management has made assumptions regarding, among other things, customer growth and retention, pricing, operating costs, network usage, technology and the economic and regulatory environment.
Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause our actual results to differ include, but are not limited to:
• the uncertainties related to, and the impact of, our proposed merger with CenturyTel;
• the effects of vigorous competition in the markets in which we operate, including access line loss to cable operators and wireless providers;
• the impact of new, emerging and competing technologies on our business;
• the effect of changes in the legal and regulatory environment and the impact of compliance with regulatory mandates, including the proposed FCC order regarding changes to intercarrier compensation and federal USF support;
• potential fluctuations in our financial performance, including revenues, capital expenditures and operating expenses;
• the impact of any adverse change in the ratings assigned to our debt by ratings agencies on the cost of financing or the ability to raise additional financing if needed;
• the effects of mergers, consolidations or other unexpected developments in the industries relevant to our operations;
• the failure to realize expected improvement in operating efficiencies;
• the costs and business risks associated with the development of new products and services;
• the uncertainties related to our investments in networks, systems and other businesses;
• the uncertainties related to the implementation of our business strategies;
• the inability of third parties to perform to our requirements under agreements related to our business operations;
• our ownership of or ability to license technology that may be necessary to expand our business offerings;
• restrictions in our patent agreement with Sprint Nextel;
• unexpected adverse results of legal proceedings involving our company;
• the impact of equipment failure or other breaches of network or information technology security;
• potential work stoppages;
• a determination by the IRS that the spin-off from Sprint Nextel should be treated as a taxable transaction;
• volatility and other market conditions in the equity and credit markets, including impacts on the stability of banks and other financial institutions;
• the effects of changes in both general and local economic conditions on the markets we serve, which can impact demand for our products and services; customer purchasing decisions; collectability of revenue; and required levels of capital expenditures related to new construction of residences and businesses;
• the possible impact of adverse changes in political or other external factors over which we have no control, including hurricanes and other severe weather; and
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this document. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
OVERVIEW
Merger Agreement
On October 26, 2008, we entered into the Merger Agreement whereby CenturyTel will acquire us in a stock-for-stock transaction, which is expected to be tax-free to our shareholders. Under the terms of the Merger Agreement, our shareholders will receive 1.37 CenturyTel shares for each share of common stock owned. Completion of this transaction is subject to approval by the shareholders of both companies, various federal and state regulatory approvals as well as other customary closing conditions. Subject to these requirements, the transaction is expected to close during the 2009 second quarter. In conjunction with this transaction, we may incur additional costs prior to closing including, but not limited to, potential impairments of duplicate system development efforts and technology; employee retention and severance costs; and other merger and integration costs.
Operations
We provide a suite of integrated communications services to consumer and business customers primarily in our local service territories in 18 states. Our service and product offerings include local and long distance voice, data, high-speed Internet, satellite video, professional services and communications equipment. In addition, we continue to serve existing wireless customers acquired under our mobile virtual network operator arrangement with Sprint Nextel; however, as part of our orderly transition away from providing these services, we have curtailed most sales activities.
We also provide wholesale services primarily to wireline and wireless carriers. Services offered include switched access, special access, intelligent network database, collocation, resale switched access lines, pay telephone, unbundled network elements, high speed data services and billing and collection services.
Through our Logistics segment, we engage in wholesale product distribution, logistics and configuration services.
Our mission is to profitably serve targeted customers through simple solutions
and a customer experience that satisfies their personal and business needs. Our
strategy for success in the marketplace has five key elements: 1) innovate in
everything we do, 2) drive productivity and cost efficiency, 3) win and retain
targeted customers, 4) drive value though the delivery of broadband services and
5) explore and pursue growth opportunities complementary to our core business.
Consistent with the past several years, we have continued to experience overall declines in telecommunications net operating revenues during 2008. Historically, these overall declines have resulted from voice revenue reductions driven by switched access line losses, somewhat offset by growth in data and high-speed Internet revenue. In recent quarters, voice revenue declines and line loss trends have been comparatively worse. We believe these recent trends are partially the result of general and local economic conditions in the markets we serve. The partial offset of voice revenue declines from growth in data services and high-speed Internet revenue is expected to continue based on recent results and trends; however, the amount of offset may decline in the future due to expected reduced rates of growth for these products and services.
The following table reflects information about our switched access lines (in thousands):
Access Lines Line Loss for Quarter Ended Line Loss for Twelve Months Ended
September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2007 September 30, 2008
Primary 3,636 4,026 (119 ) (3.2 )% (99 ) (2.4 )% (390 ) (9.7 )%
Additional 258 319 (16 ) (5.8 )% (17 ) (5.1 )% (61 ) (19.1 )%
Total Consumer 3,894 4,345 (135 ) (3.4 )% (116 ) (2.6 )% (451 ) (10.4 )%
Business 1,815 1,887 (26 ) (1.4 )% (9 ) (0.5 )% (72 ) (3.8 )%
Wholesale 144 171 (8 ) (5.3 )% (5 ) (2.8 )% (27 ) (15.8 )%
Total 5,853 6,403 (169 ) (2.8 )% (130 ) (2.0 )% (550 ) (8.6 )%
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Beginning in 2008, we no longer include in our business switched access line counts those lines that support our internal administrative and operational activities. Accordingly, the business access line counts at September 30, 2007, were adjusted by 162 thousand access lines to reflect this change.
Consumer switched access line losses represent the most significant portion of our losses. These losses were primarily attributed to an increasing overlap of cable operators within our local service territories offering VoIP, as well as an increasing number of customers choosing to discontinue traditional wireline phone service to rely solely on wireless services.
Product substitution among our offerings also contributes to our access line losses. Certain of our business access line losses result from the conversion to our data services. These substitutions result in a reduction in the number of switched access lines we serve, but do not represent a loss of the customer relationship.
For the year to date period ended September 30, 2008, our high-speed Internet subscribers increased to approximately 1.4 million subscribers, which is an increase of 14% as compared to the same period in 2007, while associated revenue increased 13%.
Demand during the quarter for data services continued to be strong. Our data services consist mainly of dedicated circuits connecting other carriers' networks to their customers' locations, wireless carriers' cell towers to mobile switching centers or business customers to our network. Revenue associated with these services increased 5% for the year to date period ended September 30, 2008, compared to the same period in 2007.
Satellite video service is also a growing element of our bundled service offerings that we currently offer through sales agency relationships with various satellite video service providers. As of September 30, 2008, we had 284 thousand satellite video service subscribers, compared to 190 thousand as of September 30, 2007.
To measure our success in our consumer bundling initiatives as well as attracting and retaining high value customers, average monthly revenue per household (ARPH) is a measure that we closely monitor. This measure is calculated by dividing average monthly consumer revenue by average primary consumer access lines.
Year to Date September 30, Difference
2008 2007 Amount %
Consumer revenue (millions) $ 1,916 $ 2,003 $ (87 ) (4.3 )%
Average primary consumer access lines (thousands) 3,762 4,130 (368 ) (8.9 )%
ARPH $ 56.59 $ 53.89 $ 2.70 5.0 %
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Our telecommunications net operating revenues and operating expenses include amounts that are affected by regulation, including intercarrier compensation received from or paid to other carriers for originating and terminating traffic on each other's networks. The following table reflects information about the minute-driven components of our intercarrier compensation that could be impacted by the proposed FCC order:
Quarter Ended September 30, 2008
Terminating
Originating Traffic Traffic
Revenues Minutes Rate Minutes Rate
(millions) (millions)
Interstate switched access 2,081 $ 0.008 2,002 $ 0.006
Intrastate switched access 996 $ 0.022 1,066 $ 0.027
Local interconnection - $ - 2,163 $ 0.006
Expenses
Interstate switched access 685 $ 0.008 685 $ 0.008
Intrastate switched access 589 $ 0.029 589 $ 0.021
Local interconnection - $ - 3,049 $ 0.001
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Spin-Off Related Expenditures
We replicated or otherwise arranged for replacement of certain facilities, systems, infrastructure and personnel related to functions historically performed by Sprint Nextel and successfully completed the exit of all remaining transitional agreements in May 2008.
No significant spin-off expenditures were incurred during the year to date period ended September 30, 2008. We incurred the following spin-off related charges and capital expenditures for the quarter and year to date periods ended September 30, 2007:
Quarter Year to Date
(millions)
Spin-off related charges $ 4 $ 21
Capital expenditures 2 8
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Industry Environment
We operate in an industry that has been and continues to be subject to intense competition in conjunction with regulatory and legislative changes. Given these factors, as well as the trend toward consolidation in the industry, we routinely assess the implications of these industry factors on our operations. These assessments, along with regulatory and legislative developments such as the proposed FCC order regarding changes to intercarrier compensation and federal USF support, may impact the future valuation of our long-lived assets and could have a material effect on our business, results of operations, financial condition and liquidity.
Economic Conditions
In recent months, general economic conditions in the United States have worsened; significant declines in values have occurred in the global equity, debt and derivative markets; and banks and other financial institutions have come under duress prompting government interventions. The diminished availability of credit and liquidity resulting from these conditions may adversely impact the financial health of our customers, vendors and partners.
For us, the principal immediate impact has been limited to a decline in our pension plan's assets of approximately $615 million for the year to date period ended September 30, 2008.
Adoption of SFAS 157
On January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements, for our financial assets and liabilities. Our adoption of SFAS No. 157 did not impact our financial position, results of operations, liquidity or disclosures as there are no financial assets or liabilities that are measured at fair value on a recurring basis. In accordance with FSP No. 157-2, Effective Date of FASB Statement No. 157, we elected to defer until January 1, 2009, the adoption of SFAS No. 157 for all nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. This includes goodwill and nonfinancial long-lived assets that are measured at fair value in impairment testing and asset retirement obligations initially measured at fair value. The adoption of SFAS No. 157 for those nonfinancial assets and liabilities within the scope of FSP 157-2 is not expected to have a material impact on our financial position, results of operations or liquidity.
Recently Issued Accounting Pronouncements
EITF 03-6-1, Determining Whether Instruments Granted in Share-based Payment Transactions are Participating Securities. This standard concluded that unvested share-based payment awards that contain a nonforfeitable right to receive dividends, whether paid or unpaid, are participating securities and should be included in the computation of earnings per share pursuant to the two-class method prescribed under SFAS No. 128. This standard is effective for fiscal years beginning after December 15, 2008 with early adoption prohibited. We are evaluating the impact of this standard but do not believe it will have a material impact on basic or diluted earnings per share.
RESULTS OF OPERATIONS
Quarters Ended September 30, Year to Date September 30,
2008 2007 2008 2007
(millions)
Net Operating Revenues
Telecommunications segment $ 1,408 $ 1,473 $ 4,303 $ 4,435
Logistics segment 117 121 342 353
Total net operating revenues $ 1,525 $ 1,594 $ 4,645 $ 4,788
Operating Income
Telecommunications segment $ 355 $ 365 $ 1,215 $ 1,135
Logistics segment (2 ) (2 ) - (1 )
Total operating income $ 353 $ 363 $ 1,215 $ 1,134
Net Income $ 160 $ 157 $ 578 $ 493
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Segmental Results of Operations - Telecommunications
Our Telecommunications segment consists of regulated local phone companies serving approximately 5.9 million access lines primarily in 18 states as of September 30, 2008. We provide a suite of integrated communication services including local and long distance voice, data, high-speed Internet, satellite video, professional services and communications equipment to consumer and business customers primarily in our local service territories. We also provide wholesale access to our local network and other communications services primarily to wireline and wireless carriers.
Quarters Ended September 30, Difference
% of % of
(millions) 2008 Revenues 2007 Revenues $ Percent
Net operating revenues
Voice $ 960 68 % $ 1,051 71 % $ (91 ) (9 )%
Data 202 14 % 195 13 % 7 4 %
High-speed Internet 138 10 % 124 8 % 14 11 %
Other 77 6 % 76 6 % 1 1 %
Service revenues 1,377 98 % 1,446 98 % (69 ) (5 )%
Product revenues 31 2 % 27 2 % 4 15 %
Total net operating revenues 1,408 100 % 1,473 100 % $ (65 ) (4 )%
Operating expenses
Costs of services 422 30 % 417 28 % 5 1 %
Costs of products 30 2 % 41 3 % (11 ) (27 )%
Selling, general and administrative 350 25 % 393 27 % (43 ) (11 )%
Depreciation 251 18 % 257 17 % (6 ) (2 )%
Total operating expenses 1,053 75 % 1,108 75 % (55 ) (5 )%
Operating income $ 355 25 % $ 365 25 % $ (10 ) (3 )%
Capital expenditures $ 172 $ 195 $ (23 ) (12 )%
Switched access lines (thousands) 5,853 6,403 (550 ) (8.6 )%
Switched access minutes of use (millions) 6,145 6,909 (764 ) (11 )%
High-speed Internet subscribers (thousands) 1,388 1,216 172 14 %
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Year to Date September 30, Difference
% of % of
(millions) 2008 Revenues 2007 Revenues $ Percent
Net operating revenues
Voice $ 2,978 69 % $ 3,206 72 % $ (228 ) (7 )%
Data 599 14 % 572 13 % 27 5 %
High-speed Internet 408 9 % 361 8 % 47 13 %
Other 232 6 % 219 5 % 13 6 %
Service revenues 4,217 98 % 4,358 98 % (141 ) (3 )%
Product revenues 86 2 % 77 2 % 9 12 %
Total net operating revenues 4,303 100 % 4,435 100 % (132 ) (3 )%
Operating expenses
Costs of services 1,192 28 % 1,238 28 % (46 ) (4 )%
Costs of products 96 2 % 104 2 % (8 ) (8 )%
Selling, general and administrative 1,053 25 % 1,172 26 % (119 ) (10 )%
Depreciation 747 17 % 786 18 % (39 ) (5 )%
Total operating expenses 3,088 72 % 3,300 74 % (212 ) (6 )%
Operating income $ 1,215 28 % $ 1,135 26 % $ 80 7 %
Capital expenditures $ 532 $ 565 $ (33 ) (6 )%
Switched access minutes of use (millions) 19,398 21,550 (2,152 ) (10 )%
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Net Operating Revenues
Net operating revenues decreased $65 million for the quarter and decreased $132 million for the year to date period ended September 30, 2008, compared to the same periods in 2007. Variances in individual categories of revenue are discussed below.
Voice
Voice revenues include monthly recurring fees for local service, enhanced calling features and long distance. Additionally, voice revenues include access and other wholesale services to other carriers to enable connectivity to our network as well as USF receipts and customer surcharges. Voice revenues declined $91 million for the quarter and decreased $228 million for the year to date period ended September 30, 2008, compared to the same periods in 2007.
The following table lists the major drivers of these changes:
Increase (Decrease)
Quarter Year to Date
(millions)
Local voice revenues primarily due to access line
losses $ (61 ) $ (165 )
Long-distance voice revenues primarily due to access
line losses and yield declines (13 ) (26 )
Access revenues primarily associated with lower
access minutes of use (8 ) (22 )
USF receipts (4 ) (9 )
Other (5 ) (6 )
Total change $ (91 ) $ (228 )
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Data
Data revenues represent data network services sold to business customers and
special access services sold to other carriers. Data revenues increased $7
million for the quarter and increased $27 million for the year to date period
ended September 30, 2008, compared to the same periods in 2007. The following
table lists the major drivers of these changes:
Increase (Decrease)
Quarter Year to Date
(millions)
Special access revenue $ 5 $ 20
Other 2 7
Total change $ 7 $ 27
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High-speed Internet
High-speed Internet revenues increased $14 million for the quarter and increased $47 million for the year to date period ended September 30, 2008, compared to the same periods in 2007 due to a 14% increase in subscribers.
Other Service
Other service revenues consist primarily of professional services, intelligent network database services, billing and collection services, wireless services . . .
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