Lumen Technologies Inc (LUMN) 2002 Q2 法說會逐字稿

Yes, good morning.

My name is Ashley and I will be your conference facilitator.

At this time, I would like to welcome everyone to the CenturyTel second quarter 2002 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer period.

If you would like to ask question during this time, simply press star then the number 1 on your telephone keypad.

If you would like to withdraw your question, press star then the number 2 on your telephone keypad.

Thank you.

I will now turn the call over to Tony Davis, Vice President of Investor Relations.

You may begin your conference sir.

Thank you, Ashley.

Good morning everyone and welcome to our call today.

The purpose of which is to discuss CenturyTel's second quarter 2002 earnings, released earlier today.

Your host for our call is Glen Post, Chairman, President, and Chief Executive Officer of CenturyTel.

Joining Glen on our call today is Stewart Ewing, CenturyTel's Executive Vice President and Chief Financial Officer.

Also available during the call today is Karen Pukett, CenturyTel's Executive Vice President and Chief Operating Officer.

We do ask that you please review our Safe-Harbour language found in our press release and in other SEC filings.

As we will be making certain forward-looking statements during our call today, particularly as they pertain to the Verizon property acquisitions in Missouri, CenturyTel's wireless business divestiture to Alltel, guidance for third quarter, and full year 2002 and other outlooks in our business.

At this time, I would like to turn the call over to your host today, Glen Post.

Glen?

Thank you, Tony.

And thank you all for joining our call today.

We appreciate the opportunity to review CenturyTel's second quarter 2002 results with you.

Our nation continues to struggle economically and the telecom industry continues to experience unprecedented challenges.

We are pleased to report CenturyTel has generated strong operating results for the quarter.

Meeting or exceeding the guidance given during our first quarter earnings call in April.

Excluding nonrecurring items, CenturyTel's fully diluted earnings per share for the quarter was 60 cents.

Exceeding the 52 cents, first call consensus estimate for the quarter by 8 cents or 15.4%.

Free cash flow for the quarter was a strong $53 million a 33.2% increase over second quarter 2001.

Our revenue from continuing operations increased 7.2% to $438.7 million.

Data revenues continued a strong growth trend, increasing 38% during the quarter.

Our long distance business continued to experience solid customer growth with net additions over 21,000 for the quarter.

That's 4% sequential growth.

We've added more than 120,000 long-distance customers since the second quarter of 2001.

We added almost 6,000 DSL connections during the quarter, reflecting continued strong demand for high-speed internet services in our rural markets.

We have added more than 22,000 DSL subscribers since the second quarter 2001, more than doubling our DSL customer base during that period of time.

Internet and DSL profitability have also improved considerably year over year as we achieve break-even cash flow in our internet and DSL operations combined for the second quarter.

EBITDA for -- from continuing operations, excluding nonrecurring items, increased 9.6% to $221 million during the quarter.

Consolidated EBITDA margin excluding nonrecurring items, was 50.4% for the quarter, compared with a margin of 49.3% for the second quarter of last year.

We're also raising our range of earnings per share guidance for the year, to $2.08 to $2.20 from the range of $2.06 to $2.18 we had given you earlier.

I'd now like to recap several significant accomplishments and activities since our first quarter call with you and provide a brief update on our acquisition and divestiture activities.

On the acquisition front, we completed the acquisition of the Verizon Alabama wireline properties on the July 1st.

The integration teams for both Verizon and CenturyTel did an excellent job, and I'm pleased to report a very smooth transition with that acquisition.

Our comprehensive communications plan for the Alabama acquisition was, we believe, successful in minimizing any confusion during the change from Verizon to CenturyTel, and all the systems worked -- are working very well.

With the closure of Alabama acquisition, our integration team is now focused on the acquisition of the Missouri properties, which is still on target to close August 31st.

We continue to make solid progress with Alltel toward the divestiture of our wireless operations.

The transition teams from both companies are working well together.

And we expect to close the transaction on August 1st.

In May of this year, CenturyTel completed a $500 million equity units offering.

Providing approximately $483 million in net proceeds.

At the time of the offering, Moody's and S&P both reaffirmed their credit ratings of CenturyTel as B double A 2 and triple B+, respectively.

Both with a stable outlook.

Also Fitch recently initiated rating on CenturyTel at triple B+, with a stable outlook as well.

Earlier this week, we announced the completion of the syndication and closure of $800 million in new credit facilities, that included a $533 million three-year revolver.

And a $267 million, 364-day facility with a one-year termout option.

We are very pleased with the strong interest in our credit syndication from a number of banks, which resulted in our upsizing the facility from $750 million to $800 million.

At this time, I'll ask Stewart Ewing, our Chief Financial Officer, to review our results for the second quarter on a business unit level, and update you on our financial guidance for the third quarter of 2002.

Thank you, Glen.

Consistent with our discussion last quarter, due to our pending wireless divestiture and the accounting treatment of this business segment as discontinued operations in accordance with GAAP, we'll only provide selected operating metrics for our wireless business.

I will cover our telephone operations and other operations, which primarily include our long distance, internet, and CLEC operations in our normal level of detail.

In our telephone segment, our operating revenues increased 3.4% to $380.5 million.

Our internal revenue growth rate and our telephone operations was 2.3%, which was negatively impacted by decline in intrastate revenue.

Revenue growth was helped by a $5 million increase in Universal Service Fund revenue, due to the FCC revising the Universal Service Fund sizing calculation, retroactive to January 1, to reflect changes that were made in 2001, related to the mag order.

Data revenue growth as Glen indicated, was 38% compared with the second quarter of last year, our data revenues include our cash transports, ISDN, ATM, frame relay, local area network, LAN, data private line, internet, DSL and web-hosting's revenues.

CenturyTel ended the quarter with 1,795,180 total access lines and about 2,015,891 voice grade equivalents.

As CenturyTel experienced a loss of approximately 600 access lines during the quarter, primarily due, we believe, to the continued economic slowdown.

This compares with a loss that we experienced in the first quarter of 1874 access lines.

So a favorable comparison there.

During the second quarter, we established a $15 million reserve for uncollectible accounts receivable from access customers, primarily WorldCom.

And this is treated as a nonrecurring item in our financial statements.

Operating cash flow for CenturyTel's wireline operations, excluding this $15 million bad debt reserve related to the access receivables.

Our operating cash flow increased 5.3% to $208.9 million from second quarter of last year.

Our operating cash flow margin was 54.9%, compared with 53.9% in second quarter of last year.

So 100 basis point increase in our cash flow margin year to year.

Our operating income for CenturyTel's wireline operations, increased 4.1% or from $114.1 million as adjusted in the second quarter of 2001 to $118.7 million. in second quarter of this year.

Operating revenue was positively impacted the operating income, while telephone operating expenses increased due to acquisition integration, costs that we've talked about before, employee related network and depreciation expense, partially offset by a decrease in retail bad debt expense and access charge expense.

Our operating income margin was 31.2% compared with 31% as adjusted in second quarter of 2001.

Turning to our discontinued operations or our wireless segment.

The wireless service revenue was $104.4 million for the second quarter, down slightly from $107.1 million in second quarter of 2001, primarily due to lower roaming revenues.

Our wireless EBITDA was $46.3 million, resulting in an EBITDA margin of 43.5%, we believe, among the highest in the wireless industry.

Our wireless units were 783,258, down a little over 6100 units during the quarter, primarily due to lower gross additions.

Our post paid churn rate was 1.9% for the quarter, a solid improvement from the 2.35% we experienced in the first quarter of this year.

Turning to the other operations segment.

Revenues increase 40.7% to $58.2 million.

Our operating cash flow from other operations more than doubled from $6.5 million last year to $14.8 million in the second quarter of this year.

Operating income for other operations increased to $11 million, primarily due to decreased losses in our internet business.

Our long-distance revenue increased $6 million to $34.5 million or a 20.9% increase.

Long distance operating income was $7.7 million for the quarter.

As Glen indicated, we added approximately 21,000 long distance customers during the quarter, bringing total long distance customers and service to over 536,000 as of the end of the quarter, an increase of over 29% since second quarter of last year.

Our long distance customer penetration rate in our local exchanges as a percentage of access lines, reached 29.4%, versus 22.3% as of June 30 of last year.

Internet revenues also increased $6 million or almost 69% to $14.7 million for the quarter.

We added about 6,000 DSL customers during the quarter, representing 18.5% customer growth since the first quarter of 2002.

So we ended the quarter with about 38,400 DSL subscribers, or about a 3.2% penetration rate of our DSL-enabled lines.

Our internet business generated $55,000 of positive operating cash flow for the quarter, compared to a $2.7 million negative operating cash flow a year ago, due primarily to the growth of DSL revenue.

We added over 5600 CLEC equivalent access lines during the quarter.

Our CLEC operating losses, which we expect to be approximately $15 million for 2002 were $2.8 million for the quarter, versus $2.7 million a year ago.

Now, turning to our guidance for the third quarter of this year, which includes the Alabama properties that we acquired from Verizon on July 1, 2002 and assumes the closure of the wireless sale on August the 1st and also completion of the Missouri property acquisition on August 31.

Of the third quarter this year, we anticipate total revenues from continuing operations to be from $515 million to $530 million.

We believe that our third quarter operating cash flow from continued operations will fall within the range of $260 million to $270 million.

For the third quarter of this year, we expect earnings per share from continuing operations, excluding nonrecurring items, will be in the range of 40 to 44 cents.

We expect total earnings per share, excluding nonrecurring items, will be between 49 and 54 cents, or within that range.

Keeping in mind our expectations of only one month's of EPS impact from our wireless operations.

For the full year 2002, we anticipate total diluted earnings per share, after giving effect to all pending transactions, integration costs, and financing plans, but excluding nonrecurring items and at one time integration costs related to the Verizon acquisitions, to be from $2.08 to $2.20 per share.

As Glen indicated, this results in or is a small increase from the guidance that we gave last quarter for the full year, which was $2.06, to $2.18 per share.

Concerning our financing for the remainder of the year, we recently, as Glen indicated, completed an $800 million credit facility with a group of banks.

After the sale of our wireless properties, that we again expect to close August 1, and the completion of the acquisition of the Verizon Missouri telephone properties, that again we expect to close August 31, we will have a minimum of $400 million of committed availability on this credit facility.

And we believe that is sufficient capacity to take care of our short-term liquidity needs.

The only other needs that we have at this point in October of this year, we have a $400 million remarketable loan.

Bonds that were issued two years ago that mature.

B of A has the option to remarket that.

We expect that to be remarketed or to issue debt to replace that $400 million.

But again, in the event that the markets are such that we can't, we think we'll have liquidity on this committed credit facility to be able to take care of that.

The only other need that we have for this year is on December the 15th, about a $350 million requirement to make our tax payment.

So you know, we believe that these financing needs can be very, very easily handled by us during the remainder of the year, and they're significantly impacted favorably by the committed credit facilities that we have available.

In a moment, we'll open the call for questions.

However, before we do so, I want to remind you that we will not discuss any other specific operating metrics related to the wireless business.

At this time I'll turn the call over to the operator for instructions regarding asking questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q & A roster.

O.K., your first question comes from John Bright with Johnson Rice and Company.

Thanks.

Good morning.

On your Cap-X guidance for 2002, Stewart, you're still holding around the 400 million range.

And could you give that to me as well of net wireless?

John, this is Glen.

We're at -- we're about the 425 range, actually but Stewart can give you the details here.

Basically John, we're about at 425 and I think that's what we had in our 10-K and I believe that's pretty much what we've been saying most of the year.

We're somewhere at the $425 million range to maybe slightly over that.

Teleco, with our existing properties is still in the $315 million range.

We believe that we will have spent by the end of this month, about $28 million in our wireless business.

Our other segment, we expect to spend about $45 million, which leaves, you know, about $37 million or so for the Verizon properties.

We think the Verizon properties in the remainder of this year we'll probably spend somewhere between the $35 to $50 million there.

So, I mean, we're still in the range that we have been talking about with respect to our Cap-X.

O.K., and then there was a tick up in the other Cap-X in this quarter.

What was that attributed to?

John, some of that was attributed to preparation of our call centers for the Alabama acquisition.

And some of it was related to the upgrade of our computer system to allow us to be able to do the billing for the Verizon acquired properties.

So it's really, a lot of that tick-up was related to the Verizon acquisitions and in preparation of those.

Okay.

And Glen, maybe if you could give us your thoughts on what the environment looks like.

You started out mentioning that the certainly the nation is struggling.

Are we seeing a bottom in here as far as access lines are concerned, in your opinion?

That's hard to say.

We believe that we have -- as far as comparing our numbers this year to last year, that we're -- it's pretty well bottomed out.

We're not seeing any degradation in those levels.

Matter of fact, a little bit of improvement.

But we won't -- it's hard to say.

We do know that the economy is still difficult in a lot of our areas.

In Washington and Oregon, we have -- in Oregon, I think the highest unemployment rate in the nation, Washington the second highest.

And Wisconsin and Michigan, midwest, we're having, you know, there's still a lot of issues up there economically.

So it'll be a while yet before we see a complete turnaround.

But we don't see it really going down much further.

It's just how long is the turnaround going to take.

That's really the issue.

O.K.

And on a -- from a competitive standpoint, any change in what you're seeing from wireless substitution or cable competition?

Not any real change, John.

We're still -- we know there is wireless displacement out there.

We've -- as far as wireless -- our customers taking a wireless phone in favor -- over a wire line phones, we're not seeing that.

We've lost less than a thousand customers to wireless based on the reason codes that we keep up with in our call centers.

But we do know there is wireless displacement out there.

As we had seen some degradation intrastate [INAUDIBLE], when that's part of the reason.

Okay.

Finally, Stewart, you guys over performed on the EPS this quarter and you raised your guidance I guess by about 2 cents.

Any thoughts on why not going up equivalent to what you out performed this quarter?

John, we just, I guess, you know, because of the environment and the economy, you know, didn't feel like that we should really raise our guidance to the full amount of the -- that we, you know, over performed this quarter.

And you know, some of that was related this quarter to our wireless segment, too.

So I think, you know, those are really the reasons why we didn't increase any more than we did.

All right.

Thank you.

Next question comes from Robert Schiffman with CSFB.

Good morning.

Could you walk through again sources and uses?

I'm just trying to add up all the available access to cash that you have.

It seems as if there's still a shortfall.

With the corporate bond markets where they are, I think we've got to assume that there's not going to be an ability to remarket that security.

Could you just go over again exactly how much cash you've got access to, what your needs are for the second half of the year and what realistically are the options to fund those holes?

Thanks.

Yeah.

Robert, you know, first of all, I mean, we have not had any issues with access.

And as Glen mentioned, we, with our bank credit facility, we went out for $750 million and actually got commitments for around $850 or so and decided to upsize it to 800.

So, I mean, we feel comfortable that we can go out and get committed facilities to take care of any shortfalls that we have.

That being said, here's sort of a reconciliation.

Basically, once we close, we've got $800 million available on the facility that we have today.

When we close the wireless transaction, we'll get about a billion 650 from Alltel.

The Missouri acquisition will be a little over a billion 1.

When all that sorts through, we think we will still have about $400 to $450 million of availability under the $800 million credit facility that we have outstanding, that will be at the end of August.

At that point, as I said, we'll have $450 million of availability.

We think that between now and the end of the year, we'll have $125 to $150 million of free cash flow.

Okay.

The only obligations that we have are the $400 million remarketable that, you know, again comes to you in October.

And we are currently working on options related to that.

And the only other item is the $350 million or so federal income tax payment that we have that comes to December the 15th.

So really if you -- if you say that we've got $400 to $450 million of availability on the facility and $125 to $150 million of free cash flow coming, you know, that could get us to $550 say to $600 million of availability.

And we have got about a $750 million need.

So, we're only maybe, you know, $150 to $200 million or so short.

And we feel very, very comfortable with our ability to be able to raise that financing over the balance of this year.

Yeah I'd like to add to that, Stewart.

We could have locked in to the medium amount of short -- more than amount of shortfall very, very easily as far as locking into that -- securing that financing.

We have chosen not to because the carrying costs of locking into it now versus waiting until it's needed.

So, we don't expect any issues with funding our cash needs on these acquisitions in the future.

Hello?

So you're saying you're confident that you could raise additional money on an unsecured basis from banks at any point in time?

Bobby, we believe that, you know, we believe that we could have gone out for a larger facility --

We believe we could have gone out and secured a facility that would have been large enough to take care of the additional, you know, $150 to $200 million gap that we may have this year.

And again, as Glen indicated, I mean, we feel confident that we could have gotten that, but just didn't really feel the need to do it, just due to the fact of the additional carrying costs that we'd have.

And, I mean, you know, we would not have any trouble accessing the capital markets if we needed to from a long-term, you know, unsecured bond standpoint year after year.

We believe we could go out today and secure that financing.

Okay.

Thank you.

The next question comes from Phillip Olsen with UBS Warburg.

I hate to do this to you guys, but just want to follow-up on Rob's question.

I understand your confidence on your ability to meet your funding needs.

I'm not quite sure the market has the same degree of confidence, given what's going on around you guys in the telecom space.

At this point in time why not go out there and proactively refinance either the maturing call bond or the tax payment just so you take the liquidity question right off the table?

And we're looking at doing that.

And I mean, we've had conversations with several bankers about doing that.

And at this point I guess really wanted to get second quarter earnings done before we address that.

But I mean, you know, we are looking at addressing that.

And we understand the concerns, you know, that folks have related to the market.

But I mean, I think that is something we can take care of.

And we are in the process of trying to address it.

So, you know, we just -- it is something that we will address in the relatively near future.

So just two follow-ups then.

It's likely then that we could expect to see some public debt issuance from you guys over, you know, the next couple of weeks?

Not necessarily the next couple of weeks.

But I mean it is something that we have been talking with our bankers about.

And we are making plans to access the markets, you know, at the appropriate time.

Okay.

And final question, on the call bond, to the extent that if there is a failed remarketing on that, what would be the -- at current rate, if it was to be cash settled today, what would be the premium that you would have to pay?

It would be -- I haven't calculated it, you know, since rates have gone down this week.

But I believe it was -- last time I looked at it, it was around $30 million or so.

Great.

Thanks a lot.

Your next question comes from Mark Kraufman, from JP Morgan.

Thanks a lot.

Actually wanted to follow-up on the access line stuff to understand sequentially.

What the trend is, and this is given that the rbachs are starting to break out a lot of this information.

But what's happening with primary lines, versus secondary lines from a growth perspective on the residential side?

And then maybe if you can give us some sense of what's going on with the business lines.

Also in terms of growth and just from a sequential standpoint.

Okay.

From the -- don't have residential and business broken out separately, but I can tell you what happened with second lines.

Second lines -- our second-line penetration rate at the end of the quarter was 8.36%.

So our second lines were down about 1,000 during the quarter.

From second quarter.

And again, we lost about 600 access lines net from first quarter to second quarter.

So we did -- and from year end to first quarter, we lost about 1600 access lines.

About 1500 or so second lines.

So, you know, we did see a decline in both the second lines that we lost during the quarter as well as the total access lines that we've lost here in the quarter.

And I really don't have a breakdown between business lines and residential totals.

Is your sense of it though that maybe business is down and primary residential is growing at slightly under -- sequentially slightly under housing growth?

I mean, or is it just everything is kind of down across the boards?

And just your sense of it.

Actually, this is Karen Pukett.

We don't have it broken out by deal, it's just that service order activity, which is an indicator or access line growth on the inward side.

Quarter 1 and quarter 2, our business lines were down from our -- from the prior quarter.

However the outs seem to be stabilizing.

So we see less outs.

It's more of an inward problem than an outward problem, people disconecting, which I think is a good sign, in terms of stabilizing.

A lot of the feedback from business customers is, we want to get our bills down, so they're disconnecting.

That's still happening, but I do believe that's stabilizing.

So, my point is, it's more of an -- an inward problem at this point, than a outward problem.

Great.

Thanks.

That's helpful.

Your next question comes from Simon Flannery with Morgan Stanley.

Thanks a lot.

Good morning.

Can you give some sense of what your DSL share is of broadband homes in the territory, to what extent do you have aggressive cable modem competition and, you know, are you taking 50% of the broadband homes?

Or are you north of that?

South of that?

If you could give us some sense of that.

And also, you know, nice boost here from the USF.

Is there anything else we should be looking out for on the regulatory side over the next couple of quarters?

Thanks.

Simon, I'll start here.

As far as the percentage overlap, we have modem competition's about 33 to 34% of our markets, we have modem competition.

Karen, do you have the -- as far as the broadband homes, market share?

We don't have -- we don't have -- we don't have the market share that we're taking relative to cable versus DSL.

We just don't have that.

Do you have a gut feel?

Are you sort of matching them, are you more dominant, or is it more like the national average, which is probably 2-1 cable versus DSL?

I'm guessing your better than that.

No -- we're a -- you know, It's all intuitive.

I don't have data to back it up.

But we believe that, you know, we are with them or ahead in many of the cases.

In fact, we've had very strong year, year to date, on DSL activations.

So we believe that we're doing very well in that space.

In terms of competition, you know, they're doing basically the same things.

Is that they have a discount for the first three months that you sign on.

We've had like campaigns, too, they've been very effective for us.

And so I think that -- I know talking to the consumer and especially on the business side, that DSL is a preference and of course cable typically doesn't address the business customer.

And we have been first to market in the majority of our markets, Simon, which has given us really a head start and we believe it's given us an opportunity to be ahead of the cable company in most cases as far as penetration.

And on the regulatory side?

Simon, on the regulatory side, the only other item that we have going at this point in the state of Wisconsin, in terms of a rate case, we basically had filed a rate case earlier on the -- in the Verizon properties that we acquired during the year 2000 in Wisconsin.

We received an interim rate increase, subject to refund of about $8 million, and we're billing that to customers.

And we're booking that as revenue today.

We believe that we will get that finalized sometime in late fourth quarter.

And we expect it to be, you know, somewhere in the range of what we're booking or hopefully a little more than what we're booking.

Thanks.

Your next question comes from Cannon Carr with TIBC World Markets.

Yeah, CIBC World Markets.

Just two quick questions.

Understanding a little bit the timing effects, you touched on it Stewart.

You said, I guess Alabama's already closed obviously, right?

And will be a full quarter impact for third quarter.

And any estimate of when Missouri -- Missouri's towards the latter part of the quarter?

Yeah, Cannon.

The Alabama closed on July the 1st.

We'll have results for a full quarter in the third quarter for those properties.

And how much EBITDA do you expect to contribute from that?

We haven't really broken that out separately.

We've, you know, we've given Missouri and Alabama together for the first 12 months of operations, but we really haven't broken that out.

Okay.

The -- we'll also have our wireless properties for one month of the quarter, the month of July, as we expect to close August the 1st.

And sell the wireless properties to Alltel.

And then we expect to close the Verizon Missouri properties on August 31st, which would give us one month, of the month of September in the third quarter for those access lines.

Right.

O.K.

And then also, just a clarification on the USF side, you know, you've got about 5 million this quarter.

Is that related to the -- completely related to the June 13th, high lude cost ruin from FCC or is that something else in addition to that?

Because I thought that was going to hit more in the third quarter?

Yeah, it was related to the order I think that you're talking about.

It -- you know, what they did was basically they went back and corrected the formula to be consistent with the way they had set it last year after the mag plans.

And they made the Universal Service Fund payments retroactive back to January 1 of this year.

So they made the order ret -- effective retroactive back to the first of this year.

We'll actually not receive the cash until third quarter.

But basically, you know, there's $5 million of revenue that should have been booked in the first six months of this year, and that's why we went ahead and booked that.

Because I mean we will receive the cash actually in the third quarter.

Right.

And so how much do you recognize then on going from here?

Kind of a --

Ongoing, it's about $2.5 million a quarter.

So the $5 million that we reflected in the second quarter, about $2.5 million of that really relates to the first quarter, and 2.5 will be continuing on, you know, into the third and fourth quarters.

O.K.

Great.

And just one other question too.

You'd mentioned bad debt down a little bit.

What changed on the margin there?

Our agings are better.

Our aging analysis is better.

Our over-60-day receivables is about half of what it was at the end of the last year.

So that's kind of encouraging on the margin then?

Our folks have really focused on that.

And we also had some bad debt issues last year.

And if you remember, our bad debt expense was higher than normal last year, due to some issues related to the Verizon properties that we acquired.

We had some bad debts there.

Uh-huh.

Some of the customers that we wound up reserving for it.

And, you know, those subsequently have been written off now.

And that's part of what has cleared our agings up some too.

What's bad debt now then?

Last question.

What's the reserve?

Yeah.

The allowance is -- it's a little over $6 million.

Okay.

Great.

Thanks, guys.

Your next question comes from Mike Balhoff with Legg Mason.

Good quarter.

I have a couple of questions.

First of all, when you're talking about the $55,000 break even -- or better than break even on the internet related stuff, is that both regulated properties as well as deregulated?

Because obviously your internet stuff is in a dereg sub.

So I'm assuming right now it's just the dereg.

That's correct Mike.

It's just the dereg.

And Mike, that was operating cash flow, not operating income.

That's right.

I'm sorry.

Can you give us an idea of what it is when you combine the regulated and deregulated?

It's positive.

It's -- certainly better than break-even that way, Mike.

Okay.

A second issue is obviously the price for the Alltel acquisition of your wireless properties is dependent to some extent to Cap-X and marketing.

Is there likely to be, or do you have an estimate for -- adjustment related to the purchase price?

Mike, on the Cap-X we probably spent $6 or $7 million less than the 35 that we, you know, were obligated to spend.

So there will be, you know, $6 or $7 million there that will be coming off the purchase price.

On the marketing, we're pretty much on target with what we're supposed to spend there, you know, maybe a couple million dollars off.

So it's going to be relatively close.

Okay.

And the third issue, some people were talking about the additional detail on lines that we're getting from the arbalks, a number of the questions that have been out there have been related to UniP and such for the arbalks.

I did some quick studies of the properties where you bought arbalk properties in Wisconsin, Missouri, Arkansas, and Alabama, and the indications are that there is fairly high UniP prices in those territories.

And my assumption is that there is not any UniP program out there.

Worldcom is not out there, so my first question is, is that, in fact, true?

And do you have some sort of estimate for what your UniP rates are in those areas?

And the other part of the question is whether or not there is any UniP incursion or competition in any of your other non-arbalk acquisition properties?

O.K. Mike, this is Glen, the first -- first of all, we have no UniP competition in any of our non-arbalk acquired properties.

So we have none there.

The majority of the one that -- in the properties we've already acquired, we have no zone 1 UniP rates.

We're all in zone 2 and 3.

And in those states even, the levels are pretty high as far as the prices for the Uni's are concerned.

In Alabama, we will have -- we now do have a few zone one UniP's in some of those markets.

However, again, the Uni price is high comparatively in those markets, even in the zone 1 market is as high as some zone 3 markets in other areas.

So we feel good about that.

We will pick up, I think, about 15,000 UniP customers with the acquisitions, to give us a total of 20,000, I think, which is less than 1% of our access lines.

So we don't expect any major issues with the Uni's and the competition in these markets going forward.

So my assumption going forward, therefore, is that -- that you don't really think in light of the pricing that is out there, that there's going to be any kind of material change in that, then?

Expect any at this point, we sure don't.

Okay.

Thank you very much.

Your next question comes from Frank Governali with Goldman Sachs.

Thank you.

Most of my questions have been answered.

Just one more.

Just to clarify a comment you gave earlier.

You said your second lines were down a thousand in the second quarter.

And that was total lines, I assumed.

But -- residential lines, excuse me.

But the total loss was only 600, meaning that a net, you actually increased your lines by 400.

Excuse me.

Your primary lines went up by 400.

Is that -- do you have any sense of whether that's on the business or residential side?

No.

We really don't have a sense of whether it's business or res, Frank.

But you do have the analysis correct there.

O.K.

So in general, the assumption that we've all had is just the trends are significantly better than what the bells are seeing.

Certainly seems to be the case here.

And as you said earlier, Stewart, you're just not seeing kind of deteriorations, in the parent for Bell South or SBC?

Right.

And we don't have the exposure that they have on second lines because our penetration rates are not nearly as high as their penetration rates.

In any of the locations that you recently picked up from GTE, are their second line penetrations significantly higher or lower than yours?

And does that create opportunity or a risk?

Let us see just a second, Frank.

We're looking for something.

Yea, it doesn't really appear to be any higher than ours overall, Frank.

O.K.

Great .

Thank you.

The next question comes from Richard Clubman with Jeffries and Company.

Congratulations, good quarter.

Stewart, you -- I think in response to a previous question, you sounded like you wanted to be conservative about the guidance going forward for the full year.

You know, having the full year number up less than what you've achieved on second quarter.

Does some of that also have to do with the fact that you had a bigger lump from the USF in the second quarter than you will in the future -- in 3Q and 4Q, so therefore, you know, the increment should not be that much later in the year.

Yeah, that's -- that is part of it, Rick, it sure is.

You know, the other thing too, is that, you know, we have three huge transactions that are closing in the third quarter.

And I mean, you know, we think we have done a really good job of going through and determining the impacts of those.

But you know, we do have three significant transactions, one of which is already closed.

And the other two will get closed this quarter.

And just to confirm what I think is built in there, you're -- the full year numbers -- you're including the total EPS guidance for 3Q, of 49 to 54, not the continuing of 40 to 44?

Yes.

That's the total EPS.

The guidance for the full year is total EPS, which includes the discontinued operations.

Okay.

That's what I thought.

Thanks a lot.

The next question comes from Karen Young with Strong Capital Management.

Hi.

Good morning.

I apologize if this question has already been asked.

But the increase in the corporate and other line, on wire line, it looks like it was up significantly, sequentially.

Is that due to kind of preparation for kind the access lines that you're buying?

And if so, do you think it levels off at this point?

Or does it decline sequentially?

Yeah.

Karen, the -- that's the -- that's the line item that we included the $15 million bad debt reserve that we set up associated with access carriers, primarily Worldcom.

I see.

But that's the reason for the big increase there.

So help me.

I'm not -- I don't remember my accounting that well.

Does that stay -- does that fall?

That would go down.

That is kind of a more one-time in nature?

It's one-time in nature of item.

And it's in the -- the EPS analysis that we've done in our news release, that $15 million has really been excluded from, you know, most of the discussion that took place.

Okay.

The $5 million benefit from Universal Service, is that, in terms of your calculating internal growth, is that included in there or excluded in there?

The only part that's included in there is the $2.5 million that really relates to the second quarter of this year.

So in other words, we had a $5 million increase related to Universal Service.

And about $2.5 million of it, which is the amount that was actually related to the second quarter, is included in the internal revenue growth calculation.

Okay.

Okay.

And then on your data revenue growth was very strong.

How much of that -- could you break that out?

How much of that was due to DSL?

I mean, for example, the arbalks are reporting much lower, you know, midsingle digit data revenue growth.

I'm just trying to understand the difference.

Yeah, Karen, about a little less -- about $5.9 million was related to a combination of DSL and internet.

And what was the total data?

The total data revenue increase was about a little over $7 million.

Okay.

I was -- I'm sorry.

You said $5.9 of the $7 million was related to DSL?

Right.

Hang on just a second.

Yeah, about $5.9 of the $7.4 was -- it's actually 7.4 is the 38%, was related to DSL and internet.

Okay.

Okay.

And in terms of DSL at this point, I think you said it's -- your ISP and DSL operations are break even?

From a cash flow perspective.

Where do you think, you know, -- where do the margins go?

You know, out a year, where do you think the margins go on an operating cash flow basis for those businesses?

Karen, we really haven't given any guidance in terms of, you know, where we expect the margins to go by product line like that.

I think that, you know, in terms of DSL, we'll continue to be competitive with cable guys.

So that is a competitive space.

We don't give margin by product lines, Karen, but in general, I think you could look at that the DSL has been competitive.

We are doing some bundlings that will very much help the value proposition to the customer in terms of looking at a whole package, beyond just DSL, with the r-1 and all the custom calling features in LD, too.

Okay.

That's kind of where we're headed.

We're looking less at per product and looking at a total value proposition, bringing that to the table very quickly.

O.K.

O.K., good.

Given that you're not -- it sounds like from -- Karen, your comments earlier, you're not seeing as much disconnects at this point.

And given the fact that it looks like your primary access lines have actually grown sequentially.

From Frank's analysis, would you expect that access lines, you know, might of actually I mean -- that we might see gains going forward at this point?

What do you seeing, you know --

You know, I admit It's a hard call.

Because every time you think you -- think that something is happening stabilizing the economy, there is another surprise.

But, I would say in general, what we're seeing is, is that I think it's a good thing that -- you know inwards aren't necessarily picking up, but the outwards are deaccelerating.

And so overall, we should, you know, at least have perhaps maybe a 1% gain.

I still think that, you know, 2003 probably looks a whole lot more optimistic than 2004.

I wouldn't say there's great gains.

Because consumers are very much -- 2003 is when we'll see, I think, a pickup.

2002 this year I think is still challenged, just from the standpoint that when you talk to customers and you listen to calls coming from the call center, consumers and businesses are still very concerned about decreasing their bills, looking at ways to do that.

That still is very much happening.

Karen, going back to Frank's analysis, we have got more information there.

The split between residential and business, in terms of the increase in primary lines, was evenly split.

We had about 200 access line increase in residences, residential primary lines, and about a 200 access line increase in our business primary lines.

Okay.

Okay.

Good.

Thanks very much.

Your next question comes from Tavis McCourt with Morgan Keegan.

Good morning.

Nice quarter guys.

I just have some cleanup questions here.

I apologize if this was in the press release.

But what was the Cap-X in the quarter, Stewart?

Cap-X in the quarter was $119.6 million.

All right.

And then on the wireline operations, it looked like plant ops and customer ops both increased sequentially, pretty substantially and that wasn't a -- doesn't look like that's a seasonal.

Is that some integration expenses that you guys incurred in the second quarter that flow into those line items?

Yeah, we had some integration expenses in there, some network expenses, in fact that income employee related expenses hit those lines, so that was the three primary.

Great.

And then finally, Stewart, where would you expect the net-debt balance to fall out at?

Post the -- I guess post third quarter, post the acquisition divestiture activity?

Okay.

Tavis, at the end of the quarter, we had $3,183,000,000 of debt.

If you net the proceeds that we'll get from the -- the acquisition -- the divestiture of our wireless properties against what we'll pay Verizon for the Missouri properties, we'll add about $704 million of debt.

So on a pro forma basis, would be a little less than $3.9 billion.

And then minus whatever free cash flow?

Minus whatever -- that's right.

Minus whatever free cash flow we have.

Great.

Thanks.

Congratulations.

Thank you Tavis.

Your next question comes from Frank Louthan, with Raymond James.

Hey guys.

Just a quick follow-up regarding the access lines that you did take over on July 1st.

Can you characterize what was -- were they -- did they grow from where you originally announced them, or was there some erosion, can you characterize that?

And how have the sales been going so far?

I know it's been only a few weeks.

But are you seeing increase in selling additional services?

And related to that, how is long distance pricing going through your network?

Thanks.

Frank, we actually lost some access lines since we first began negotiations down to deal.

It worked, not substantial losses, but they did lose some lines.

Vertical services -- Karen?

What we have an early penetration for, we don't have numbers, but I will tell you that very positive things in terms of trend.

Our call volumes, we were able to keep our service levels in the 90% ranges, which is extreme given, you know, transition like that.

Our service order activity, we were working -- in general, we were only out two days.

So we were -- due dates were only one to two days, which is extraordinary.

Two activities are happening.

We have, as we call into the call center, we've been selling our services to these customers.

Many of them are very interested in the one bill because they had Verizon LD.

We are activating very actively in our call centers our LD product as we speak, with calls coming in.

We have started our welcome calls.

This week, every customer will be called and we're having good success on activations of vertical service, in particular the LD package.

So we're looking for good things there, don't have specific numbers to share, but next quarter we will.

All right.

Regarding long distance pricing, we have brought down our pricing in recent months.

However, on the other side, our -- the wholesale prices we're paying for capacity has also come down, so our margins have been very stable.

And we feel good about our ability to compete on the long distance side.

At current pricing, and even if they go down further.

Yes.

70% of our consumers are really taking our freedom 5 and freedom 7, which is a flat monthly fee of $4.95.

And the interstate is 5 cents a minute, the intrastate is 12 cents a minute, and the Freedom 7 is 7 cents inter and 10 cents intra.

Okay, great.

And just one quick follow-up.

I apologize if this has been asked, but what is your current exposure to Worldcom, as far as a receivables basis?

Thanks.

Our net on a net basis, Frank, is about $11 million.

And we basically reserved -- took that through our reserve with a part of the $15 million for this quarter.

Great.

Thanks a lot.

Your next question comes from Glenn Waldorf with UBS Warburg.

Good quarter once again.

Just a couple of things, in terms of just housekeeping.

Can you just give us a number of dial-up subs that you had last quarter?

O.K., and while you're looking that up, let me just keep going.

You mentioned that you lost about 1,000 second lines in the quarter, can you just also -- you mentioned the economy as one factor, but can you also attribute any sense of how much wireless substitution or your own DSL substitution is taking of the share of those lost lines and if , in fact, represents a revenue opportunity for you?

On that one, Glen, we lost, I think, about 250 lines to wireless.

Uh-huh.

For the quarter.

So that's, you know, it's not substantial.

And what was your --

Just along those lines, you also mentioned that you're adding your DSL subs.

So are we, in fact, -- along the lines of that dialup question, are you in fact seeing that broadband migration, while it does take away your second lines that were used for dialup, are you, in fact, seeing it being made up on the DSL line?

We believe we are, yeah.

As far as the net effect, we are making it up on DSL in that situation.

That's correct.

And your question on DSL subs.

The dialup subs, you gave us the DSL subs.

Dial-up subs, net adds 2,655 dialup for second quarter.

Great.

And looking at the new territories as well, can you just give us a sense of what the future penetration is within those territories now in terms of characterizing what the upside is?

You're picking up these subs with 0% long distance, because you didn't buy those contracts.

But similarly, what was Verizon's penetration of those customers?

That you could, almost automatically displace, because they want one bill?

What we don't know, obviously, Verizon wouldn't share, obviously because it is a competitive business is they didn't share their LD number with us.

So, from our perspective, you know, we have zero penetration going into this thing.

We're looking toward to positive end roads there.

In fact, if you look at the prior GTE property, on the LD penetration side, we're up in the 24.5% penetration rate.

And, you know, that equates to on an annual revenue run rate of about 31 million incremental revenue.

So that's just a flavor for what we can experience in these new properties in a very short time.

Understood.

Now, are there any other opportunities in terms of features?

And then one final follow-up question on the acquisitions?

There are other opportunities.

Now, with these properties, they do have higher penetration rates of some of the vertical features.

We will be deploying dialup and DSL where it makes sense economically, it's a different regulatory structure.

We're very excited about our new bundle plans that we're offering.

And those will be offered in Alabama.

Where it's package of your r-1 or b-1, with the customer -- vertical features that you can choose from our 18.

And then we have voltons with dialup and DSL and LD.

So again, it's back to that strong value proposition on the bundle.

That's ready to go and will be starting to be marketed there in Alabama here in the next couple of weeks.

Understood.

O.K.

Karen, if you can keep going in that vain, can you just give us a sense on a by-feature basis, what the penetrations are in core properties, versus newly acquired properties, then?

i.e. custom calling, caller I.D., voicemail?

Yeah, I'm not sure.

I've got -- I'm not sure we've shared with the new Verizon properties yet on those properties.

But the DSL and the data side is pretty extreme upside because especially on the business side, they've -- Verizon did not have the focus -- distribution focus or the product focus to the small-medium sized businesses there.

The class and call features Glenn, are pretty strong.

They penetrated there.

But voice mail is low.

It's only in the 5% to 6% range in these markets, versus our 10 to 12% penetration.

So we think there is opportunity there.

And of course, long distance, as Karen said, data has a lot of upside.

The only difference -- real difference from the other previous properties is the class features are more well penetrated than the other properties we've bought.

Right.

That's encouraging.

Really in the final question, just can you give us an estimate on how many lines you're going to pick up in Missouri, because you said that's on track and you're preparing for it well?

Do we just have a sense of what that final number is going to be when you get the access lines?

Yeah.

I think we're still using the 365 range on the access lines lines there.

Terrific.

Thanks very much.

Thank you.

We have time for one more question.

Your final question is from Marty Dropkin with CSFB.

Yeah, hi.

Back to the subject of line growth, so we can beat that one a little bit more.

Did you see any improvement during the quarter?

So were your trends and -- we actually heard another provider tell us that June was a much better month for them than April was.

And while it's too early to call it a trend, at least it tends to look positive.

So are you seeing any of that?

And just a clarifying question on the Worldcom exposure.

I think you said you had 11 million net.

Could you give us the gross number and then the $15 million charge that you took during the quarter, which one does that reflect?

The net or the gross?

The $15 million really covers the $11 million net number that Glen mentioned.

Okay.

Our total exposure, including the internet -- the interstate receivables to Worldcom is, you know, somewhere in the neighborhood of $22 million or so.

But again the -- you know, the portion of that that's interstate in effect we'll not have to write that off.

Because it would go to NACA.

Okay.

Also are you -- are you holding back any -- I assume you collect some excess revenues from your customers.

And are you holding them back from them?

That's kind of where I'm getting at with the gross and the net.

Yeah, we -- they're small amounts that -- that we -- you know, that they would -- that we would owe them.

They're not really material.

The larger amounts, I guess, where we owe them are on the -- the long distance side, where we purchased network from them and because it's with a different subsidiary, we can't offset those.

Okay.

And Marty, on the line growth, we're seeing it stabilize certainly.

We're not -- it seemed like it's a little stronger the last few months than it was before, but we're not seeing the growth yet.

But just not -- it seemed like it stabilized and not get any -- certainly not getting any worse.

And probably a little better now.

So even during the quarter, it was relatively flat across the three quarters, you think?

Yes.

I mean, across the three months.

Well, we actually saw some improvement I think in June.

O.K..

Yeah that's actually what I was getting at.

Because I heard that from another world provider as well.

TDS actually said that.

Thank you.

This concludes today's --

Thank you.

I do apologize.

This concludes today's q&a session.

I will now turn the call over to Glen Post for any closing remarks.

Thank you.

In closing, we are very pleased with our results for the second quarter.

Considering the results that some of the industry players are reporting, we believe that CenturyTel's results for the quarter strongly indicate that our position as a leading pureplay wireline carrier in the rule sector of the industry, is a very good place to be.

We believe our ability to provide high-speed data services to more than two thirds of our customer base, along with the quality of our network infrastructure, positions us very well to continue increasing our revenue streams in the months ahead.

We expect continuing demands for long distance and internet services.

And we're focusing on aggressively driving revenue in our recently acquired and soon to be acquired, telephone properties in Alabama and Missouri.

There are obviously many challenges ahead.

But we believe CenturyTel is well positioned to continue our growth.

Thank you for joining our call today.

And we look forward to communicating with you in the weeks ahead.

This concludes today's CenturyTel conference call.

You may now disconnect.