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Verizon Communications
2006 Annual Report

Table of contents

  • Page 1
    Verizon Communications 2006 Annual Report

  • Page 2
    ... accepted accounting principles (GAAP) for the non-GAAP financial measures included in this annual report. Verizon's 2006 reported results include revenues and expenses from the former MCI, Inc., subsequent to the close of the merger in January 2006. Information provided in this annual report on...

  • Page 3
    ...of high-quality television programming over our advanced fiber-optic network. Wireless customers talk, share text and photo messages, access the Internet and email, download music, and watch videos using the nation's most reliable wireless network. Business customers trust Verizon's expansive global...

  • Page 4
    ...Wireless retail stores across the country Employees in over 300 Verizon Business offices in 75 countries across six continents First company to provide fiber-based digital TV to the mass market First company to provide wide-area wireless broadband service First commercial provider of Internet access...

  • Page 5
    ...invest฀in฀technology฀to฀deploy฀them฀to฀customers'฀homes฀and฀businesses,฀ maintain฀them,฀and฀upgrade฀them฀for฀the฀future.฀Our฀networks฀give฀us฀a฀platform฀ for฀ innovating฀ and฀ delivering฀ the฀ great฀ products,฀ services,฀ applications...

  • Page 6
    ... is uniquely positioned to meet customers' growing bandwidth needs for years to come. Verizon's fiber-based FiOS Internet service offers customers ultra-fast broadband connections with current download speeds up to 50 Mbps (megabits per second) - the fastest in the market today. In addition, FiOS...

  • Page 7
    ...฀ the฀ ability฀to฀offer฀advanced฀Internet฀Protocol฀solutions฀to฀business฀customers฀around฀ the฀ world.฀ And฀ we฀ continue฀ to฀ differentiate฀ our฀ platforms฀ with฀ applications฀฀ and฀services฀that฀make฀them฀work฀better,฀faster,฀more...

  • Page 8
    ...core฀network฀businesses฀by฀disposing฀of฀non-network฀assets,฀such฀ as฀Verizon฀Information฀Services฀-฀now฀trading฀on฀the฀New฀York฀Stock฀Exchange฀as฀ Idearc฀-฀and฀our฀investment฀in฀the฀Dominican฀Republic.฀We฀also฀paid฀$4.7฀billion...

  • Page 9
    ... by publications and industry organizations for the best customer service > Highest customer loyalty in the industry > Over 2,200 Verizon Wireless retail stores across the country > Portfolio of innovative wireless devices for consumers and businesses > Industry-leading operating income margins...

  • Page 10
    ...ended฀the฀year฀with฀ 34.3฀million฀retail฀ data฀customers.฀With฀V฀CAST฀services฀and฀other฀high-speed฀applications,฀Verizon฀ Wireless฀is฀transforming฀the฀cell฀phone฀into฀a฀multimedia฀device฀capable฀of฀delivering฀music,฀Internet฀access...

  • Page 11
    ...IC AT IO N S IN C . 2006 AN N U AL R E PO RT What We Do: Wireless Data From text messaging and music downloads to GPS navigation and Internet access, Verizon Wireless had another strong year of growth in data services. For the third consecutive year, wireless data revenues doubled over the previous...

  • Page 12
    ...-art data centers in 22 countries > The Verizon Business network includes high-capacity lines that allow data transfer up to 10 gigabits per second, the fastest commercially available today > Strength in financial services, retail, high-tech, health care, federal/state/local government and education...

  • Page 13
    ...Going฀ forward,฀ we're฀ focused฀ on฀ using฀ the฀ unique฀ Verizon฀ model฀ to฀ change฀ our฀ growth฀profile฀and฀drive฀value฀for฀customers฀and฀shareowners. We฀ continue฀ to฀ restructure฀ our฀ assets฀ to฀ focus฀ on฀ broadband,฀ wireless฀ and...

  • Page 14
    ... year 600,000 Hours of community service by Verizon Volunteers in 2006 3,300 Nonprofit organizations that received grants directly from the Verizon Foundation Verizon Thinkfinity at a glance: 47,000 Free online educational plans and other resources available to educators 90,200 Schools using Verizon...

  • Page 15
    ... education organizations, Thinkfinity is commercial-free and accessible anytime from anywhere at no cost. The homepage can be found at www.thinkfinity.org. Verizon will continue to expand this treasure chest of ideas and is working to make it available on other technologies to support learning...

  • Page 16
    ...and Video 2006 $88.1 Billion Global Business Wireless Consumer Voice Wholesale Other Wireline International and Information Services Wireless Broadband and Video Consumer Voice Other Wireline Wholesale Adjusted revenues in 2004 include those related to our former Information Services segment...

  • Page 17
    ...฀interests,฀reviewing฀strategic฀plans฀ and฀holding฀management฀accountable฀for฀the฀successful฀execution฀of฀annual฀operating฀ plans.฀ Our฀ full฀ board฀ met฀ 12฀ times฀ and฀ there฀ were฀ a฀ total฀ of฀ 21฀ committee฀ meetings฀ in฀ 2006...

  • Page 18
    ...฀day฀with฀a฀passion฀to฀compete฀and฀win. They฀challenge,฀communicate,฀take฀down฀barriers฀and฀do฀the฀work. They฀ intervene฀ in฀ the฀ lives฀ of฀ their฀ organizations฀ to฀ drive฀ performance฀ and฀ help฀Verizon฀win. Our฀people฀understand...

  • Page 19
    ... through 2006 are described in Management's Discussion and Analysis of Results of Operations and Financial Condition. • 2003 data includes severance, pension and benefit charges and other special and/or non-recurring items. • 2002 data includes gains on investments and sales of businesses and...

  • Page 20
    ... spending continues to be directed toward growth markets. High-speed wireless data (EvolutionData Optimized, or EV-DO) services, replacement of copper access lines with fiber optics to the premises, as well as expanded services to business markets are examples of areas of capital spending in support...

  • Page 21
    ... data transmission rates; profitably acquire, satisfy and retain our customers; and increase the value of our service offerings to customers while achieving revenue and net income growth. We also continue to expand our wireless data, messaging and multi-media offerings for both consumer and business...

  • Page 22
    ... due to pricing changes in early 2005, partially offset by a 71.7% increase in data revenue per customer in 2005 compared to 2004, driven by increased use of our messaging and other data services. Increases in wireless devices sold and revenue per unit sold drove increases in equipment and other...

  • Page 23
    ... costs, higher direct wireless network costs, increases in wireless equipment costs and higher costs associated with our wireline growth businesses. The overall impact of pension and other postretirement benefit plan assumption changes, combined with lower asset returns over the last several years...

  • Page 24
    ... $55 million, respectively, related to the early retirement of debt. Interest Expense Years Ended December 31, Interest expense Capitalized interest costs Total interest costs on debt balances Weighted average debt outstanding Effective interest rate (dollars in millions) 2006 $ 2,349 462 $ 2,811...

  • Page 25
    ...of initially measuring the outstanding liability awards (VARs) of the Verizon Wireless joint venture at fair value utilizing a Black-Scholes model. We do not expect SFAS No. 123(R) to have a material effect on our consolidated financial statements in future periods. 2006 $ 2,674 32.8% 2005 $ 2,421...

  • Page 26
    ... revenues are earned from long distance and other competing carriers who use our local exchange facilities to provide usage services to their customers. Switched access revenues are derived from fixed and usage-based charges paid by carriers for access to our local network. Special access revenues...

  • Page 27
    ... transport, represented $1,601 million or 47% of the market's total revenue in 2006, the first year the Wholesale business group has offered voice products. Wholesale revenue is influenced by aggressive competitive pricing, in particular long distance voice services. Wholesale data and Internet...

  • Page 28
    ... a New York City office building, changes to management retirement benefit plans, severance costs, and Verizon Center relocation-related costs. Special and non-recurring items in 2004 primarily included pension settlement losses, operating asset losses, and costs associated with the early retirement...

  • Page 29
    ... after-tax, or $.18 per diluted share). Sales of Businesses, Net During 2005, we sold our wireline and directory businesses in Hawaii, including Verizon Hawaii Inc. which operated approximately 700,000 switched access lines, as well as the services and assets of Verizon Long Distance, Verizon Online...

  • Page 30
    ... with the sale of Verizon Information Services Canada, we recorded tax benefits of $234 million in the fourth quarter of 2004 pertaining to prior year investment impairments. The investment impairments primarily related to debt and equity investments in CTI, Cable & Wireless plc and NTL Incorporated...

  • Page 31
    ... offset by higher cash income tax payments, including taxes paid in 2005 related to the 2004 sales of Verizon Information Services Canada and TELUS shares, and higher pension fund contributions. Operating cash flows from discontinued operations decreased $505 million to $1,076 million in 2006 due to...

  • Page 32
    ...from the sale of Verizon Information Services Canada, partially offset by capital expenditures related to discontinued operations. Under the terms of an investment agreement, Vodafone had the right to require Verizon Wireless to purchase up to an aggregate of $20 billion worth of Vodafone's interest...

  • Page 33
    ...by increased capital expenditures and higher acquisitions and investments, partially offset by proceeds from the sale of businesses and lower repayments of borrowings. Employee Benefit Plan Funded Status and Contributions In September 2006, the FASB issued Statement of Financial Accounting Standards...

  • Page 34
    ... rate fluctuations, changes in equity investment prices and changes in corporate tax rates. We employ risk management strategies using a variety of derivatives, including interest rate swap agreements, interest rate locks, foreign currency forwards and collars and equity options. We do not hold...

  • Page 35
    ... increase (decrease) for the year ended December 31, 2006 Pension plans discount rate + 1.00 - 1.00 $ (3,844) 4,597 $ (130) 266 Long-term rate of return on pension plan assets + 1.00 - 1.00 Postretirement plans discount rate cash flows. There is inherent subjectivity involved in estimating...

  • Page 36
    ...On January 6, 2006, Verizon acquired 100% of the outstanding common stock of MCI, Inc. (MCI) for a combination of Verizon common shares and cash. MCI was a global communications company that provided Internet, data and voice communication services to businesses and government entities throughout the...

  • Page 37
    ... stock held as of the record date. Both the spin-off and merger are expected to qualify as tax-free transactions, except to the extent that cash is paid to Verizon shareowners in lieu of fractional shares. The total value to be received by Verizon and its shareowners in exchange for these operations...

  • Page 38
    ... line charges into one subscriber line charge (SLC) and provides for de-averaging of the SLC by zones and class of customers. Third, the plan set into place a mechanism to transition to a set target of $.0055 per minute for switched access services. Once that target rate is reached, local exchange...

  • Page 39
    ...-to-peer Internet protocol service that does not use the public switched network is an interstate information service and is not subject to access charges, while a service that utilizes Internet protocol for only one intermediate part of a call's transmission is a telecommunications service that is...

  • Page 40
    ... increase radio interference to Verizon Wireless's operations from other spectrum users, or allow other users to share its spectrum. These changes may adversely impact the ways in which it uses spectrum, the capacity of that spectrum to carry traffic, and the value of that spectrum. State Regulation...

  • Page 41
    ... review of those results; • the effects of competition in our markets; • the timing, scope and financial impacts of our deployment of fiber-to-the-premises broadband technology; • the ability of Verizon Wireless to continue to obtain sufficient spectrum resources; • changes in our accounting...

  • Page 42
    ...on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan...

  • Page 43
    ...operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, Verizon changed its methods of accounting for stock-based compensation...

  • Page 44
    ... effect of accounting change Income on discontinued operations, net of tax Cumulative effect of accounting change, net of tax Net Income Weighted-average shares outstanding (in millions) (1) Total per share amounts may not add due to rounding. See Notes to Consolidated Financial Statements. 2006...

  • Page 45
    ... one year Accounts payable and accrued liabilities Liabilities related to assets held for sale Other Total current liabilities Long-term debt Employee benefit obligations Deferred income taxes Other liabilities Minority interest Shareowners' investment Series preferred stock ($.10 par value; none...

  • Page 46
    ... of long-term borrowings and capital lease obligations Increase (decrease) in short-term obligations, excluding current maturities Dividends paid Proceeds from sale of common stock Purchase of common stock for treasury Other, net Net cash used in financing activities - continuing operations Net cash...

  • Page 47
    ... of year Shares issued Employee plans Shareowner plans Shares issued MCI/Price acquisitions Balance at end of year Contributed Capital Balance at beginning of year Shares issued-employee and shareowner plans Shares issued-MCI/Price acquisitions Net tax benefit from employee stock compensation Idearc...

  • Page 48
    ... service that brings high-quality video, 3D games and music to a wide array of new phones. We have two reportable segments, Wireline and Domestic Wireless, which we operate and manage as strategic business units and organize by products and services. For further information concerning our business...

  • Page 49
    ... that current estimates of reductions in impacted asset lives is reasonable and subject to ongoing analysis as deployment of fiber optic lines continues. The asset categories impacted and useful life changes are as follows: Average Lives (in years) Central office equipment Digital switches Circuit...

  • Page 50
    ... and average useful lives of our other acquired intangible assets, see Note 7. Income Taxes Verizon and its domestic subsidiaries file a consolidated federal income tax return. Stock-Based Compensation Effective January 1, 2006, we adopted SFAS No. 123(R), ShareBased Payment utilizing the modified...

  • Page 51
    ... special dividend paid by MCI that was treated as a return of our investment ($973 million) and closing and other direct merger-related costs. The number of shares issued was based on the "Average Parent Stock Price," as defined in the merger agreement. The consolidated financial statements include...

  • Page 52
    ... capital expenditures for new long-haul network capability; and offering wireless capabilities to MCI's customers. Allocation of the Cost of the Merger In accordance with SFAS No. 141, the cost of the merger was allocated to the assets acquired and liabilities assumed based on their fair values...

  • Page 53
    ...price of and number of shares of Verizon common stock underlying options to purchase shares of Verizon common stock, restricted stock units (RSU's) and performance stock units (PSU's) were adjusted pursuant to the terms of the applicable Verizon equity incentive plans, taking into account the change...

  • Page 54
    ...operations in the consolidated statements of income. Our investment in CANTV continues to be accounted for as an equity method investment in continuing operations. The assets and liabilities of the U.S print and Internet yellow pages directories business, Verizon Information Services Canada, Verizon...

  • Page 55
    ... an agreement to sell our wireline and directory businesses in Hawaii, including Verizon Hawaii Inc. which operated approximately 700,000 switched access lines, as well as the services and assets of Verizon Long Distance, Verizon Online, Verizon Information Services and Verizon Select Services Inc...

  • Page 56
    ... information related to our investments in marketable securities: Gross Unrealized Gains (dollars in millions) Gross Unrealized Fair Losses Value Our investments in marketable securities are primarily bonds and mutual funds. During 2004, we sold all of our investment in Iowa Telecom preferred stock...

  • Page 57
    ... statements of cash flows. Equity Investees CANTV CANTV is Venezuela's largest full-service telecommunications provider. CANTV offers local services, national and international long distance, Internet access and wireless services in Venezuela as well as public telephone, private network, data...

  • Page 58
    ... the remaining 45%. Under the terms of an investment agreement, Vodafone had the right to require Verizon Wireless to purchase up to an aggregate of $20 billion worth of Vodafone's interest in Verizon Wireless at designated times (put windows) at its then fair market value, not to exceed $10 billion...

  • Page 59
    ... in millions) Years Ended December 31, Pretax lease income Income tax expense/(benefit) Investment tax credits $ 2006 96 57 4 2005 $ 119 (25) 4 2004 $ 63 (52) 3 As Lessee We lease certain facilities and equipment for use in our operations under both capital and operating leases. Total rent...

  • Page 60
    ... At December 31, Long-term debt maturing within one year Commercial paper Other short-term debt Total debt maturing within one year 2006 $ 4,139 3,576 - $ 7,715 2005 $ 4,526 2,152 10 $ 6,688 The weighted average interest rate for our commercial paper at year-end December 31, 2006 and December 31...

  • Page 61
    ... Global Funding debt the right to proceed directly against us for payment of interest, premium (if any) and principal outstanding should Verizon Global Funding fail to pay. The holders of Verizon Global Funding debt did not have recourse to the stock or assets of most of our telephone operations...

  • Page 62
    ... rates, market quotes for similar instruments or other valuation models 2006 Carrying Amount Fair Value (dollars in millions) 2005 Carrying Amount Fair Value Cost investments in unconsolidated businesses, derivative assets and liabilities and notes receivable At December 31, Short- and long-term...

  • Page 63
    ... operations and cumulative effect of accounting change Income on discontinued operations, net of tax Cumulative effect of accounting change, net of tax Net income Diluted Earnings Per Common Share(1) Weighted-average shares outstanding Effect of dilutive securities: Stock options Exchangeable equity...

  • Page 64
    ... from Verizon Wireless, for which we recorded a $42 million cumulative effect of accounting change, net of taxes and after minority interest, to recognize the effect of initially measuring the outstanding liability for awards granted to Domestic Wireless employees at fair value utilizing a Black...

  • Page 65
    ...$248 million for 2006, 2005 and 2004, respectively. Stock Options The Verizon Long Term Incentive Plan provides for grants of stock options to employees at an option price per share of 100% of the fair market value of Verizon Stock on the date of grant. Each grant has a 10 year life, vesting equally...

  • Page 66
    ...July 1, 2006, management employees receive an increased company match on their savings plan contributions. The following tables summarize benefit costs, as well as the benefit obligations, plan assets, funded status and rate assumptions associated with pension and postretirement health care and life...

  • Page 67
    ... Change in Plan Assets Beginning of year Actual return on plan assets Company contributions Benefits paid Settlements Acquisitions and divestitures, net End of year Funded Status End of year Unrecognized Actuarial loss, net Prior service cost Net amount recognized Amounts recognized on the balance...

  • Page 68
    ...The weighted-average assumptions used in determining net periodic cost follow: Pension 2004 6.25% 8.50 5.00 Health Care and Life 2005 2004 5.75% 7.75 4.00 6.25% 8.50 4.00 Years Ended December 31, Discount rate Expected return on plan assets Rate of compensation increase 2006 5.75% 8.50 4.00 2005...

  • Page 69
    ... and value-added. To determine the aggregate return for the pension trust, the projected return of each individual asset class is then weighted according to the allocation to that investment area in the trust's long-term asset allocation policy. The assumed Health Care Cost Trend Rates follow...

  • Page 70
    ... tax rate and the statutory federal income tax rate: Years Ended December 31, Statutory federal income tax rate State and local income tax, net of federal tax benefits Tax benefits from investment losses Equity in earnings from unconsolidated businesses Other, net Effective income tax rate 2006...

  • Page 71
    ... increase was offset by valuation allowance reversals relating to utilizing prior year investment losses to offset the capital gains realized on the sale of various businesses including Verizon Dominicana. Former MCI tax loss carry forwards include federal, state and foreign net operating loss tax...

  • Page 72
    ... Minority interest Provision for income taxes Segment income Assets Investments in unconsolidated businesses Plant, property and equipment, net Capital expenditures 2005 External revenues Intersegment revenues Total operating revenues Cost of services and sales Selling, general & administrative...

  • Page 73
    ...130 $ 146,851 19,107 $ 165,958 Financial information for Wireline excludes the effects of Hawaii access lines and directory operations sold in 2005. We generally account for intersegment sales of products and services and asset transfers at current market prices. We are not dependent on any single...

  • Page 74
    ...we adopted SFAS No. 158 effective December 31, 2006, which resulted in a net decrease to shareowners' investment of $6,883 million. The changes in the minimum pension liability in 2005 and 2004 were required by accounting rules for certain pension plans based on their funded status (see Note 15). In...

  • Page 75
    ... Cash Flow Information (dollars in millions) Years Ended December 31, Cash Paid Income taxes, net of amounts refunded $ Interest, net of amounts capitalized Supplemental Investing and Financing Transactions Cash acquired in business combination Assets acquired in business combinations Liabilities...

  • Page 76
    ...$25 and were sold primarily to retail investors and are listed on the New York Stock Exchange. SEC rules permit us to include condensed consolidating financial information for these two subsidiaries in our periodic SEC reports rather than filing separate subsidiary periodic SEC reports. Below is the...

  • Page 77
    ... Consolidating Balance Sheets At December 31, 2006 Parent Verizon New England Verizon South Other Adjustments Total Cash Short-term investments Accounts receivable, net Other current assets Total current assets Plant, property and equipment, net Investments in unconsolidated businesses Other assets...

  • Page 78
    ... Consolidating Balance Sheets At December 31, 2005 Parent Verizon New England Verizon South Other Adjustments Total Cash Short-term investments Accounts receivable, net Other current assets Total current assets Plant, property and equipment, net Investments in unconsolidated businesses Other assets...

  • Page 79
    Notes to Consolidated Financial Statements continued NOTE 21 COMMITMENTS AND CONTINGENCIES Several state and federal regulatory proceedings may require our telephone operations to pay penalties or to refund to customers a portion of the revenues collected in the current and prior periods. There are ...

  • Page 80
    ... Results of operations for the first quarter of 2006 include after-tax charges of $16 million for the early extinguishment of debt related to the MCI merger, $28 million for costs associated with the relocation to Verizon Center, $42 million for the impact of accounting for share based payments, and...

  • Page 81
    ... stock held as of the record date. Both the spin-off and merger are expected to qualify as tax-free transactions, except to the extent that cash is paid to Verizon shareowners in lieu of fractional shares. The total value to be received by Verizon and its shareowners in exchange for these operations...

  • Page 82
    ... Strategic Advisory Services LLC Joseph Neubauer Chairman and Chief Executive Officer ARAMARK Holdings Corporation Donald T. Nicolaisen Former Chief Accountant United States Securities and Exchange Commission Thomas H. O'Brien Retired Chairman and Chief Executive Officer The PNC Financial Services...

  • Page 83
    ... funds transfer service to registered shareowners wishing to deposit dividends directly into savings or checking accounts on dividend payment dates. For more information, contact Computershare. Direct Invest Stock Purchase and Ownership Plan - Verizon offers a direct stock purchase and share...

  • Page 84
    Verizon Communications Inc. 140 West Street New York, New York 10007 212 395-1000 verizon.com ©2007. Verizon. All Rights Reserved. 002CS-13417 Printed on recycled paper