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-0Q) 3 r4P c1 a -0u Series H Cost of Capital Schedule H - Rate of Return

Schedule H7 CENTRAL TELEPHONE COMPANY OF TEXAS SCHEDULE H-7 INQUIRY INTO THE REASONABLENESS OF RATES - DOCKET NO. 9981 PAGE 1 OF 1 SUPPORT FOR FAIR RETURN ON COMMON STOCK EQUITY WITNESS : 0 CLAERHOUT

The analyses and support information used by Central Telephone Company of Texas in reaching its conclusion as to a fair return on common stock equity are contained primarily in the testimony and exhibits of Dr. Charles M. Linke and Ms. Dianne Ursick, copies of which were filed contemporaneously with this schedule. Series H cost of Capital Schedule H - Rate of Return

Schedule H8 CKNTEAL TKLKPEONK CO%PANY OF TKXAS .. SCEKDOLB E-8 IllQOIEY INTO TEB EKASONABLKNKSS 01 RATE - DOCKKT NO. 9981 PAGK 1 OF 2 SKLKCTKD FINANCIAL RATIOS FOR CKNTKL-TKXAS , INC. AITNKSS: (Dollars in Thousands) CLAKREOOT

6 Pre-Tax Tires Interest Karned (3) / (2). 7.39 6.58 7.20 6.87 5.27 5.33 7 After-Tax Tires Interest Karned (5) / (2) 4.72 4.24 4.97 5.34 4.15 4.15

Fixed Charge Coverage Ratio ...... 8 Incore before Incore faxes $29,699 $32,370 $31,079 $24,283 $24,370 9 Total Interest Kxpense 5 ,324 5,218 5,298 5,682 5,623 10 1/3 of Rental Kxpense 1,075 604 351 432 545 0- 11 Adjusted Pre-Tax Karnings 12 Incore Taxes 13 Adjusted After-Tax Karnings

14 Total Interest Kxpense 15 1/3 of Rental Kxpense 16 Total Fixed Charges

l? Pre-Tax Fixed Charge Coverage (11) / (16) 6.26 5.64 6.56 6.50 4.97 4.95 18 After-Tax Fixed Charge Coverage (13) / (16) 4.06 3.70 4.56 5.07 3.92 3.88

Telephone Plant Under Construction as a Percentage of Net Plant ------_____ 19 Telephone Plant Under Construction (TPOC) $3,412 $4,341 $4,107 $1,045 $1,835 $115

20 Net Telephone Plant $182,389 $191,625 $194,157 $194,621 $197,244 3!:.4,944 21 TPOC / Net Telephone Plant (19) / (20) 1.87X 2.27X 2.12t 0.54X 0.93% 3 0 06% CBNTRAL TBLKPEOHB COMPANY OF TEXAS SCHEDULE H-8 INQUIRY INTO TEK RKASONABLKNKSS OP RATKS - DOCIKT NO. 9981 PACK 2 OF 2 SKLBCTKD PINANCIAL RATIOS FOR CKNTKL-TBXAS, INC, BITNBSS: @ (Dollars in Thousands) CLABREOUT

APUDC as a Percentage of Net Income 1 Allowance for Funds Used During Construction ( APUDC) 2 Net Income $16 ,514 $11,216 $2b,126 $23,004 $11,880 $17,140 3 APUDC to Net Income (1) / (2) 0.05x 0 -02% 0. oox 0. oox 0. oox 0.oox

Percentage of Cash Construction -_-_------___--______Funds Generated Internally 4 Net Income $16,514 $11,216 $20,126 $23,004 $11,880 5 Depreciation Ixpense 16,281 11,560 19 ,340 19,554 16,983 6 Deferred Income Taxes and D 0 0 0 0 Investment Tax Credits, net 3,188 1,526 1455) (1,441) (139) 1 Other Generated Internally, net 1,150 2,022 1,213 109 (1601 8 Less: APUDC 9 4 0 0 --____-_-_-0 9 Cash Generated fror Operations 40,884 41,220 34,564 10 Less: Common Dividends Paid 22,100 11, 100 16,500 11 Net Cash Generated from Operations

12 Construction Kxpenditures 13 Less: APUDC 14 Net Capital Kxpenditures

15 Percentage of Cash Construction Funds Generated Internally 90.01X 103.81X 81.16X 121.90% 96.48% 129.20%

Cash...... Ploa Coverage of Common Dividends 16 Cash Generated from Operations (9) $31 ,?a4 $38,380 $40,884 $41,220 $34,564 $33,488 17 Common Dividends Paid (10) $16, 600 $11,350 $22,100 $11,100 $16,500 $14,100 18 Cash Ploa Coverage of Common DIvidends (16) / (l?) 2.28 3.38 1.80 2.41 2.09 2.30 Series H cost of capital Schedule H - Rate of Return

Schedule H9 CENTRAL TELEPHONE COMPANY OF TEXAS SCHEDULE H-9 INQUIRY INTO THE REASONABLENESS OF RATES-DOCKET N0.9981 PAGE 1 OF 2 0SUMMARY OF DEBT COVENANTS-YEAR ENDED DECEMBER 31, 1990 WITNESS : CLAERHOUT

Fixed Charae Covenants Central Telephone Company of Texas and Centel-Texas, Inc. have no ongoing fixed charge covenants which they must meet. Issuance of Debt 1. Central Telephone Company of Texas 8.5% and 9% Loan Agreements (Sec. 3.12) ... prohibits new non- subordinated debt. 9.61% Sr. Note Agreement (Sec. 5.06) ... additional unsecured funded debt, and senior funded debt secured by permitted liens, requires pro forma senior consolidated funded debt ratio to not exceed 65%, consolidated funded debt ratio to be less than 75%, 175% fixed charge coverage, and limits funded debt secured by liens to 5% of consolidated capital. Subordinated funded debt of the Company is permitted if pro forma consolidated funded debt ratio does not exceed 75% and fixed charge coverage is 150%.

9.61% Sr. Note Aqreement (Sec. 5.07) forbids additional indebtedness under the First Mortgage Indenture. 02.Centel-Texas, Inc. 11.2% Sr. Notes (Sec. 9.20), 12.625% Sr. Notes (Sec. 9.20) . . . prohibits additional unsecured senior funded debt issuance, 'unless on a pro forma basis the consolidated senior debt ratio is less than 60% and consolidated fixed charge coverage is greater than two times interest charges. Secured debt and subsidiary funded debt is allowed if (1) permitted above and (2) consolidated secured plus unsecured funded subsidiary debt is less than 15% of consolidated capital. 9.3% Sr. Notes (Sec. 5.06) ... allows additional issuance of unsecured debt, and funded debt secured by permitted liens, if on a pro forma basis consolidated funded debt ratio is less than 60%, fixed charge coverage is at least 200%, and secured funded debt ratio is less than 15%.

Payment of Dividends s 1. Central Telephone Company of Texas Amended, Restated and Consolidated (REA) Mortgage (Sec. 15) ... limited to amounts of net worth in excess of 40% of adjusted assets. 8.5% and 9% Loan Agreements (Sec. 3.15) ... limited to dividends permitted by the Mortgage.

9.61% Sr. Notes (Sec. 5.9) ... limited to $60 M plus consolidated net 0 income since 1989, common stock sales and common shareholders' contributions. SCHEDULE H-9 PAGE 2 OF 2 WITNESS : CLAERHOUT

2. Centel-Texas, Inc. 11.2% Sr. Notes (Sec. 9.15), 12.625% Sr. Notes (Sec. 9.15) ... limited to $15 M plus consolidated net income since 12/31/85, common stock sales and common shareholders' contributions.

9.3% Sr. Notes (Sec. 5.8) ... limited to $20.7 M plus consolidated net income since 9/30/88, common stock sales and common shareholders' contributions. Guarantees No guarantees have been made by either company, nor have the securities of Central Telephone Company of Texas or Centel-Texas, Inc. been guaranteed by any of their affiliated companies. Series H cost of Capital Schedule H - Rate of Return

Schedule H10 CENTRAL TELEPHONE COMPANY OF TEXAS SCHEDULEH-10 INQUIRY INTO THE REASONABLENESS OF RATES - DOCKET NO. 9981 PAGE 1 OF 1 0 FINANCIAL RATINGS REPORTS WITNESS : CLAERHOUT

See attached.

a BAY STATE GAS CO. SBP Contact; Mac Sonnenblrck 1212) 208-1662

I).- RATIN6 ASSffiNED Bay State Gas Co.‘s prospects for good growth in contvlue to earn m excess of its allowed return. si00 mr. m.-tarmm. due not firm sales are favorable, primarily reflecting con- Pretax mterest coverage should remam well above iess man 9 mos. from eate of opportunities for conversions to gas from the mum3.0 tunes for the ratmg. Internal cash issue A tinuing heating oil. The market risk profile is well below generation is adequate, but is not expected to fully OUTLOOK: STABLE average as the majority of sendou t goes to residen- tund Bay State’s heavy construction budget tial and commercial markets, and wallyall profit through the early 1990’s. As a result, the company on interruptible sales is credited to fum customers. wdl have to tap capital markets on a regular basis. With the recent restructuring of rates to more ac- However, growth m retamed eanungs and equity curately reflect actual costs, and the immediate issuances through the divldend remvestment plan return on investment provided by conversion should allow the capital structure to remam satls- growth, the need for rate relief over the short term factory. is expected to be minimal; the company should

CATERPILLAR INC. AND RELATED ENTITIES SBP Confacr: Daniel ff. DiSenso (212) 208-7618

RATING ASSIGNED Ratings reflect Caterpillar Inc.’s leading business important end markets, and heavy expenses asso- $500 mil eem secs praiim A- positions, sound capital structure, and strong ciated with its $2.0 billion factory automation pro- RATIIGS AFFIRMED measure of finanaal flexibility.The world’s largest gram. However, Caterpillar‘s ability and CI~LrInc. producer of earthmoving equipment, Caterpillar willingness to maintain a sound capital structure Sr deet A- has been successful at maintaining its market provides sufficient ratings support to offset eam- Comm ~ap A-1 dominance, despite intensified competition from ings volahlity and heavy hved capital require- CmrprN8f fl~mcidN.V. foreign competitors and a shift in demand to ments of the business. ljpgrade potential over the Sr debt A- smaller-sized,lower-margmed equipment, an area intermediate term is lirmted by the industry’s in- C8IWplH8r Hn8MCUl where the company lustorically placed less em- tensely competitive nature. Longer term, hgher SemcW Wp. Sr debt A- phasis. Together with numerous steps Caterpillar ratings may be merited if Caterpilla$s factory auto- Rule 415 shell reg prelim A- took to improve its cost structure, the firm should mation and cost-cuttmg program, scheduled for *) Commpap A- 1 generate acceptable earnings measures over the completion in 1993, materially mitigates competi- c8mrprll8r Awtnlir ud. course of the economic cycle. Near term, earnings tive pressures. cc”n Pap A-1 will be very depressed, reflecting softness in many OUTLOOK: STABLE

CENTEL CORP. SP Contact: Rosemary Avellfs-&rams (212) 208-1 750

OUTLOOK REVISED Centel Corp.’~ratings reflect the fmancial strength nabon of cash, common stackand cellular mterests TO FROM of its telephone operations, which are somewhat for its telephone uxuts. Part of the proceeds born sms Neg Stable Offset by the weaker credit protile of its cellular these transacbons wdl be used to further reduce RATINGS AFFIRMED operations. Cellular revenues should grow at a debt. Centel pmmdes telephone semce to about sr.sec. . rapid pace, but ttuS business is expected to remain 1.6 donaccess lures m rune states through its Sr. unsec. EBB in the red in 1991 due to expansion costs. Cash flow Central Telephone comparues. Centel Cellular Co., Pntm BBB support for credit has detenorated since 1988, due a wholly owned uxut of Centel Corp., owns majority and mmonty mterests a number of cellular OUTuHIk NEGATIVE to the debt-funded acquisition of cellular proper- m ties. Long-tern debt obligations total $1.4 billion. partnershps, readung a populabon ot over 14 ml- Pretax interest coverage is likely to remain weak. hon. Centel’s telephone properties conmue to despite expected improvement in 1991. Centel re- post above-average access lure growth. Telephone tired some debt with proceeds from the sale of its eanungs and cash flow are expected to remam cable television properhes in 1989. The company strong. Nevertheless, uncertamhes regardmg the has reached agreements to sell its electric proper- mgand amount of cellular’s more posihve con- ties and two of its smaller telephone units. It will tnbuhon to overall cred~tworth~~essremain a con- receive cash for its electnc properhes and a combi- cern, as is the currently weak capital structure.

STANDARD & POOR’S CUOMRK MARCH4,l-1 89 Centel Corporation (CNT) 151334 Fixed Income Summary March 5,1990 Public Utility James J. Stork CFA, 3121'630-4658 Telephone I i DIP Mdy'dS6P D&P Last Ch8nge Ratings Ratings D8te From To I Mtge Bonds A+ Baal/BBB+ 11/86 - A+ Sub Debs 8. Notes BBB- Baal /EBB+ 2/90 EBB+ BBB- Preferred Stock BB+ NR/BBB+ 2/90 BBB BB+ Centel Cap. Comm. Paper 0-2 P-2/A-2 12/88 - D-2

Key Ratios 1986 1SWE Total Capitalization (MM) $1,967 $2048 $2,897 $2,533 $2,500 $2625 All Debt 49.7% 44.6% 66.2% 54.8% 59% 6046 Preferred 1.9 1.8 1.1 1.6 2 2 Common 48.4 53.6 32.7 43.6 -1.339 36 Inc. in Cap. 16.9 4.1 41.5 -1 2.6 5.0 Avg. Debt Int. Cost 7.9 9.5 9.4 9.4 9.2 92 Coverages and Ratios PreTx Int. Cov. ex AFC 4.1 X 2.63.6X 2.11.8 x 11.1.ox 1.6X1.4 1.ax AftTx Int. 8. Pfd. Div. 2.7 1.5 Return Av. Com. Eq. 15.0% 13.8% 9.1 % 1.o%' 5.7% 8.1 9t

I I I Pmlected Flnmcina: 1989: $OMM 1990: $50MM 1991: $100MM 1992: $50MM I

Reasons for Rating: We have lowered the ratings of the Fundamentals: Centel operates the fifth largest non-Bell debt securities of Centel and Centel Capital from BBB+ telephone system in the US.. serving approximately 1.6MM to BBB- and Centel's preferred stock from BBB to BBB- access lines in portions of 9 states. The largest areas are: . We have also removed them from our Watch List. The Las Vegas. parts of Florida, and suburban Chicago. CNT's Watch Listing reflected uncertainty regarding the use of telephone facilities are very modern and include a high the S750MM (after-tax)from the sale of Cable TV properties, percentage of digital central office switches. Its modem which has been completed. Although most of the proceeds network has contributed to earned returns from telco were used to retire debt incurred to acquire cellular operations near the highest in the industry. CNTs rapidly properties during 1988, the Company also declared a growing cellular properties are in areas reaching possibly $60MM special dividend, and continues to repurchase more than 18MM pops, including options to purchase RSA equity. Additionally, earnings from core operations did not licenses. Cellular revenues in 1989 were $119.3MM and meet expectations in 1989. Therefore, coverages will remain the operating loss was $20.6MM. CNT also provides electric weaker than earlier anticipated and debt levels are likely service to over 136,000 customers in sections of Kansas to rise somewhat in 1990 upon exercising the option to and Colorado. Loss of some wholesale load, the relatively purchase RSA licenses from United Tel. Sale of the slower growing service territory, and regulatory decisions remaining units within Business Systems could provide cash have negatively impacted operating earnings in recent to help fund the ASA acquisitions. We have not lowered years. Earnings are highly correlated to weather conditions the rating of Centel's first mortgage bonds (A+), which are in the service territory. CNT has completed the sale of its secured by the assets of its electric utility operations, or Cable TV properties. with the net after-tax proceeds of the securities of Central Telephone Company and its approximately $750MM utilized to pay down debt levels, subsidiaries (AA). The credit quality of these issues is not repurchase equity, and pay a $60MM special dividend. significantly impacted by the parent company's expansion CNT's Business Systems division is also for sale. and in cellular. therefore recorded as discontinued operations. CNT recently announced the. sale of a unit within Business M.jor Rlrkr: Because of generally strong earnings. the Systems, Federal Systems, for $50MM. CNT continues to adoption of alternative regulatory plans might result in initial look for attractive acquisition candidates in the telephone rate cuts. Currently, Centel plans to propose alternative and cellular industries. regulatory plans in several states during 1990. Acquisitions of telephone or cellular properties could lead to further credit Eamlngr Sou- 1989 oper. revenues (oper. income): weakening. Debt servicing requirements of subsidiaries Telephone - 75% (109%), Electric - 14% (16%). Cellular - I'nUSt be met before cash may be upstreamed to the parent. 10% (-ll%), and Other - 1% (-14%).

SUITE 3600 . 55 EAST MONROE STREET CHICAGO, ILLINOIS 60603 . (312) 263-2610 TELEX 25-5165 This material is confidential for the use of our clients only and may not be reprinted or reproduced. Copyright 0 1990 Duff 8 Phelps Inc. 4 !

IIAlr

kl. 001. (X) 1.7 1.1 1.1 WIT0 - - 76.6 OB. mvon (n) 18.2 17.6 16.3 i no8 n, 4.6 1.7 37.6 1z.a 10.6 6.P =mU)(w 7.1 6.4 6.8 6.6 13.0 12.1

camm ini 31.B 24.8 36.6 la. em. (mi.) 3.3 3.4 3.0 3.4 2.7 2. TD%lm.up. 66.0 - 24.8 13.4 30.0 31 .m 44.1 I DAOdalo aFi&ar- urubl mhrat0 Amount Outstandina ($mil.) Moodv 'IRating C Contd Corporation First Mtge. 8.108. 1996 $17.8 ha3 7.375% Notes, 1991 $50.0 8.oosC Notes, 1996 50.0 Debenture 9.1258, 2017 $50.0 0083 Debenture lO.OOs, 2018 60.0 B883 S.F. Debenture 11.758, 2005 40.0 8883 S.F. Debenture 9.*, 2016 80.0 8083

2 Centel Corporation e j '0 Rating Outlook Moody's belie#vesthe direction of Centel's debt rating will be largedy determined by the results of its c8llular operations and the timing of tho80 resrdtr. In addition, the regulatory arena and the outcome of the company'8 aggressive thrust towards incentive regulation also will be a primary determlnrnt of the company's rating. Until ruch time as these issues evolve, we would anticipate the rating to be stabk.

Company Fundamentals

Fundarnentrl adCompetlth enth largest cdhW 8ubscriber bare Porltlorr of U.S. ce#ulu companb but is spread ovw 44 MSA markets. This 0 CNT ha8 telephone operations in large footprint h iikdy to resutt in nine 8tatw. sewing more than 1.6 higher marketing expenditures than a million telephone access lines. Its cel- more densely populated portfolio with lular interests cover 14.4 million po- a similar number of pop spread over tential cellular subscriberr (pops) in less MSA8. However, OPICB the net- the metropditan statistical areas work is in place, capital expenditures (MSAd). The Company'o Portfolio of should slow until the company be- other krsinesses includes electric op- comes capacity constrained which eratiom h Kanaas and Colorado: Cen- should occur at a later point in time tJ Informntion Systems, which is for than another mnywith a more sak: and Centd Communication8 Sys- densely populated pwtfolio. tem. wttich recently was announced 0 We expect the electric opera- to have achieved an agreement of tions. in Kansas and Cdorado. to con- 9aiehprincrp.l. tinue to provide steady earnings and e 0 cash contributii for the foreseeable operations are bntd's primary bu8ine88, comprising approxi- future. Mse operations contributed mat* 75% of revenue8 on a conbdi- 14% of corrsoliidated revenues for deted buir. These operations senm 1989. nim state8 md are divided into dx operatwig telephone companies. Cen- Manapemont Stntm Company represent8 consolidated teb 0 CM's primary focus ir to build phme operating cash flow and ha8 their two core businesses. cellular ad operation8 in North Carolina, low, telephone sewice. mere will be con- Mi, Nevada, Florida. Illi, tinued focus on enhanang the regub- and Vigini8. CentJ 8180 has tek- tory framework for the telephone OP phone operations in texas and ohm. erations, concentrating on incentive Given that Nevada, Florida. and Illinois regulation plans that offer the comw operations represent almost half of ny the incentive to become more effi- the total operating cash flow Contrib- cient and share the benefits between uted by the telephone operations, we the rate payer and shareholder. In cd- consider these regulatory environ- luiar, we expect the company to f0CU ments to be very important. on upgrading the quality of the net- 0 Because of the purchase of cellu- work and net 8-i- growth whib lar progerties from United TeleSpec- attempting to maintain average month- trurn for $796 milli in 1988, Centd's ly revenues per subscriber. cellular ex sure is large relative to 0 CNT will continue to invest in ita the sue op" its telephone operations. telephone network which ir already CNT'8 book value investment approxi- more efficient than many other do- mates $3 bili, with about $2 billion mestic telephone companies. lt k in telephone and $1 billion in celUar. through the modernization of the net- This hrge cellular investment results in work that CNT habeen able to offw additiil business and financhl risk new product8 and 88Nic8s like the m over the short and intermediate term. tentially hiQhmargin CUSS servicer. 0 center's wholly owned cellular These offeri s have the potential of subsidiary, Centel Cellular Company, improving C8 's average monthly re+ '. ended 1989 with sliihtty over 113,000 enue per access line for focal serVi# cellular subscribers and 14.4 million from the $17 experienced in 1988. POPS. me company bossts the ok+v- 0 Cellular service b still in its inf- cy, with Centd'8 owall penetration Centd filed on June 12, 1990 for rate at approximatdy 1%. Manage- $18.0 miiiin additional rat. rW mtbelieves cellular subscriber and the introduction d irrcsntiw reQu- grMh will continue at a 8trorrg pace lation and additional f Iexibilii . and expects to cagnrlize on the ex- 0 viwi contrim!.Sw of pansion. Therefore, we expect CNT to CNT's operatmg cash flow in 1989 and continue its commitment to expand $137 million n revenw. Tho Virginia the coverage, capaaty, and quality of commission has adopted 8 deregul8- it8 network. However, we do not antic- tion experiment for the bute'8 brgen ipate the cellular operations's financial bCdm- Cam8 &bd@ success to negate their increased fi- CM.The plan separates tw nancial and busiisr risk untltho-_ mid nications services into far categorim: 19808. actuatty cunpetitii, potentialty com- 0 Cellular revenue8 comprised an petitive, discretionary, and basic. We impressive 10% of CNTs consolidated consider theissued cost allocation. revenues for 1989. However, we be- which currently is beii reviewed, to lieve W cellular exposure has 10- be one of the most important icrswr sulted in increased business and finan- addressed when cat cial risk. We believe in the potential of vices arb separated.~:;,T-the the cellular business, but consicJer extent that costs are shifted from the meof the bullish estimates for the traditional seuwces to the competitivb cellular industtry's future success may category, margins in the competitivs be overty aggressive, particularly in category wifl be impaired. re8pect 10 their relatively short-time 0 Texas contributed 13% of operat- horizons. ing cash fkm n 1989 and 10% of toW 0 Earlier thb year, a joint venture, telephone revenues. We do not ex- comprised of Motoroh Inc. and 00- pect CHT to file with the Tam Public mo8 LnternatioMl SA. of Monterrey, Utili Commrssion for an incentive Mexico, was licensed to operate a cek plan until after Southwe#cm Bad's lukr radio-telephone network in the 'Texas Fir8t' regulatory plan b deter- northern region of Mexico. Centel b a mined. 2O%-owner d thia company whii will 0 Iowa b the state wtmre CM hu wethe state8 of Chihuahua and Du- had the most succea8 on the re-regu- rango as well a8 pan of Coajub. lation front. UnfoRunatdy, It OrJY rep 0 CM h pur8ung a strategy ol di- resent8 3.0% of CNT operating cuh WMting rubsidwO8 mnomw flow. Wet form have replaced tn- ftr it8 strategic plan. Toward this end. ditiorul regulation of prices for the M- tb COmpanY h8 htW88t h mtd 8mice.a: paging, call '?cor& Federal System earlieu thi8 year. tt g%uTFEx. speed aaing; mtertA- abaokl about 65% of CeCrtJ Credii TA toll, and billing ud cdecmn* 'k Compay'r tekcommunWtm equip- centbe regutation plan, we likdy to ment portfolio d $70 million. The $ab bOdiSCWWdOVWthOnOXtJr of mtd CommuMution8 system8 month. recently was afmowced.

Rwulation md Ikt.8 0 CNT's strategy of building for the 0 Nevada h CM's most impoftant long term has negative intermediate- state. compri8ii about 20% of 1990's term implication8 dw, h pan, to ttm operating cash fkw md having con- infancy of the cellular industry. tributed $189 million.. in revenue8 in 0 cenuhr ia 1989.m- has adopted a ingly impottant vpart d '8 incr- fvun- new rule reqprding ahernatwe regula- ciak. lb infancy of celhdar telephoy tion which allow8 the company to keep suggests that even with cellulu'8 m%-tO-md J earnings up to spectacular growth rate$, it wil take 5OO-basis point8 ov(w a bench mark another few yean for CM to reap the ROE. AWe this M,75% of urn- beMfR8 Of its CUWMt Cds& inveft- ings will be returned to ratepayers. menta. Therefore, whL we WleM h 0 Florida b CM's second moat im- the --term potential of cellular tek portant state from a cash contriikn phony; it Weakened m.8C8- perspecttvo. lime rationa contrlb- structure h the short term. AdditknrC uted approximately Or1 SC of CNT's tela ty, there are stin many issue8 whi phone operating cash flow for 1988. continue to evolve and must continue Regulation for telephone operatiam io to be addr-, *Muding: penem cwrentty under review by the 8tate. tbn nte8, average month!y revenma, ' marketing expenditures, margins, cap a major beneficiary with earnings ad C ital expenditures as affected by digital- operating cash fkw expanding signifi- ization, regulatory treatment, competi- cantly beyond hbtoriCaI levels. Howev- tive technologies, and the effect of an er. the time horizon may prove to be economicslowdown. in the late to md-1990s. 0 We expect almost all of CM's 0 If CNT is successful in the in- telephone operations to enter into rate tive regulation front, it should be abbe reviews in their respective jurisdictions to take advantage of its above aver- over the next two years. Incentive reg- ag8 tele@one access ligrowth and dation is to bo a primry objective for strong minutea of use growth to en- CNT with its receipt possibly coinciding hance profitability. CNT's access lines with meup front rate concessms. increased by 5.8% versus the indw However, because CNT has aggres- try's grMh rate of approximate&y sively moved toward increasing its op- 3.1% in 1989. erating efficiency, the primary qw- 0 Many telephone companies have tion is whether regulators are going to shown an interest in the acquisition of give CNT credii for taking the initiative additional telephone properties. We without actual incentive regulation believe CNT only would be interested plans in place. Oifferent state regula- in brge acquisitions. Depending on tory commissions are likely to view specifics, such as price. financing CM's modernization and incent- methodology, and the post capital plans more favorably than others. structure of the surviving entity, we thereby providing both uncertainty and would view such a deveiopment as an omunity in regard to the net out- opportunity for CNT to strengthen their come. capital structure. 0 CNT ended 1989 with 92.6% of its Op~rtunltieslStrmnmths telephone lines served by digital switches versus 86.8% in 1988. This CNT telephone rates are some of the extraordinarity hgh percentage of de lowest in the indurtry. Therefore, it is tal switches is allowing the company unlikely the new rate proceeding would to expand its offering of htgh margin rebutt in large rate reductions adin- CLASS servicw to a large percentage stead is likely to include some rate of its service territory and should re- increases. autt in margin expansion for the tela 0 II cellular were to meet Wall phone operations before regulatory Street's expectations, Centel would be effects.

Centel Corporatiorr 5 Financial Analysls 0

0 lebphone access line growth * Recent cettular subacri growth continue8 to run at almost twice the rate8 ruggoat CM's 1990 year and indu8tty average. Telephone accesa cellular subscriber level to increase to lines increased by an impressive 5.8% at baa 175,000 from the 113,000 in 1989, resulting in a total of 1.6 mil- wbacribcw, reponed at the end of tart liiaccess line8 served at the end d year. Cslulrr acceaa lineu incroa-d the year. We expect 1990 to be by 85% for 1989, paw 8s a re8uh another year of strong @rowth for teb- ~l the wy sage of the newer mar- phone operations and prqect year end ket$. However. thi8 growth wu ac- telephone accew lines of at bast 1.67 compwed by an incream d 126% in millkrr. capital expmdiwes to $43.5 miam 0 W'scapital expenditures will urd a 148% Weam h operating bm continue to increase over the next few to 520.5 millkn. years, as a result of the strong growth 0 We estimate CNT'a avera- cat rates of the cellular and telephone op- per cektar pop, including the Una& eration8. For 1989, CNT capital expen- Telespectrum acquisitm, to be below ditures of 5258.7 million represented a $70. k a re$& of the strong market 4.7% increase from the $247 million for CelMaf propertler, we experienced in 1988. tkdy animate a 'paper profit'-- on 0 CNT's interest coverage in 1989 wa8 1.05 times versa 2.1 times in these propertkm of at Iemt $70 per 1988. Intereat coverage averaged 3 pop (excluding capital exgendiurer). . timw and peaked in 1986 at 4.1 times h addii, CNT will continue to pur- for the past five yean. We expect dwse the rural wvco area8 as they CNT'a 1989 interest coverage to be a become available due to tha United base from whicn the company shW Tebmdeal. eecauae the price improve over the foreseeable future. of the80 properties WS8 negotiated in 0 We expect CNT's debt to total 1988.wd be(ieve these propenm capital ratio to deteriorate over the auld be r(uo# for over 175% of tM next few year8 from the current purcham price. Howevw, to the ex- 45.7%. We corr8ider the current led tent CNT chooses to prwid. cellular to b0 a 8hort tmWnOmenOn re- sefvim in these small markotr, it k wtbng from debt reduction because of &ety to cake an average d at kut the aak of cable operations. W's three-tc+fow yean to reach operating capital expendaures 8houM run in the ca8h ffow break-even in our base 8c+ area of $300 minion for 1990. Mrk.

6 Centd Corporation rn CAWAVO. 1989 1981 1986 1985 Incomo Statistic8 Not 8-8 -2.s l.1U 1.476 1.370 1,328 OPW8thg hconW -8.3 182 E 306 315 289 Not hcomr 29.3 445 135 157 109 129

% $8108 coat of QoOda rdd 64.7 67.9 62.4 65.7 62.9 64.6 ~oc.I m. 0xp.nrr 143 16.8 16.5 13.6 14.1 13.6 Wd 8dmh. ------0- 2.2 1.8 2 .o 2.2 2.7 2.4 RID 0 0 0 0 0 0 - p.nrlon costs -0.8 -0.S -0.8 AmuJ -0.6 4.8 -0.3 20.4 15.3 21.1 20.7 23.0 21.8 htWOBt - 8.6 15.1 10.3 5.9 5.7 5.6 othrr hconwlrxponu 0.s 0.5 3.0 2.2 -1.9 0.6 Rotax hcomo 12.8 0.8 13.8 17.0 15.5 163 AttW tuht. bef. 0qulty Om. 16.6 37.5 12.3 10.8 8.0 9.7 Not Morn 16.6 37.5 12.3 10.6 8.0 9.7 T8X I8tO - 0 27.2 37.5 48.5 42.0 1u.r pa - -83.3 24.8 20.7 30.1 23.8 Mvldmd P8Yout(% hcorn) 283.1 1.187.0 66.8 47.1 62.9 51.9 OMdMd pryout(% gross cash flow) 19.0 11.0 28.8 19.1 17.5 18.8 Covorogo Anrlyrlr krtWO8t coVrr890 3.0 1.1 2.1 3.6 4.1 4.0 IntWOlt I 100% font 2.4 1 .o 1.9 2.9 3.1 3.1 Intwoat I 113 run 2.7 1.1 2.0 3.3 3.7 3.8 lot& covy'oI~ 2.7 1 .o 2.0 3.2 3.6 3.5

! Assot Efflcioncy AVU8p UI.1 tvnovW 0.11 0.33 0.1 0.50 Ad 1.d 8VU890 8lS.t twVU 0.42 0.34 0.1 0.47 FI~hHntorytwvu 12.10 25.22 9.34 9.14 O8yr ro&v.#r 41.29 35.74 45.31 40.23 0 rpy&lo (0.27 101.16 97.69 60.69 FI% ~,hvortmont/aalor 0.0) -0.06 0.02 0.07

Roturnr On Assotr 6 Capltalizatim Eel1 t0 m8QO 8UM8 @.I5.3 7.8 11.5 10.7 11.9 AOI. EBlT to 84. aw89m us018 12.1 18.2 8.7 11.2 10.5 11.7 Emf to ng. crpnatzath 10.8 5.8 8.6 13.0 12.1 i3.r A EBlT to 84. 8VQ. C@8k8tbn 12.) 18.5 9.1 12.1 11.3 12.8 "%VW.O.d fOtUVl On 8VQ. Cmd28- 6.4 4.0 6.0 8.0 6.3 7.7 btWll Ofl 8VQ. CommOr, 11.1 1 .o 11.1 15.8 12.0 15.6 AVOf8gO Colt d brM 8.0 10.7 7.8 8.9 8.5 9.2

Centel Corporation 7 198sC mCAGR/AVG. 1989 191 1987 1986 - Cash flow/lnwstrnont AnrlVtir 0p.ratlng sourc.8 -38.a 11 110 157 108 $29 0.8 199 181 201 193 l(0 4.8 4 4 42 3e 41 - 0 0 0 0 0 - et) -40 -13 51 6 Oroar cash (b* 26.8 1.lW 25s 387 392 356 11.2 1sO n 73 67 66 0 1 1 1 1 1

bt.h.d Clrh (bw 28.7 1.061 181 313 323 21) Invortmont U8.a Qlosr cwrl 0xp.nd. - - - 287 24a 257 Loss drporJI - - - 1 1 6

Not CWJ0xp.nd. 4.1 2s 247 287 247 251 workhg Upltal factor - -55 -150 -13 29 -5 Not cW&rmpkyod 9.8 204 97 274 276 20 AcqulJtkru 11.7 38 915 14 265 . Notothw - 28 25 -5) 51 81 Tot& hV8rurmt8 7.8 268 1.037 234 592 337 *t fhmchg gllmrt.d(r.q. j 47.1 ?e3 -856 79 -268 -48 No1 Rnanolng Roqulrod(gon.) M.2 -564 997 40 202 %zlxLl - -163 -166 -5 w ec0 h tuh h m.-.(hc.) 2.8 4a 26 -8 1 42 N.1 murho nglWm.1 47.1 -m 856 -79 26e 48 €mtgcuhhrrrkt.seo. 0.a u 22 I( 42 u

Ratios -88 m#xIdOWe. - - - 1.4 1.3 1.4 Actm. d0Qr.c.Id.pr.c. urg. 1.4 5.9 8.0 5.1 5.0 4.8 mors cuh noV w qorr CAPEX - - - 134.7 lS.3 130.6 a088 Cuhfb % wx 188.8 480.9 103.0 135.0 150.8 141.7 Rot. Ca& IbW % *OS8 Mx - - - 109.0 130.6 112.6 Rot. crSh llow w not CAPEX 167.7 410.2 73.3 109.2 131.0 115.0 -1 CASh WW % Mt CW. m. 211.0 519.7 11.9 114.3 117.1 117.1

Orow crSh (kw Y tot& &bt u.2 u.9 13.0 40.6 38.3 43.3 Rot. C8Sh fbW % t0t.l drbt 37.1 76.5 9.3 32.8 31.6 35.2 Rot. cash now w bQ. .4. tot& dabt S2.1 71 .9 8.6 26.6 25.3 27.9

8 Centel Cocporation 11.2 1.387 1.951 955 1.023 821 - 27 21 69 0 0 0.7 500 503 564 545 51 3 0 40 33 35 36 38 6.8 1.079 925 1.029 952 646 0 0 0 0 3,434 2.671 2.556 2.218

c_ 43.0 45.7 56.8 35.7 40.0 37 .O 0.8 0.9 0.6 2.6 0 0 lS.6 16.5 14.7 21.9 21.3 23.1 1.3 1.3 1 .o 1.3 1.4 1 .7 36.3 35.6 26.9 38.5 37.2 38-1 0 0 0 0 0 0

9.0 1.562 2.120 1,218 1.317 1 .on - 27 21 69 0 0 0.7 500 503 564 545 51 3 0 40 33 35 36 36 8.6 1.079 925 1,029 952 846 - 0 0 0 0 0 8.7 3.209 3.606 2.934 2.850 2.474

47.1 48.7 58.9 41 .5 46.2 43.5 0.7 0.8 0.6 2.3 0 0 17.1 15.6 13.9 19.9 19.1 20.7 1.2 1.2 0.9 1.2 1.3 1 .5 32.4 33.6 25.6 35.1 33.4 34.2 0 0 0 0 0 0

14 346 71 138 52 1,373 1.606 883 a05 769 0 0 0 0 0 175 1 74 263 2% 256 1,562 2.120 1.218 1,317 1.077

0.9 16.3 5.8 10.5 4.6 67.9 75.5 72.6 67.2 71.4 0 0 0 0 0 11.2 8.2 21.6 22.4 23.8

Centel Corporation 8 mCAGRIAVO. 1989 1988 1987 1986 1965 c 0th~LMmQO Ratios Puulan.41.TDUcrO. 4s.4 46.2 57.0 30.1 43.8 Lo.? Debt aq. a.kv. TO W w. c.pm. 47.8 48.7 58.0 41.5 46.2 43.5 Em. adj. dbl. kv. 10 U aq. capzn. W.0 52.5 63.1 42.5 47.1 U.8 htoirst sonskhm d.M % rd(. cwn. 6.S 0.4 20.2 2.4 6.3 3.2 us~arv+tad dobt K adj. capzn. 46.8 47.2 58.7 40.5 45.4 42.5 common U 8dj. totJ asma 29.1 30.0 23.6 31.4 29.0 30.5 Ilrlr(. VJ. wmnon % rd(. tot. asaota Sa.2 101.0 50.5 46.8 50.8 47.1 Totd d8bt K MotCrpm. 12.1 24.8 43.4 30.0 31.8 30.6 Tot. Irb.1rd)wt.d fW wor(h 1.1 1.1 1.6 0.8 0.0 0.0 Aurt wrgl hdu 2.1 2.1 2.0 1.7 1.0 1.?

10 Centel Corporation I- Donaldson, Lufkin 8 Jenrette Securities Corporation 140 Broadway. New York. N Y 10005 (212) 504-3000

Research Bulletin

Jod 0. Grou July 31,1991 WePresident 0941-91 (212) 5061)998

CENTEL CORP. (CNT)

Cellular Turns Profitable; Restructuring Activities to Generate Cash

FACTBOOK Bracket: (1) Rating: Analyst's Buy Relative Return Projection: Over 20%

Prlco Earnings Per Share PIE Ratio8 Dividend 07t30mi 52-Week Range -12/90 W91E 12/92€ 12/91€ 12/92€ --Rate Yield 31 'A 36-33 $0.75 $0.60a $0.80 52.0 39.1 $0.88 2.8%

DJIA 3016.32 Shares Outstanding (mil.): 84.6 SPII: 460.62 Matitet Capitalization mil.): $2.6

'Does not include an estimated $1.30 in onetime capital gains.

VIEWPOINT

We continue to rate the shares of Centel Corp. Analyst's Buy because we believe that the investment community continues to ignore the significant metamorphosis that the company has and continues to undergo as it changes from a "utility conglomerate" to a well-focused "telecommunications services enterprise." In our opinion, the combination of an undervalued stock, rebounding earnings, improved long-term growth opportunities and management's focus on building shareholder value make these shares very attractive. Centel is expected to close on the sale of its electric utility operations by year-end at a sizable profit, and it has already implemented portions of the telephone-cellular properties swap agreement with Rochester Telephone, with the remainder expected to close in the third quarter. In the last two years, Centel sold its CATV operations, its long distance operations and its telecommunications computer equipment sales and leasing operations. Meanwhile, it has made significant cellular acquisitions, and as a result, the company's valuation is skewed more by its cellular value than by its telephone value. These acquisitions have also significantly diluted current earnings, resulting in a very high PIE ratio. However, from our perspective they have increased shareholder value tre- mendously. While we believe that more cellular acquisition activity will follow, we expect the restructuring activity to subside and for Centel to demonstrate considerable earnings growth in the early to mid-199Os, driven by the profitability of the company's cellular telephone properties.

0 Donaldson. Lufkln & Jenrette Securfllrs Corporalion. leal

AddRlonal Information Is available upon request. THlS REPOAT W BEEN PREPARED FROM ORIGINAL SOURCES AND DATA WE BELIEVE TO BE RELIABLE BUT WE MAKE NO REPRESENTAllCWS AS TO ITS ACCURACY OR COMPLEENESS THlS REPORT IS PUBLISHED SOLELY FOR INFCRWTON FURPOSES AND IS NOT TO BE CONSTRUED & AN OFFER TO SELL OR THE SWCrrATlON OF AN OFFER To BUY ANY SECUWIN ANY STATE WMRE SUCH AN OFFEROR SOLlClTATIONWOULD BE ILLEW DO" LUFKlN 6 JE"flE BECUMTIESCORPORATION. ITS AFFILIATES AM) SUBSDIARIESANDiORTC(EIROFFICERS AH) EMPWYEESMAY mOM TIMETOTIME ICWIRE,HOLD OR SELL APOSITION INTHESECURITIES MENlWNEDMREH UPON REWEST WE WILL BE PLEASED TO NRNIW SPECIFK: INFORMATION IN THS REGARD IF DONALDSON LWKlN 6 JE"E SECURITIES CORPORATION IS 4SED IN CONNECTIONWITH THE WRCHASEORSALEOFANYSECURlTYDISCUSSEDINTHlSREPORTD0NAU)SON WFKIN6JENR€I?E SECUWTIESCORWRATIONMAY ACTASAPR%IPMFORmMACCOW OR AS AN AGENT FOR BOTH THE RIVER AND THE SELLER 0Pl"s EXPRESSED MREIN MAY DIFFER FROM 7HE OPINIONS EXPRESSEDBY OTnER DMsK)hls OF DLJ Due to the company's restructuring activities, quarterly earnings have been highly irregular and there has been a significant amount of earnings dilution, which we believe has kept investors from properly focusing on the strength of Centel's underlying business, the stock's valuation and the company's long-term earnings prospects. For the last two years Centel's earnings have been substantially diluted, largely by its cellular operations, owing to a combination of acquisition and start- up expenses. However, recent results would indicate that the company's cellular properties-both those managed directly and those in which the company has a minority stake-are turning profitable and are contributing to corporate earnings. As cellular profitability grows, Centel's earnings will accelerate. In addition, because proportionately Centel owns more cellular properties than most of its peers, the company's future earnings growth rate is likely to substantially exceed that of most of the other telcos over the next few years. In the last year or so,Wall Street's dislike for leveraged companies and asset plays, including cellular stocks, has put pressure on telco-cellular hybrids such as Centel, resulting in what we consider to be an outstandingly attractive valuation for Centel's shares. Our valuation model, which is a combination of bond surrogate or dividend discount model for the regulated telephone properties and a discounted "per pop" value for cellular properties, places Centel's current target price at $40 per share, approximately 25% above recent price levels. As Centel's earnings grow, largely from the earnings contribution of its cellular properties, investors should begin to discriminate among the cellular or telco-cellular hybrid stocks, and therefore CNT should appreciate toward our target price even if the "pure" cellular stocks remain out of favor. As a result of the aforementioned property sales and exchanges, Centel will have approximately $250-300million in cash by year-end 1991, which it could use to retire debt or make further telephone or cellular acquisitions. Thus far the company has indicated it will pay down its debt (currently about 60% of capitalization) "unless a better opportunity arises." We believe that there are opportunities for acquisitions and that this may be the more likely course of events. Centel continues to express a strong desire to acquire cellular properties and has bought numerous properties over the last three years. Centel currently has the right of first refusal on about 2.3 million of United Telecommunications' RSA cellular pops, an option left over from when Centel purchased United Tel's MSA properties for $772 million in 1988. At a price of $40-45 per RSA pop, such a transaction would cost about $1 00 million. In addition, Centel covets MetroMobile's properties in the south- west, which includes the Albuquerque and Las Cruces, New Mexico, and El Paso, Texas MSAs. These properties collectively contain about 1.3 million pops, which at a price of $1 75 per pop would cost about $225-230million. Earlier this year, MetroMobile publicly stated its interest in selling these holdings but has since withdrawn that statement in order to study other alternatives to maximize its own shareholder value. If Centel were to make one or both purchases, corporate earnings would be diluted even further and earnings would likely remain noticeably diluted for another two years or so. This could keep the stock from achieving our near-term price target as long as the stock market remains focused on "earnings momentum" stocks and not "value" stocks. However, such acquisitions, if made at attractive prices, would significantly add to long-term shareholder value. We believe that Centel's management is focused on long-term shareholder value. We also note that because more than half of Centel's stock price is a function of the value of its cellular properties, Centel will tend to trade more like a "cellular" stock than a "telephone" stock.

2 RESTRUCTURING ACTIVITY UPDATES

Centel Sells Last of Business Systems In 1989, Centel announced its intention to sell its Centel Business Systems Division, comprised of three separate units. Centel Federal Systems, the first unit to be sold, was purchased by its management in the first quarter of 1990 for an undisclosed amount, although Centel indicated it was for about book value. Centel retained an 111h% interest in Federal Systems.

Centel Communications Systems, the largest piece, was sold in February 1990, to a unit of the Wil- liams Telecommunication Group Inc., headed up by former Tie Communication executives Edward H. Lavin, Jr. and William A. Merritt, Jr. Terms of tha'. deal were also undisclosed but the company again indicated that the transaction was completed for approximately book value. In the first quarter of 1991, Centel Information Systems, the third piece, announced the formation of a joint venture with lnacomp Computer Centers Inc. Although Centel retains an interest in the venture, its day-to-day involvement in operations and its financial commitment to the business . should be minimal.

Centel to Sell Electric Utility Operations By Year-End On December 13, 1990, Centel announced that it had reached a definitive agreement to sell its electric utility operations to Utilicorp United of Kansas City, Missouri, for approximately $345 million. The price includes $20 million in current liabilities; Centel is expected to receive about $325 million in cash. After income taxes and banking fees, we expect the company to net about $250 million. The sale is subject to various state and federal regulatory approvals, which we do not expect will be a problem, and should close in the fourth quarter of 1991. Centel had announced plans to sell its electric operations in August 1990, on the condition that it received a fair price. In our Octo- ber 29, 1990 Company Analysis, we estimated that the operation would bring $250-300 million, so the $345 million price exceeded our forecast. Centel's electric operations have about $1 00 million in debt, of which $50 million must be retired at the time of the sale with the other $50 million retained at the corporate level. As a result of the sale, Centel is expected to net out approximately $200-250 million in cash that can be used to retire debt or make acquisitions.

Centel's electric operations served about 136,000 customers in Colorado and Kansas. The division generated $165 million in revenues and $20 million in operating income in 1989. We estimate that the unit would have had revenues of about $171 million in 1990 and $174 million in 1991 and would have generated operating income of about $30 million and $31.6 million, respectively. If the deal closes close to year-end 1991, it will have negligible affect on our 1991 earnings estimates other than the onetime capital gain of approximately $0.50 per share the company is expected to report, but reduces our 1992 earnings estimates slightly, reflecting the lost income from the electric division net of the savings in interest expenses (if the cash is used to retire debt).

Centel and Rochester Tel Swap Telephone and Cellular Properties Centel and Rochester Telecom announced on January 10,1991, that they had signed a definitive agreement whereby Centel will sell 135,000 of its telephone access lines in Iowa and Minnesota to Rochester Telephone in exchange for $1 00 million cash, 2.885 million newly issued shares of Rochester Telephone common stock and 424,000 cellular pops on terms we assess to be favorable to Centel. (The original deal included 640,000 pops but some pops were subject to rights of first refusal. However, Centel received the cash from the properties where the rights were exer- cised.) The 424,000 pops consists of about 124,000 MSA pops (mostly Lancaster, Pennsylvania) and about 300,000 RSA pops. The cellular properties that Centel is receiving as a result of this transaction include minority interests in 20 markets located in seven states. The transaction gives Centel 87% ownership in the Harrisburg, Pennsylvania market. The telephone properties Centel sold represented approximately 8% of its total access lines, which at the company’s recent growth rate represents slightly more than one year of access line expansion. The transaction will close in phases beginning with the Minnesota telephone properties in the second quarter of 1991 and the Iowa telephone properties in the third quarter, at which time Centel will report noticeable onetime capital gains. Also as a result of this transaction, Centel will become Rochester Telephone’s largest shareholder with a 9.1% interest in the company. The companies have a standstill agreement which forbids Centel from acquiring more than 10% of Rochester Telephone’s outstanding shares until December 31, 1995. After taxes, Centel will net about $40 million in cash from these transactions.

The telephone properties Centel is selling are located in states in which it did not have a large pres- ence and therefore the operations were somewhat inefficient in that the company did not have large economies of scale, particularly in staff functions such as state regulatory, legal, personnel, etc. The sale of these properties should not be misinterpreted as Centel’s interest to diminish its role in the telephone business. On the contrary, we believe that if Centel could find and finance a sizable telephone acquisition at an attractive price, it would do so. Centel’s telephone properties in Minnesota and Iowa were part of the company’s Central Tele- phone Company operations. The Minnesota properties, containing about 85,000 access lines, are in suburbs of Minneapolis with an access line growth rate of about 4-5% a year. About 78% of these properties are served by digital central offices. The Iowa properties, primarily in Fort Dodge, contain about 50,000 access lines, are 45% digital and have been experiencing a 1YO annual access line growth rate. The properties collectively had revenues of $67 million in 1989.

Where Will the Cash Go? The cash received from the Rochester deal, coupled with the cash Centel will receive from the sale of its electric utility operations, will total about $250-300 million, which can be used to reduce corporate debt or make cellular and telephone acquisitions. The company says it will use the funds to retire debt. As of the second quarter of 1991, Centel’s capital structure was 59% debt and 41% equity. Assuming that all of the net proceeds are used to retire debt, then Centel’s debt will fall to about 55% of capitalization. However, we remind investors that Centel has been aggressively acquiring small cellular properties and traditionally keeps little cash on hand, thus we would expect Centel to maintain debt levels at about 60% of capitalization for the near to intermediate future.

While it is possible that Centel will use this cash to pay down debt, we believe that it is more likely that it will be used to make additional acquisitions. In particular, we note that Centel has right of first refusal to acquire about 2.3 million of United Telecom’s 2.5 million RSA pops. (Centel purchased UT’S 8.2 million MSA pops in 1988 for $775 million.) It is our understanding that Centel has the option to purchase these RSA properties at $40-45 per pop for a total cost of about $100

4 million. Centel may also be interested in MetroMobile’s Las Cruces and Albuquerque, New Mexico, and El Paso, Texas properties containing some 1.3 million pops. The deal could be worth about $225-230 million assuming a purchase price of about $175 per pop. Centel already has four of the six surrounding RSAs in New Mexico as well as an interest in the adjacent Mexican franchises. (See October 29, 1990 Company Analysis.)

EARNINGS OUTLOOK DEPENDS ON TRANSACTIONS Centel’s 1991 earnings will be materially affected by the dilution of past cellular acquisitions and by the capital gains from recent transactions. Centel booked a onetime capital gain of $0.54 per share in the second quarter as a result of the sale of its Minnesota Telephone property to Rochester Tele- phone, and is expected to book onetime capital gains of about $0.23 per share in the third quarter as a result of the sale of its Iowa properties to Rochester Tel and of about $0.50 per share in con- junction with the sale of its electric utility properties in the fourth quarter of 1991. Altogether, these gains will be in the neighborhood of about $1.30, which when added to our EPS estimate of $0.60 from operations will give Centel total reported 1991 earnings of about $1.90 per share. Our $0.60 per share forecast includes the earnings dilution from previous cellular acquisitions. Centel’s operating income and earnings will be somewhat diminished in the second half of 1991 and in 1992 due to sale of the aforementioned telephone and electric properties, which will make quarterly comparisons for the next year difficult. Some of the earnings reductions will be offset by interest income on the cash received from the sales as 1991 progresses. For 1992, we have created two different earnings scenarios. The first scenario assumes that Cen- tel retains the cash (and either its interest expense goes down or its interest income rises) and results in a 1992 earnings estimate of $0.86 per share. For now, this is our base case and the one we will use in our earnings tables. However, as discussed above, we believe that it is likely, if not probable, that Centel will make further cellular acquisitions using up most, if not all, of its free cash. If the company buys cellular properties that are still losing money because of their start-up nature and most of the purchase price is goodwill, then 1992 earnings are reduced noticeably from our base case scenario. Not knowing exactly what Centel is likely to do or when, a rough ballpark earnings estimate for 1992 under this scenario is $0.66 per share. Again, if Centel were to make good acquisitions at favorable prices, we believe it would add to shareholder value, but in the in- terim it is likely to keep Centel’s share price close to recent levels for some time to come.

VALUATION VERY ATTRACTIVE

Our two-part Dynamic Equilibrium Valuation model develops a “bond-surrogate value” for Centel’s regulated telephone companies based on the historic relationship between the yield of the stock and that of the 30-year Treasury bond (a mathematical shorthand for a dividend discount model) plus a cellular (“dollar per pop”) derived from a DLJ proprietary data base of market-specific cellular values that are based on projected cash flows. We believe that this methodology, while not per- fect, is a good shorthand means of determining the public value of a telephone stock. We currently assess Centel’s stock value at approximately $41 per share, or about 30% above the recent trading price of $31 per share. Our price target is the sum of $15.75 per share for the regulated telephone companies on a “bond-surrogate” basis (given a current yield on the 30-year Treasury

6 bonds of 8.5%) plus $24.50 per share in cellular value based on a weighted average per pop value of $140 for its 14.8 million MSA pops and $0.90 per share for its 1.5 million RSA pops at a weighted average value of $50 per RSA pop. The average per pop values are based on the individ- ual private market property values in DLJ's cellular property valuation database, which then are discounted by 25% to convert from private to public market value. If we were to value Centel based on the current average imputed value per pop of approximately $122 per MSA pop (based on the prices of DLJ's cellular stock universe as of July 29, 1991, and $50 per RSA pop, our target price would be $38 per share or about 21% above recent price levels. Thus, even at current interest rates of 8.3% and depressed industry average cellular valuations, Centel is still noticeably undervalued.

Readers should be aware that our price targets are heavily dependent on two key variables-interest rates and cellular prices. For instance, should interest rates rise to a 9.0% yield on the 30-year Treasury bond, our target price falls about 5% to about $39 per share. Conversely, if interest rates fall to 7.0%, our price target increases to about $43 per share. More important, because approximately 60% of our price target is due to the value of its cellular properties-a larger percentage than that for most other phone companies-any shifts in cellular valuations will have a significant affect on our target price for Centel's stock and, as a result, Centel will often trade more in line with the cellular stocks than the telephone stocks.

SECOND QUARTER EARNINGS-CELLULAR EARNINGS POSITIVE Centel reported second quarter 1991 earnings of $0.62 per share from continued operations (plus $0.06 per share in earnings from its gas operations which are listed as discontinued operations due to the pending sale of the operation) versus $0.18 per share in 1990 ($0.13 before extraordinary items). However, both periods include unusual items so as to make them somewhat incompa- rable. In the second quarter of 1991, Centel reported a onetime after-tax capital gain of $0.54 per share from the sale of its Minnesota Telephone operations. Excluding the effects of the sale, Cen- tel would have reported $0.08 per share. Adding back the $0.06 per share from. discontinued operations, normalized earnings would have been $0.14 per share, in line with our $0.15 per share forecast. In 1990, Centel "doubted up" earnings from its yellow page operations because of the formation of a partnership with Donnelley and changes in the way Centel accounts for revenues and expenses, both by line item and in timing. In addition there were a number of regulatory-related adjustments in its telephone operations that boosted last year's earnings but that were negative adjustments in this quarter. The company also incurred a $0.01 per share charge due to early debt retirement.

Of greater significance is that Centel's cellular operations showed an operating profit of $1.5 million, its first profit despite losses on the sale of cellular equipment. While Centel's cellular operating income could still return to negative territory over the next few quarters due to acquisitions, RSA buildouts or a surge in sales (owing to losses on the sale of cellular equipment, usually around Christmas time), we feel its important to point out that the "core" cellular business has turned toward profitability, and we stick with our longer-term forecast that cellular will become a very important part of Centel's earnings, as well as its valuation. In the quarter, cellular subscribers grew 46% from year-ago levels and 8.6% sequentially. In addition, revenue per subscriber grew 9% from $78 to $85 per month as minutes of use increased. Centel's minority interest in other cellular properties also contributed to earnings. These results are included in Equity in Earnings of In- vestees, however this line showed an overall loss of $432,000 in the quarter due to Centel's interest in Cendon, its joint venture with R.H. Donnelley. The Cendon loss is the result of timing differences of revenues and expenses related to when different telephone directories are published (a common reporting phenomenon for telephone companies).

Joel D. Gross (21 2) 504-3998

Suzanne Becker (21 2) 504-4337

Note: Prices are as of the close, July 30,1991. lnacomp Computer Centers (INAC): 7% MetroMobile (MMZB)O: 18% Rochester Telephone (RTC)#: 29%'' TidCommunications (TIE): 91/2 United Telecom (UT): 26% Utilicorp United (UCU)+#t 24% Williams Telecommunications (WMB): 3334

# DONADSON. LUFKIN h JENRmE SECURITIES CORPORATION MAKES A MARKET IN THIS SECURITY. HAS PERIODIC POSITIONS IN THIS * SECURITY IN CONNECTIONWITH THIS ACTIVITY AND MAY BE ON THE OPPOSITE SIDE OF PUBLIC ORDERS WECUED ON A REQlONAL STOCK EXCHANQE WHERE WE ACT AS A SPECIALIST

8 DONALDSON. LUFKIN h JENRETE SECURITIES CORPORATION HAS FROM TIME TO TIME PROVIDED INVESTMENT BANKlM SERVICES To THE COMPANY AND HAS BEEN COMPENSATEDFOR THOSE SERVICES

+ WITHIN THE PAST THREE YEARS WNALDSON, LUFKlN h JENRmE SECURITIES CORPORATIONHAS BEEN A MANAQIM OR CO-MANAGLNQ UNDERWRITER OF THE COMPANY'S SECURITIES

7 Table 1 CENTEL CORPORATION SEGMENT INCOME STATEMENT (In Thousands) 1990 10 20 30 40 Year

TELEPHONE OPERATIONS Revnuer Local Service $85,362 $87,274 891,004 892.21 1 $355,851 % Change from Year-Earlier Period 7.9% 3.3% 9.3% 12.4% 8.2% Toll Service 98,908 107,874 102,939 104,367 41 4,088 % Change from Year-Earlier Perid 7.9% 13.9% 10.9% 2.0% 8.5% Miscellaneous 55,791 55,729 44,200 38,451 194,171 % Change from Year-Earlier Period 31.6% 24.5% iu!%! -1 2.0% 10.6% TOTAL TELEPHONE REVENUES $240,061 $250,877 $238,143 $235,029 $964,110 % Change from Year-Earlier Period 12.6% 12.0% 7.8% 3.1% 8.8% Expenrer Maintenance $138.403 $149,786 $142,244 $147.173 $577,606 % of Total Operating Revenues 57.7% 59.7% 59.7% 62.6% 59.9% Depreciation 39.1 93 39.91 2 40.434 40,134 159,673 % of Total Operating Revenues 16.3% 15.9% 17.0% 17.1% . 16.6% Total Telephone Operating Expenses $177,596 $1 89,698 $1 82,678 $1 87,307 $737,279 TELEPHONE OPERATING INCOME $62,465 $61,179 $ 55,465 . $47,722 $226,831 % of Total Operating Revenues 26.0% 24.4% 23.3% 20.3% 23.5%

CELLULAR Revenuer Service Revenues 31,352 39,227 42,806 43,796 157,181 % Change from Year-Earlier Period 61.1% 66.0% 64.2% 67.6% Equipment Sales 6,473 6,996 6,011 5,516 2:59:: @ % Change from Year-Earlier Period 19.0% 14.6% -1 7.3% 4.1% TOTAL CELLULAR REVENUES 37,825 46,223 48.81 7 49,312 182,177 % Change from Year-Earlier Period 47.3% 56.7% 55.9% 50.4% 52.7% Expensas Cost of Equipment Sold 6,527 7,607 6,342 7,127 27,603 % of Equipment Sales 100.8% 108.7% 105.5% 129.2% 1 10.4% Operating Expenses 29,420 3 1,200 34,023 36,554 131,197 % of Service Revenues 93.8% 79.5% 79.5% 83.5% 83.5% Depreciation and Amortization 8,711 9,235 9,333 10,571 37,850 % of Cellular Revenues 23.0% 20.0% 19.1% 21.4% 20.8% Total Operating Expenses 44,658 48,042 49,698 5m 196,650 CELLULAR OPERATING INCOME (LOSS) ($6,833) ($1,819) ($8811 ($4,940) ($1 4,473)

OTHER Revenuer 1,032 2,004 0' 0' 3,036 % Change from Year-Earlier Period NA NA NA NA NA Expenser Operating Expenses 1,456 4,331 0' 0' 5,787 % of Revenues NM NM NM NM NM Depreciation 4 5 0' 0' 9 % of Revenues 0.4% 0.2% NM NM NM Total Other Expenses 1,460 4,336 0' 0' 5,796 OTHER OPERATING INCOME (LOSS) -428 2,332 0' 0 -2,760 UNALLOCATED CORPORATE COSTS 2,696 4,947 5,754 6,122 19,519

' Discontinued

8 Table 2 CENTEL CORPORATION CONSOLIDATED INCOME STATEMENTS (In Thout8ndsl

1990

10 20 3Q 4QE Ym Revenues Telephone Operations 240,061 250,877 238,143 235,029 964,110 % Change from Year-Earlier Period 12.6% 12.0% 7.8% 3.1 % 8.8% Cellular 37,825 46,223 48,817 49,312 182,177 % Change from Year-Earlier Period 47.3% 56.7% 55.9% 50.4% 52.7% Other 1,032 2,004 0 0 3,036 % Change from Year-Eariier Period NA NA NA NA ' NA Consolidated Revenues 278,918 299,104 286,960 284,341 1,149.3z

ExFSes Operating Expenses 178,502 197.87 1 188,363 196,976 761,712 Depreciation & Amortization 47.908 49.152 49.767 50.705 197.532 Total Expenses 226,410 247,023 238,130 247,681 959,244

Operating income 52,508 52,081 48,830 36,660 190,079 % of Revenues 21.9% 20.8% 20.5% 15.6% 19.7%

Equity in Earnings of lnvestees -4,637 2,744 6,858 6,025 10,990 Nonoperating Income (Loss),net 1,693 -662 923 3,667 5,621

Adjusted Operating Income 49,564 54,163 56,61 1 46,352 206,690

Interest Expense 29,973 36,421 36,014 33,084 135,492

Pretax Income 19,591 17,742 20,597 13,268 11.198 % of Revenues 7.0% 5.9% 7.2% 4.7% 6.2%

Income Taxes 6,948 6,424 7,444 3,302 24,118 Tax Rate 35.5% 36.2% 36.1 % 24.9% 33.9%

income from Continuing Operations 12,643 11,318 13,153 9,966 47,080 Income from Discontinued Operations 1,523 3,928 7,784 4,305 17,540 8Net income 937 14 71 4 Preferred Stock Dividends 403 40 1 401 401 1,606

Earnings Available for Common Shareowners $13,763 $14,845 $20,536 $13,870 $63.01 4

Average Shares Outstanding 83,804 83.642 83,959 84,308 83,927

Earnings Per Share $0.16 $0.18 $0.24 $0. 16 $0.75

Earnings Per Share (Continuing Ops) $0.1 5 $0.13 $0.1 5 $0.1 1 $0.54 Earnings Per Share (Discontinued Ops) $0.02 $0.05 $0.09 $0.05 $0.21

9 e Table 3 CENTEL CORPORATION SEGMENT INCOME STATEMENT (In Thousands) 1991 'I 1QA 2aA 3QE 4QE Year

TELEPHONE OPERATIONS Revanues Local Service $93,665 $98,872 $86,284 $80,588 ' 8359,409 % Change from Year-Earlier Period 9.7% 13.3% -5.2% -12.6% 1.O%

Toll Service 100,904 99.634 100,086 102,085 + 402,709 % Change from Year-Earlier Perid 2.0% -7.6% -2.8% -2.2% -2.7% Miscellaneous 40,453 41,181 41,106 41,143 $163,883 % Change from Year-Earlier Period -27.5% -26.1% --7.0% 70% -15.6% TOTAL TELEPHONE REVENUES $235,022 $239,687 $227,476 $22248 16 $926.002 % Change from Year-Earlier Period -2.1 % -4.5% -4.5% -4.8% -4.0%

Expanses Maintenance $144,489 $145,706 S 136,486 S 134,290 $560.97 1 % of Total Operating Revenues 61.5% 60.8% 60.0% 60.0% 60.6% Depreciation 41,501 41,704 36,851 36,258 $156,314 % of Total Operating Revenues 17.7% 17.4% 16.2% 16.2% 16.9% Total Telephone Operating Expenses $185,990 $187,410 $173,337 $170,548 $717,285

TELEPHONE OPERATING INCOME $49,032 $52,277 $54,139 $53,2 6 8 $208,717 % of Total Operating Revenues 20.9% 21.8% 23.8% 23.8% 22.5%

CELLULAR Revenues Service Revenues 45,162 53,388 56,290 63,504 21 8,344 % Change from Year-Earlier Period 44.0% 28.8% 31.5% 45.0% 38.9% Equipment Sales 7,376 5,867 8,956 9,653 31,852 % Change from Year-Earlier Period 14.0% 20.0% 49.0% 75.0% 27.4% TOTAL CELLULAR REVENUES 52,538 59,255 65,246 73,157 250.1 96 % Change from Year-Earlier Period 38.9% 28.2% 33.7% 48.4% 37.3%

Expenses Cost of Equipment Sold 8,265 6,527 9,225 10,136 34,153 % of Equipment Sales 112.1% 111.2% 103.0% 105.0% 107.2% Operating Expenses 36,061 40,630 42,780 47,946 167,417 % of Service Revenues 79.8% 76.1% 76.0% 75.5% 76.7% Depreciation and Amortization 10,238 10,545 12,071 13,754 46,607 96 of Cellular Revenues 19.5% 17.8% 18.5% 7 18.8%1,835 248,17718.6% Total Operating Expenses 54.564 57,702 64,076 CELLULAR OPERATING INCOME (LOSS) ($2,0261 $1,553 $1,170 $1,322 $2,020

UNALLOCATED CORPORATE COSTS $5,217 $3,945 $5,700 $6,100 $20,962

*Reflects the sale of CNT's Iowa and Minnesota Telephone properties to Rochester Telephone.

10 Table 4 CENTEL CORPORATION CONSOLIDATED INCOME STATEMENTS (In Thousands)

1991

10 20 30E 40E YecV

Revenu~ Telephone Operations 235,022 239,687 227,476 223,816 926,002 % Change from Year-Earlier Period -2.1 % -4.5% -4.5% -4.8% -4.0% Cellular 52,538 59,255 65.246 73,157 250,196 % Change from Year-Earlier Period 38.9% 28.2% 33.7% 48.4% 37.3% Consolidated Revenues 287,560 298,942 292,723 296,973 1,176,198

Expenses Operating Expenses 188,815 192,863 188,491 192,37 1 7 6 2%540 Depreciation 81 Amortization 51,739 52,249 48,922 50.01 2 202,922 Unallocated Corporate Expenses 5217 3.945 5.700 6.100 2QAm Total Expenses 245,771 249,057 243,113 248,483 986,424 berating income 4 41 1 774 % of Revenues 17.8% 20.8% 21.8% 21.7%

Equity in Earnings of lnvestees 2,252 -432 4,000 3,000 8,820 Nonoperating Income (Loss), net 945 101 2,000 2,000 5,046 Adiusted Operating Income 44,986 49,554 55,610 53,491 203,640

Interest Expense 37,650 37,518 37,718 37,918 150,804 Pretax Income 7,336 12,036 17,892 15,573 52,836 % of Revenues 2.6% 4.0% 6.1 % 5.2% 4.5% Income Taxes 2,580 5,000 5,904 5,139 18,623 Tax Rate 33.0% 33.0% 33.0% 33.0% 35.2% Income from Continuing Operations 4,756 7,036 11,987 10,434 34.21 3 Income from Discontinued Operations 3,186 3,000 3,000 3,000 12,186

Net Income 7,942 10,036 14,987 13,434 46,399

Preferred Stock Dividends 396 40 1 40 1 401 1,599

Earnings Available for Common Shareowners $7,546 $9,635 $14,586 $13,033 $44,800

Average Shares Outstanding 84,733 85,157 85,582 86,010 85,371

Earnings Per Share $0.09 $0.1 1 $0.17 $0.1 5 $0.52

Earnings Per Share (Continuing Ops) $0.06 $0.08 $0.14 $0.12 $0.40

One-Time Gains (Losses) $0.00 $0.50 $0.35 $0.50 $1.35 Total Reported Earnings $0.09 $0.61 $0.52 $0.65 $1.87 Table 5 CENTEL CORPORATION SEGMENT INCOME STATEMENT (In ThousMdsl 1992 1QE 20E 3QE 4QE Vm

TELEPHONE OPERATIONS Revenues Local Service $82,158 $87,782 $86,187 $87,035 $343,162 % Change from Year-Earlier Period -12.3% -1 1.2% -0.1% 8.0% -4.5% Toll Servic.e 102,949 104,6 16 106,090 108,190 $421,845 % Change from Year-Earlier Perid 2.0% 5.0% 6.0% 6.0% 4.8% Miscellaneous 41,262 42,005 41,928 41,966 $167,161 % Change from Year-Earlier Period 2.0% 2.0% 2.0% 2.0% 2.0% TOTAL TELEPHONE REVENUES $226,369 $234,402 $234,205 $237.1 90 $932,167 % Change from Year-Earlier Period -3.7% -2.2% 3.0% 6.0% 0.7% Expenses Maintenance $133,558 $138,297 $138,181 $139,942 $549,979 % of Total Operating Revenues 59.0% 59.0% 59.0% 59.0% 59.0% Depreciation 38,709 40,083 40,049 40,560 $159,401 % of Total Operating Revenues 17.1% 17.1% 17.1% 17.1% 17.1 % Total Telephone Operating Expenses $172,267 $178,380 $178,230 $180,502 $709,379 77$54 1 $56 2 $5 7 $5 $2 % of Total Operating Revenues 23.9% 23.9% 23.9% 23.9% 23.9%

CELLULAR Revenues Service Revenues 66,388 78,480 82,746 93,351 320,966 % Change from Year-Earlier Period 47.0% 47.0% 47.0% 47.0% 47.0% Equipment Sales 10,695 10,561 12,539 13,514 47,309 % Change from Year-Earlier Period 45.0% 80.0% 40.0% 40.0% 48.5% TOTAL CELLULAR REVENUES 77,083 89,041 95,285 106,865 368,275 % Change from Year-Earlier Period 46.7% 50.3% 46.0% 46.1 % 47.2% Expenses Cost of Equipment Sold 10,481 10,297 12,037 12,838 45,654 % of Equipment Sales 98.0% 97.5% 96.0% 95.0% 96.5% Operating Expenses 49,791 58,468 61,398 69,080 238,736 % of Service Revenues 75.0% 74.5% 74.2% 74.0% 74.4% Depreciation and Amortization 15,031 17,363 18,581 20,839 71,814 % of Cellular Revenues 19.5% 19.5% 19.5% 19.5% 19.5% Total Operating Expenses 75,304 86,127 92,016 102,757 356,204 ;$1 780 $ 14 $ $418 $1 01

UNALLOCATED CORPORATE COSTS $6,222 $6,346 $6.473 $6,603 $25,645

12 e

Table 6 CENTEL CORPORATION CONSOLIDATED INCOME STATEMENTS (In Thousands) Scenario A: Assumes No Acquisitions, Keep Cash 1992 1QE 2QE 3QE 40E Year 8 Revmues Telephone Operations 226,369 234,402 234,205 237,190 932,167 % Change from Year-Earlier Period -3.7% -2.2% 3.0% 6.0% 0.7% Cellular 77,083 89,041 95,285 106,865 368,275 % Change from Year-Earlier Period 46.7% 50.3% 46.0% 46.1% 47.2% Consolidated Revenues 303,453 323,443 329,491 344,056 . 1,300,442

Expenses Operating Expenses 193.830 207,062 21 1,616 221,861 834,369 Depreciation & Amortization 53,740 57,446 58,630 61,398 231,214 Unallocated Corporate Expenses 6.2226.346 6.473 §.I!w25.645 Total Expenses 253,793 270,854 276,719 289,862 1,091,228

aperating Income 49,660 52,589 52,771 54,194 209,2 14 % of Revenues 21.9% 22.4% 22.5% 22.8% 22.4%

Equity in Earnings of lnvestees 3,000 2,000 4,000 3,000 12,000 Nonoperating Income (Loss), net 2,050 2,050 2,050 2,050 8,200 Adjusted Operating Income 54,7 10 56,639 58,821 59,244 22 9,414

Interest Expense 37,539 36,037 34,596 33,212 141,384 Interest Income 5,000 5,000 5,000 5,000 20,000 Pretax Income 22,17 1 25,602 29,225 31,032 108,036 % of Revenues 7.3% 7.9% 8.9% 9.0% 8.3%

Income Taxes 7,316 8,449 9,644 10,241 35,650 Tax Rate 33.0% 33.0% 33.0% 33.0% 33.0%

Income from Continuing Operations 14,855 17,153 19,581 20,791 72,380 Income from Discontinued Operations 0 0 0 0 0

Net Income 14,855 17,153 19,581 20,791 72,380-

Preferred Stock Dividends 40 1 40 1 401 401 1,604

Earnings Available for Common Shareowners $14,454 $16,752 $19.180 $20,390 $70,776

Average Shares Outstanding 86,440 86,873 87,307 87,744 87,091

Earninas Per Share $0.17 $0.1 8 $0.21 $0.23 $0.79

13 Table 7 CENTEL CORPORATION CONSOLIDATED INCOME STATEMENTS (In Thousands1 Scenario B: Assumes Further Ce1uJl.r Acquisitions 1992

1 QE 2QE 3QE 4QE YW

Revenues Telephone Operations 226,369 234,402 234,205 237,190 932,167 % Change from Year-Earlier Period -3.7% -2.2% 3.0% 6.0% 0.7% Cellular 85,583 98,541 105,785 1 18,365 408,275 % Change from Year-Earlier Period 46.7% 50.3% 46.0% 46.1% 47.2% Consolidated Revenues 31 1,953 332,943 339,991 355,556 1,340,442

Expenses Operating Expenses 202,330 216,562 222,116 233,361 874,369 Depreciation & Amortization 55,740 59,446 60,630 63,398 239,214 Unallocated Corporate Expenses 6,222 !LW6.473 uQ325.645 Total Expenses 264,293 282,354 289.21 9 303,362 1,139,228 berating Income 47,660 50,589 50,771 52,194 20 1,214 96 of Revenues 15.3% 15.2% 14.9% 14.7% 15.0% Equity in Earnings of lnvestees 3,000 2,000 4,000 3,000 12,000 Nonoperating Income (Loss),net 1,000 1,000 1,000 1,000 4,000

Adjusted Operating Income 51,660 53,589 55,771 56,194 217,214

Interest Expense 37,539 36.037 34.596 33,212 141,384 Interest Income 0 0 0 0 Pretax Income 14,121 17,552 21,175 22,982 75,83$ % of Revenues 4.5% 5.3% 6.2% 6.5% 5.7%

Income Taxes 4,660 5,792 6,988 7,584 25,024 Tax Rate 33.0% 33.0% 33.0% 33.0% 33.0%

Income from Continuing Operations 9,461 11,760 14,188 15,398 50,806 Income from Discontinued Operations 0 0 0 0 0

Net Income 9,46 1 1 1,760 14,188 15,398 50,806

Preferred Stock Dividends 40 1 40 1 40 1 401 1,604

Earnings Available for Common Shareowners $9,060 $11,359 $13,787 $14,997 $49,202

Average Shares Outstanding 86,440 86,873 87,307 87,744 87,091

Earnings Per Share $0.10 $0.13 $0.16 $0.17 $0.56

14 James M. McCabe, CFA Tel~mmunicationsServices (212) 208-9416 April 30, 1991 Joanne C. Smith, CFA (2 12) 208-9595 CENTEL COW. Reiterate "Buy" Recommendation

Rating: Outperform (ltO/O") NYSE: CNT Price* 52-Week Earnings Per Share P/E Multiple Dividend 4/29/91 PriceRange 1990A 1991E ;992E 1991E J99E &&Yield $33 318 $39-23 $0.75 $0.70 $0.90 47.7X 37.1X $0.88 2.6%

Shares Outstanding: 84.7 million Book Value (3/31/91): $12.54 per share Market Capitalization: $2.8 billion Return on Equity 1991E: 5.5% Long-Term Debt: $1.4 billion

* DJIA: 2.876.98; UP400: 443.18; SkP 500: 373.66.

Summary and Investment Recommendation

Centel Corp. reported first quarter earnings of $0.09 per share on April 18, which was below our expectation of SO. 15 per share and lower than a year ago's $0.16 per share. First quarter results last year benefitted by about $0.10 per share from several nonrecurring factors in Centel's phone operations, including the reversal of an interstate overaccrual ($0.05 per share) and the stock appreciation component of the management option plan ($0.04 per share). Out $0.70 per share estimate for 1991 may be optimistic, but earnings are not important to our "O/O"investment rating, which relates to a $55-73 per share private market valuation. Phone revenues in the first quarter of 1991 were down 2%, reflecting changes in the FCC's cost separation rules and a lower rate of return. Also, the stock-based incentive plan reduced 1991 first quarter earnings. Adjusting for these items, telephone operating results were up slightly in the quarter. Access line growth was 4.5% over the last twelve months, to nearly 1.69 million lines. Access minutes of use increased 6.3% over last year, and directory advertising sales were strong.

Cellular Subscriber Growth of 53%

Cellular subscriber growth was 53% over the last 12 months to a total in excess of 200,000 at March 31, 1991. Cellular revenues jumped 39% to $52.5 million in the first quarter, but revenues per subscriber dropped from $85 per month last year to $77 per month this year, reflecting the weakening economy. Nornura Equity Research

Centel’s cellular operating loss decreased from Centel’s total debt at March 31, 1991 was $6.8 million last year to $2.0 million this year, $1.62 billion or 59.5%of total capital, compared and operating cash flow from cellular alone with $1.44 billion or 56.9% of total capital at expanded from $1.9 million in 1990 to $8.2 March 31, 1990 (please see Table 3). CEO Jack million in 1991. Centel added 11 new cellular Frazee was especially pleased by the improved sites in the first quarter, with plans to add 39 more results of Centel’s cellular operations, with over the remainder of 1991. Cellular capital operating losses plunging from $6.8 million to spending decreased nearly 42 % in the first quarter, $2.0 million. The impact of the economy on from $14.6 million in 1990 to $8.5 million in Centel’s growth has not been as large as had been 1991. feared, and “Centel remains optimistic about the remainder of 1991.” Centel still anticipates closing the sale of its electric operations in the second half of 1991 for approximately $345 Centel’s capital expenditures dropped 21.4% million. The complex exchange of telephone, from $72.7 million in the first quarter of 1990 to cellular and stock with Rochester TeleDhone $57.2 million this year, in line with Centel’s lower (RTC: $29 7/8, rating “A/A,” 1991E $1.90, annual capital budget ($175 million versus $225 1992E $2.05), which was announced in January million last year). First quarter consolidated 1991, is also expected to close in late 1991. revenues increased 3.1 % to $287.6 million @lease Centel’s stock price has recovered along with see Table 1). Operating expenses rose 8.7% and other cellular-related equities from its October depreciation advanced 8% in the first quarter. 1990 lows, but still does not fairly reflect its 555- Operating income dropped 20.4%to $41.8 million 73 per share private market value. (Please refer to in the quarter. Centel’s equity investments our March 15, 1991 research report on Centel for (CenDon and minority cellular interests) swung further details.) The low end of our value range from a $4.6 million loss in 1990 to a $2.3 million is more than 50% above Centel’s current stock profit in 1991. Interest expenses expanded 25.6% price. to $37.7 million, reflecting an accrual reversal in 1990 relating to an AT&T interstate settlement.

CHART COURTESY OF: DAILY GRAPHS P.O. Box 24933 Los Angeles, CA 90024 . (3) Nomura a Equity Research Table 1 Centel Corporation Quarteriv Income Statement (dollars in millions)

I Quarter Ending March 31 J I Quam Ending Dec. 31 [ Year Ending Dec. 31 I Revenues: -1991 m %Cha lW40 m %Chp Telephone operations 235.022 240.061 -2.1% 0.0% 235.029 235.029 0.0% 964.110 897.739 7.4% Cellular telephone 52.538 37.825 38.9 6.5 49.312 33.717 46.3 182.177 123.059 47.1 Other revenues 0.000 1.032 (100.0) 0.0 l3.415) (100.0) 3.036 4.005 (24.2) Total rwenues 8 sales 287.560 278.918 3.1 1.1 284.341 265.331 7.2 1,149.323 1,025.603 12.1

Costs & ex~enses(2): - Depreciation 8 amortization 51.739 47.908 8.0 2.0 50.705 45.148 12.3 197.532 184.587 7.0 Other expenses --194.032 178.479 8.7 (1.5) --196.976 187.255 5.2 --761.712 692.781 9.9 Total 245.771 226.387 8.6 (0.8) 247.681 232.403 6.6 959.244 877.368 9.3

Operating income 41.789 52.531 (20.4) 14.0 36.660 32.928 11.3 190.079 148.235 28.2

Interest expense 37.650 29.973 25.6 13.8 33.084 33.194 (0.3) 135.492 175.308 (q7) Misc., net other income (3.197) 2.967 NMF NMF (9.692) (3.601) NMF (16.611) (6.041) 175.0

Pretax income from cont. oper. 7.336 19.591 (62.6) (44.7) 13.268 3.335 297.8 71.198 (21.032) NMF

Income tax expl@enefit) 2.580 6.948 (62.9) (21.9) 11.142) (389.1) -24.118 (12.6711 NMF Net income from cont. oper. 4.756 12.643 (62.4) (52.3) 9.966 4.477 122.6 47.080 (8.361) NMF Net income from disc. oper. 3.186 1.523 109.2 (26.0) 4.305 (14.162) (130.4) 17.540 12.185 NMF Gain on sale of CATV ------239.200 ---- -440.000 Net income before preferred 7.942 z66 (43.9) (44.3) 14.271 229.515 (93.8) 64.620 443.824 (85.4) Preferred dividends 0.396 0.403 (1.7) (1.2) 0.401 0.368 9.0 1.606 1.150 39.7 Gctraordinary item ------_.--- -1.426 Net income avail to common . 7.546 13.763 (45.2) (45.6) 13.870 229.147 (93.9) 63.014 444.100 (85.8)

EPS from cont. oper. $0.05 S0.15 (66.7) (54.5) $0.11 $0.05 NMF $0.54 ($0.11) (590.9) EPS from disc. oper. 0.04 0.02 106.9 (26.4) 0.05 (0.17) 0.21 0.14 Gain on sale of CATV ------2.82 --- 5.06 Extraordinary item m 0.00 mu -0.00 m- Net EPS $0.09 siz (45.8) (45.9) $0.16 $2.71 NMF $0.75 $5.11 NMF

Avg. # shares outstanding 84.733 83.793 1.1 .0.5 84.308 84.682 (0.4) 83.927 86.924 (3.4) Capital spending $57.182 $72.729 (21.4) (24.6) $75.835 $66.352 14.3 $156.068 $128.654 21.3 Access lines sewed (OOOs) 1,686 1,614 4.5 1.0 1,670 1,591 5.0 1,686 1,614 4.5 Cellular customers (Ooos) 200.807 131.421 52.8 7.6 186.629 113.339 64.7 200.807 131.421 52.8

Operating margin 14.5% 18.8% 12.9% 12.4% 16.5% 14.5% Operating cash flow $59.285 $61.671 $64.575 $274.295 $260,546 $628.687 Oper. cash flow margin 20.6% 22.1% 22.796 103.4% 22.7% 61.3% Pretax margin 2.6 7.0 4.7 1.3 6.2 (2.1) Effective tax rate 35.2 35.5 24.9 NMF 33.9 NMF Net Income marpin 2.6 4.9 4.9 NMF 5.5 43.3 Nomura (4) Equity Research Table 2 Centel Corporation Quarterly Segment Breakdown (dollars in millions)

[ Quarter Ending March 31 ] I Quarter Ending Dec. 31 1 r Year Ending ~ec.31 I Revenues: mm % ChQ 1Ol4Q -1990 1989 mrsssw Telephone operations 235.022 240.061 (2.1) (0.0) 235.029 235.029 0.0 964.110 897.739 7.4 Cellular telephone 52.530 37.825 38.9 6.5 49.312 33.717 46.3 w.in 123859 47.1 Other revenues o.Oo0 1.032 (100.0) 0.0 O.OO0 (3.415) (100.0) 3.036 4.005 (24.2) Total revenues 6 sales 287,560 278.918 3.1 1.1 284.341 265.331 7.2 1,149.323 1.025.603 121

Costs a BxDense-s bv seament: Telephone 185.99 175.068 6.2 8.8 170.925 162.457 5.2 737.279 700.132 5.3 % to telephone revenues 79.1% 72.9% 72.7% 69.1% 76.5% 78.0% Cellular 54.564 44.657 222 25.8 43.390 30.363 42.9 196.650 144.454 36.1 % to cellular revenuas 103.9% 118.1% 88.0% 90.1% 107.9% 116.6% Other 5.217 6.662 (21.7) (84.4) --33.366 39.583 (15.7) -25.315 32.782 (22.8) Total expenses 245.771 226.387 247.681 232.403 959.244 877.368 9.3

Ooeratina income bv seament Telephone 49.032 64.993 (24.6) (23.5) 64.104 72.572 (11.7) 226.831 197.607 14.8 Cellular telephone (2.026) (6.832) (70.3) **** 5.922 3.354 76.6 (14.473) (20.595) (29.7) Other (7.3) (84.4) L33.366l (42.998) (q.4) 122.279) (28.m (22.6) Total operating income 41.789 52.531 (20.4) 14.0 36.66 32.928 11.3 190.079 ' 148.235 28.2

Ooeratina Marains Telephone 20.9% 27.1% 27.3% 30.9% 23.5% 22.0% Cell1.1;: telephone (3.9) (18.1) 12.0 9.9 (7.9) (16.6) Consolidated operating margin 14.5 18.8 12.9 12.4 16.5 14.5

Table 3 Centel Corporation Capitalization Table (dollars in millions)

3131191 3131 190 12/31l9O

Short-term debt Long-term debt Total debt

Preferred stock 38.0 1.4 39.6 1.6 38.4 1.4 Common equity 1,062.7 39.1 1,051.8 41.5 1.063.1 38.9 Total shareholders' equity 1,100.7 40.5 1,091.4 43.1 1,101.5 40.3

Total capital 2.719.0 100.0 2.532.7 100.0 2,729.9 100.0

Debt ratio 59.5% 56.9% 59.7% @oak, value $1 2.55 $1 2.55 $1 2.60 Shares outstanding 84.7 83.8 84.4

Neither me intormation nor me opinion expressed herein constitutes or is to be construed as. an after or the soliaration ot an otter to sell or buy me securities reterred to herein The information contained herein is based on sources which we Wweto be reliable but we do not represent that it is accurate or complete The information contained herein has been prepared by Nomura Research InsnNte America. lnc tor distribution by Nomura Securities International. Inc one of its afhllated cornpan= Nomura Securities Internanonat. Inc and ioathliates may have a posibon in these secunbes and may make purchases from andlor sales to CUstOmerS on a principal bass In addition. Nomura Securities Internationd, Inc and certain ot its afhliates may havo acmd as an UndeWriter ot securities of issuers whose securines are being recommended, and may currently be povlding Investment bMngSeNICes to these muers Copyright Q 1991, Nomura Research lnsbtute Amertca. Inc SMITHBARNEY CENTEL CORPORATION# (CNT - NYSE) Research Telecommunications/Services Release date: July 29, 1991

2Q91 EPS reported slightly below target

Analyst’s Opinion: HOLD

Charles W. Schelke, CFA Chan Counesy of Mansfield Chan Service (212) 698-6048

Price (7/23/9 1) $32 1992 P/E Rei. to S&P 500 3.37x 52-Week Price Range $36-$23 DividendlYield $0.88/2.8% EPS 1992E (-) $0.65 Book Value Per Share (2Q91) $13.00 EPS 1991E + (-) $0.32 Cash Flow Per Share 1991E $3.00 EPS 199OA $ $0.54 ROE 2.5 % EPS 92-96E Annual Growth Rate NM Debt as % of Total Cap. (2Q91) 58% Price/ 1992E 49.2~ S&P 500 (7/23/91) 379 Price/l991E 100.0~ Shares (million) 84.9 (-) Previous estimates were $0.38 for 1991 and $0.80 for 1992. $ Excludes capital gains and extraordinary items. NM - Not Meaningful

INVESTMENT OPINION AND SUMMARY

2Q91 EPS reported at $0.62 (including a net $0.53 gain), so operating earnings were $0.09 versus $0.13, below our $0.11 estimate. The shortfall was due to nonoperating income factors. Operationally, however, telephone was a little weaker than expected and cellular was stronger.

We are revising our 2H91 and 1992 estimates downward by about $0.03 per share per quarter to reflect a slower improvement in telephone results than we had expected. Thus, 2H91 quarters should be reported at about $0.09 per share.

We expect significant increases in post-1991 EPS due to completion of various property sales and improved operating results from both telephone and cellular. Our price target on the stock based on a discounted asset value is $39. CNT-2

2Q91 EPS REPORTED

Centel# reported 2Q91 EPS of $0.62 versus $0.13. The quarter included a $0.54 gain from the sale of some telephone operations and also a $0.01 per share cost of debt refinancing. Thus, operating earnings were about $0.09 per share, below our $0.11 estimate. The shortfall was due to lower-than- forecast directory publishing profits and slightly less Other income. At the operating income level, Telephone results were a little weaker than expected and cellular were stronger. We think our telephone forecast is a little aggressive for 2H91 and 1992, and we are trimming it by about $0.03 per quarter. The net result is a reduction in our 3991 operating EPS estimate of $0.06 to $0.32 from $0.39 ($0.85 reported) and $0.15 in our 1992 estimate to $0.65 from $0.80. We continue to believe that post-1992 EPS can grow at an incremental rate of $0.20-$0.40 per share. Our rating on the stock remains BUY based on a target price of $40. Highlights of the quarter were as follows:

Telephone operating strength was good, with access line growth of 4% and access minutes of use up 11.4%. As in the past several quarters, this has not translated into revenue or earnings strength because of rate cuts and changes in interstate allocations. Operating income declined from $61 to $52 million, although on a normalized basis it was slightly up (on roughly flat revenues), since 2Q90 had about $12 million of positive adjustments.

0 Cellular had a good quarter with about 16,500 subscribers added (about a 0.5% annualized penetration rate), versus 14,200 added in lQ91. Perhaps more important, monthly revenue per subscriber shot up from $75 to $85. As a result, the company reported operating income for the first time, although cautioned that this might not continue because of seasonality and expenses associated with the buildout of their RSAs.

2-1-1992 OUTLOOK

As noted, we are trimming our 1991-92 estimates by about $0.03 per quarter to reflect what has been sluggish revenue growth at the telephone operation relative to the operating statistics. This cuts our quarterly EPS numbers for 2H91 to about $0.09. We expect a significant earnings improvement in 1992 (relative to our $0.32 operating income figure) due to the sale of the electric properties (which should add about $0.15 per share due to reduced interest expense) and better performance from both telephone and cellular. Post-1992, with the company past the peak of spending on both telephone and cellular, we believe that EPS can grow $0.30-$0.40 per share.

Since CNT's# earnings continue under pressure due to both acquisitions and divestitures, as well as expenses associated with major construction programs, we continue to value the stock on an asset basis. We believe the stock is worth about $55 per share on a private-market basis, using 7.5 times operating cash flow for the telephone properties, $180 per POP for cellular and the announced sale prices of its electric and Minnesota telephone properties, which are scheduled to be sold. Discounting this by about 30%. we believe that CNT# stock is worth about $38 on a public-market basis. We rate the stock a BUY.

Previous Report: January 7,1991

I Within the last three years, Smith Barney, Hams Upham & GI,Incorporated or one of its affiliates was the manager (comanager) of a public offering of the securities of this company or an affiliate.

This study IS not a complete analysis of every material fact respecting any company, industry. or securtty &inions expressed are subject to change mthout notice Statements of fact have been obtained from sources considered reliable but no representation is made as to their completeness or accuracy This Firm or Persons associated mth tt may at any time be long or shoR any securities mentioned in the study and may from time to time sell or buy such securities This Firm or one of 11s affiliated may from time to time perform investment banking or other serwces for. or solicit investment banking or Other business from. any company mentioned in this study. An employee of this firm may be a director of a company mentioned in this study

Cjmith Barney. Harris Upham (L Co lncoroorated 1991 All riohts reserved Reoroduction or auotation in whole or Dan without Dermission is forbidden CNT-3

Table 1 CENTEL CORPORATION 1992-1989 Sunnarized Annual Incane Statenent > (Dollars In Millions. Except Earnings Per Share)

------_-_------REVENUES AND SALES _------1992E %___--- Chg. -______1991E %------Chg. ------1990A %----_- Chg. -----__1989A Tel ephone $955.0 3.3% 5924.7 -4.1% $964.2 7.4% 5897.7 Cell ular 295.3 23.0% 240.0 31.7% 182.2 47.1% 123.9 Other 0.0 *** 0.0 *** 3.0 --_------25.0%------4.0 Total Revenues and Sales $1.250.3 7.3% $1.164.7 1.3% $1.149.4 12.1% $1.025.6 OPERATING-_--_------INCOME Telephone $199.0 1.4% $196.3 -13.5% $226.9 14.7% $197.7 Cell ular 10.0 N.A. 1.4 N.A. (14.5) N.A. (20.6) Other -----(20.0) ------0.5% -----(20.1)-10.3% ------(22.4)-22.2% ------(28.8) Total Operating Income $189.0 6.4% $177.6 -6.5% $190.0 28.1% $148.3

Equity in Earnings of Investees 20.0 25.8% 15.9 44.5% 11.0 400.02 2.2 Nonoperating Income, Net N.A. N.A. -----4.0 ------4.0 ------28.6% -----5.6 ------3.8 Total Incane $213.0 7.9% $197.5 -4.4% $206.6 33.9% $154.3 Less: Interest Expense -----125.0 -17.9%------152.2 -----12.3% -----135.5 -22.7%------175.3 Income Before Income Taxes $88.0 94.2% $45.3 -36.2% $71.1 N.A. ($21.0) Income Taxes N.A. ----_33.0 -----96.3% -----16.8 --_---30.2% -----24.1 ------(12.7) Net Income Gain Incl. $55.0 93.0% 528.5 -39.3% $47.0 N.A. ($8.3) Income from Oiscont. Oper. N.A. 17.5 N.A. 17.5 N.A. 12.2 Gain on Sale of Oper. N.A. 45.6 N.A. N.A. 440.0 Extraordinary Item *** (1.1) *** N.A. 1.4 Preferred Stock Dividends 1.5 30.4% 1.2 -----1.5 ------6.3% --_--1.6 -----6.7% Earnings Available for CmnShareholders $53.5 -39.8% $88.9 41.1% $63.0 -85.8% 5444.2 Shares-Avg. 85.0 84.9 83.9 86.9 Shares-EOP 85.0 85.0 84.4 84.4 Reported EPS $0.63 98.6x 50.32 -41.5% $0.54 N.A. ($0.11) Discontinued Operations $0.00 N.A. $0.21 N.A. $0.21 N.A. $0.14 Gain on Sale of Oper. $0.00 N.A. $0.54 N.A. $0.00 N.A. $5.09 Extraordinary Item $0.00 ($0.011 $0.00 $0.02 Total EPS $0.63 -39.9x $1.05 39.5% $0.75 -85.4% $5.14

Average Equity $1,050.0 0.0% $1.050.0 0.0% $1.050.0 -11.6% $1.187.6

Return on Avg. Equity-Oper. 5.1% 8.5x 6.Ox 37.6x

NA - Not Available

Source: Company reports; SBHU estimates CNT-4

Table 2 CENTEL CORpoRATIoW Segent Operating Imxme (Dollars In Millions)

TELEPHONE 1992E % Chg. 199lE % Chg. 1990A % Chg. 1989A =I = = I a Ir; ____-----__------___----__--_ _-____ Revenues Local Service $395 4.6% $378 6.1% $355.9 8.2% $328.9 Toll and Access Services 400 2.4% 391 -5.7% 414.1 8.5% 381.5 Other 160 2.2% 157 -19.4% 194.2 3.7% 187.3

Total Revenues

Expenses Depreciation 166 1.7% 163 2.2% 159.7 4.4% 153.0 Other 590 4.4% 565 -2.1% 577.6 5.6% 547.0 .--_- _-__ -_------__ _------Total Expenses $756 3.8% $728 -1.2% $737.3 5.3% $700.0

Operating Income $199 1.4% $196 -13.5% $226.9 14.7% $197.7 ====t .E======*==E= ====I===== I====

Construction Expenditures $180 10.3% $163 -31.2% $237.2 21.5% $195.2 Identifiable Assets $1.914 0.7% $1,900 -5.9% $2.019.8 5.5% $1.913.9 Access Lines Served (000) 1.820 4.6% 1,740 4.2% 1,670.1 5.0% 1.590.7

CELLULAR ==I=*=== Revenues Services $270 25.9% $215 36.6% $157.2 57.4% $99.9 25.0 4.2% 24 Equipment -----25 -1.2%--_- ----_25 -----1.2% ------_-_- Total $295 23.0% $240 31.7% $182.2 47.1% $123.9 Expenses Cost of Equipment Sold 25 -13.2% 29 4.3% 27.6 8.7% 25.4 Operating Expenses 210 26.8% 166 26.4% 131.2 49.8% 87.6 Depreciation & Amortiz. -_---50 13.6%-_------44 -----16.1% __----37.9 20.3%---- 31.5 Total Expenses $285.2 19.5% $239 21.3% $196.7 36.1% $144.5

Operating Income $10 N.A. $1 N.A. ($14.5)-29.6% ($20.6) ==1=5 =I======E== e======E======Const./Acq. Expenditures $50 0.0% $50 -23.1% $65.0 49.2% $43.6 Ident if iable Assets $985 0.0% $985 3.6% $950.5 16.1% $818.8 Number of Customers (000) 330 29.4% 255 36.7% 186.6 64.6% 113.3

OTHER ==I== Revenues $0 so $3 -25.0% $4.0 Expenses Operating Expenses 0.0 0 5.8 -1.7% 5.9 Depreciation 0.0 0 0.0 0.0 Unallocated Corporate Costs 20.0 20 19.6 -27.1% 26.9 ===== I====-111- ===I= ===I= ====I ====a Total Expenses $20.0 $20.1 $25.4 -22.6% $32.8

Operating Loss ($20.0) ($20.1) (322.4) (528.8)

NA - Not Available

Source: Company statistics; SBHU estimates. CNT-5

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e ?-- DEAN EQUITY RESEARCH WITTER

Bette Ann Massick, CFA, (212) 392-6508 William N. Deatherage, CFA, (212) 392-3590 Consumer Group, Research Note #641, April 23, 1991

Centel Corporation

Investment Opinion: HOLD (0)

4/19/91 Normalized Price 52-Week -Earnings per Share- -P/E Ratios- Ind. Current 5-Yr Est. EPS (CNT/NYSE) Range 1990A 1991E 1992E 1991E 1992E Div. Yield Growth Rate - ---- _. - --

$35 718 $39-23 $0.75 $0.60 $0.70 NM NM $0.88 ’ 2.5% 10°/0 1991 Est. ROE: 4.8% Shares Outstanding: 84.5M Total Debt as % of Capital (3/91): 60% Next Qtr. (Jun.) EPS vs. Year Ago: $0.13E vs. $0.18

Company Description: Cenrel Corporation provides telephone service over I .69 million access lines in Nevada (28%), Florida (17%), Virginia (13%), North Carolina (12%), Illinois (ll%), Texas (a%), Minnesota (5%), Ohio (4%), and Iowa (3%). The company is a major cellular telephone service provider in many areas of the United States.

Centel Reports 1Q 1991 EPS of $0.09 Versus $0.16; DWR Estimate: $0.15 Hold rating maintained. Cellular stocks have rallied in response to lower interest rates and the prospects for further declines. Lower interest rates trim debt service costs of these leveraged companies and raise per-POP values because discount rates are reduced. By our estimates, Centel’s cellular properties are currently trading at a suggested 40% discount to private market value ($195 per POP). Since cellular assets trade in the public market at a substantial discount to the private market, little upside is left in the stock short of a takeover. Our buying point is $28 per share.

EPS require clarification; a normalized comparison is $0.11 versus $0.06. First-quarter 1990 EPS of $0.1 6 included $0.1 0 of favorable non-recurring factors, including unusually high directory revenues (which added an estimated $0.03 to EPS) related to the transition of the business to the CenDon directory partnership, as well as lower expense associated with management’s incentive- based compensation plan. Part of management’s compensation comes in the form of stock appreciation rights. The company includes the impact of a change in the stock price in current expense. As Centel’s stock price rises, expenses increase, and vice versa. The stock declined 22.4% in first- quarter 1990, benefiting earnings an estimated $0.07 per share. The same issue had a negative impadt of $0.02 per share on first-quarter 1991 earnings because the stock rose 12.6O/0.