##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended: September 30, 2006
 Or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 333-85503
 Telecomunicaciones de Puerto Rico, Inc.
  Commonwealth of Puerto Rico
    
    66-0566178(STATE OR OTHER JURISDICTION OF
    
    (IRS EMPLOYER IDENTIFICATION NO.)INCORPORATION OR ORGANIZATION)1515 FD Roosevelt AvenueGuaynabo, Puerto Rico
    
    00968(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
    
    (ZIP CODE)
 787-792-6052
  þ o
  o o þ
  o þ




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##### 



INDEX
 Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 Part I. Financial InformationItem 1.
    
    Financial Statements (Unaudited)
    
    
     3Consolidated Balance SheetsSeptember 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations Three Months Ended September 30, 2006 and 2005 and Nine Months Ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Changes in Shareholders EquityNine Months Ended September 30, 2006
    
    
    5Consolidated Statements of Cash Flows Nine Months Ended September 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    45Item 4.
    
    Controls and Procedures
    
    
    46Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    47Item 1A.
    
    Risk Factors
    
    
    47Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    47Item 3.
    
    Defaults Upon Senior Securities
    
    
    47Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    47Item 5.
    
    Other Information
    
    
    47Item 6.
    
    Exhibits
    
    
    47Signatures
    
    
    48Exhibit Index
    
    
    49Certification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to Section 906
  2




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##### Table of Contents



PART I            FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 (Unaudited)September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    106,276
    
    
    $
    55,086Accounts receivable, net of allowance for doubtful accounts
of $85,169 and $76,815, in 2006 and 2005, respectively
    
    
    193,194
    
    
    
    227,629Deferred income tax
    
    
    32,431
    
    
    
    18,324Inventory and supplies, net
    
    
    23,806
    
    
    
    47,431Prepaid expenses
    
    
    28,365
    
    
    
    20,571Total current assets
    
    
    384,072
    
    
    
    369,041PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,275,253
    
    
    
    1,351,510GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    198,541
    
    
    
    209,357DEFERRED INCOME TAX
    
    
    164,702
    
    
    
    205,853OTHER ASSETS
    
    
    93,328
    
    
    
    115,271TOTAL ASSETS
    
    $
    2,242,823
    
    
    $
    2,377,959LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    
    
    
    $
    452,042Other current liabilities
    
    
    166,765
    
    
    
    172,961Total current liabilities
    
    
    166,765
    
    
    
    625,003LONG-TERM DEBT, excluding current portion
    
    
    574,942
    
    
    
    299,812PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    523,099
    
    
    
    563,395OTHER NON-CURRENT LIABILITIES
    
    
    115,671
    
    
    
    136,345Total liabilities
    
    
    1,380,477
    
    
    
    1,624,555MINORITY INTEREST
    
    
    18,373
    
    
    
    16,555SHAREHOLDERS EQUITY:Common stock
    
    
    705,516
    
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    (26,042
    )Retained earnings
    
    
    335,810
    
    
    
    228,877Accumulated other comprehensive loss, net of taxes
    
    
    (171,311
    )
    
    
    (171,502
    )Total shareholders equity
    
    
    843,973
    
    
    
    736,849TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,242,823
    
    
    $
    2,377,959
 The accompanying notes are an integral part of these financial statements
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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)REVENUES:Local services
    
    $
    142,260
    
    
    $
    154,137
    
    
    $
    446,100
    
    
    $
    452,981Access services
    
    
    50,848
    
    
    
    61,845
    
    
    
    158,994
    
    
    
    179,834Long distance services
    
    
    14,654
    
    
    
    16,810
    
    
    
    47,622
    
    
    
    46,852Cellular services
    
    
    95,096
    
    
    
    70,917
    
    
    
    271,412
    
    
    
    202,224Directory services and other sales
    
    
    14,345
    
    
    
    18,682
    
    
    
    208,405
    
    
    
    48,479Total revenues
    
    
    317,203
    
    
    
    322,391
    
    
    
    1,132,533
    
    
    
    930,370OPERATING COSTS AND EXPENSES:Cost of services and sales
    
    
    80,147
    
    
    
    80,261
    
    
    
    253,069
    
    
    
    235,804Selling, general and administrative
    
    
    121,148
    
    
    
    133,729
    
    
    
    392,980
    
    
    
    385,997Early retirement and voluntary separation provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,687Depreciation and amortization
    
    
    61,591
    
    
    
    59,521
    
    
    
    185,247
    
    
    
    181,430Total operating costs and expenses
    
    
    262,886
    
    
    
    273,511
    
    
    
    831,296
    
    
    
    804,918OPERATING INCOME
    
    
    54,317
    
    
    
    48,880
    
    
    
    301,237
    
    
    
    125,452OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (9,545
    )
    
    
    (11,668
    )
    
    
    (31,060
    )
    
    
    (34,136
    )Equity income from joint venture
    
    
    
    
    
    
    583
    
    
    
    28,198
    
    
    
    1,695Minority interest in consolidated subsidiary
    
    
    (731
    )
    
    
    (722
    )
    
    
    (1,818
    )
    
    
    (2,129
    )Total other income (expense), net
    
    
    (10,276
    )
    
    
    (11,807
    )
    
    
    (4,680
    )
    
    
    (34,570
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    44,041
    
    
    
    37,073
    
    
    
    296,557
    
    
    
    90,882INCOME TAX EXPENSE
    
    
    17,077
    
    
    
    14,857
    
    
    
    78,536
    
    
    
    35,711NET INCOME
    
    $
    26,964
    
    
    $
    22,216
    
    
    $
    218,021
    
    
    $
    55,171
 The accompanying notes are an integral part of these financial statements.
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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity
 AccumulatedDeferred
    
    
    
    
    
    
    OtherCommon
    
    
    ESOP
    
    
    Retained
    
    
    ComprehensiveStock
    
    
    Compensation
    
    
    Earnings
    
    
    Loss
    
    
    TotalBALANCE DECEMBER 31, 2005
    
    $
    705,516
    
    
    $
    (26,042
    )
    
    $
    228,877
    
    
    $
    (171,502
    )
    
    $
    736,849Dividends paid
    
    
    
    
    
    
    
    
    
    
    (111,088
    )
    
    
    
    
    
    
    (111,088
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    218,021
    
    
    
    
    
    
    
    218,021Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    191Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218,212BALANCE SEPTEMBER 30, 2006 (Unaudited)
    
    $
    705,516
    
    
    $
    (26,042
    )
    
    $
    335,810
    
    
    $
    (171,311
    )
    
    $
    843,973
 The accompanying notes are an integral part of these financial statements.
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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
 For the Nine Months Ended September 30,2006
    
    
    2005(Unaudited)CASH FLOWS
FROM OPERATING ACTIVITIES:Net income
    
    $
    218,021
    
    
    $
    55,171Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    185,247
    
    
    
    181,430Provision for uncollectible accounts
    
    
    38,037
    
    
    
    34,898Deferred income tax expense
    
    
    27,044
    
    
    
    29,460Employee retirement benefits expense
    
    
    82,285
    
    
    
    74,101Equity income from joint venture
    
    
    (665
    )
    
    
    (1,695
    )Early retirement and voluntary separation provision
    
    
    
    
    
    
    1,687Gain on sale of building
    
    
    
    
    
    
    (207
    )Gain on sale of interest in joint venture
    
    
    (27,533
    )
    
    
    Minority interest in consolidated subsidiary
    
    
    1,818
    
    
    
    2,129Changes in assets and liabilities:Accounts receivable
    
    
    (3,602
    )
    
    
    (1,836
    )Inventory and supplies
    
    
    23,625
    
    
    
    (7,647
    )Prepaid expenses and other assets
    
    
    15,892
    
    
    
    (499
    )Other current and non-current liabilities
    
    
    (26,789
    )
    
    
    (68,537
    )Pension and other post-employment benefits
    
    
    (122,581
    )
    
    
    (118,709
    )Net cash provided by operating activities
    
    
    410,799
    
    
    
    179,746CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (98,172
    )
    
    
    (115,192
    )Proceeds from sale of investment
    
    
    26,651
    
    
    
    1,136Net cash used in investing activities
    
    
    (71,521
    )
    
    
    (114,056
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments of short-term debt, including
capital leases
    
    
    (452,000
    )
    
    
    (73,129
    )Borrowings of long-term debt
    
    
    275,000
    
    
    
    Dividends paid
    
    
    (111,088
    )
    
    
    (18,123
    )Net cash used in financing activities
    
    
    (288,088
    )
    
    
    (91,252
    )NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
    
    
    51,190
    
    
    
    (25,562
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    55,086
    
    
    
    63,346CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    106,276
    
    
    $
    37,784
 The accompanying notes are an integral part of these financial statements.
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##### Table of Contents



TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1.
    
    Business / Corporate StructureTelecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (The Company), holds 100%
of the common stock of Puerto Rico Telephone Company, Inc. (PRTC), PRT Larga Distancia, Inc.
(PRTLD) and Datacom Caribe, Inc. (Datacom). The Company holds a 67% interest in Coqui.net
Corporation (Coqui.net), in which Popular, Inc., (Popular) one of our shareholders, holds the
remaining 33% interest. The Company also held a 24% interest in Verizon Information Services
Puerto Rico, Inc. S en C. (VISI), in which GTE Holdings (Puerto Rico) LLC, our majority
shareholder, held a 36% interest. On March 31, 2006, the Company sold its equity interest in
the Puerto Rico directory operation and its right to receive 35% of the revenues from the
publication of directory advertising. The Company will continue sharing data for the
publication of directories under a new amended publishing agreement, and will also offer billing
and collection services for the directory advertising sales to its service subscribers.
Directory publishing revenues were generated through VISI until March 31, 2006. As incumbent
local exchange carrier for the island of Puerto Rico, we provide both wireline and wireless
services (the latter using the Verizon Wireless brand name). The Companys off-island long
distance service is provided by PRTLD and its Internet access service is provided by Coqui.net.GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico) LLC, acquired a 40%
interest in and management control over the Company on March 2, 1999 from Puerto Rico Telephone
Authority (PRTA), an entity of the Commonwealth of Puerto Rico (the Acquisition). In
connection with the Acquisition, Popular acquired a 10% interest in the Company. GTE and Bell
Atlantic Corporation merged on June 30, 2000 to form Verizon Communications Inc. (Verizon).
On January 25, 2002, GTE Holdings (Puerto Rico) LLC and Popular acquired an additional 12% and
3% interest in the Company, respectively, by exercising an option each had held since the
Acquisition. Verizon and Popular acquired the additional ownership interest from PRTA Holdings
Corp., a subsidiary of the PRTA (PRTA Holdings). Verizon and Popular paid PRTA Holdings $138
million and $34 million, respectively, for a total of $172 million in cash for the additional
3,750,000 shares at a $45.9364 per share price established in a share option agreement entered
into at the time of the Acquisition. As a result, Verizon owns 52%, Popular owns 13%, PRTA owns
28% and the Employee Stock Ownership Plan (ESOP) owns 7% of the outstanding capital stock of
the Company.2.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and the
rules and regulations of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in accordance with U.S.
generally accepted accounting principles for annual financial statements have been condensed or
omitted pursuant to such rules and regulations. These financial statements include all
adjustments and recurring accruals necessary to present fairly the results of its operations and
financial condition for the interim periods shown. The results for the interim periods are not
necessarily indicative of results for the full year. The Consolidated Balance Sheet at December
31, 2005 was derived from audited financial statements and should be read in conjunction with the
notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.Recent Accounting PronouncementsUncertainty in Income TaxesIn July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 requires the use of a two-step
approach for recognizing and measuring
tax benefits taken or expected to be taken in a tax return and disclosures regarding
uncertainties in income tax positions. The Company is required to adopt FIN 48 effective
January 1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an
adjustment to opening retained earnings in the year of adoption and will be presented
separately.
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##### Table of Contents



Leveraged Leases
  Effects of Prior Year Misstatements
  Fair Value Measurements
 Fair
Value Measurement
 Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans
  Impairment or Disposal of Long-lived Assets
  8




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##### Table of Contents



Goodwill and Other Intangibles
 Goodwill
  Indefinite Life Intangible Assets
    Definite Life Intangible Assets
   9




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##### Table of Contents



ReclassificationsReclassifications of prior periods amounts have been made to conform to the current periods
presentation.3.
    
    Gain on Sale of Interest in Joint VentureIn February 2006, the Company signed an agreement to sell its participation in the Companys
equity interest in the Puerto Rico directory operation for $23 million and the Companys right to
receive 35% of the revenues from the publication of directory advertising for $167 million. The
transaction closed on March 31, 2006. The net pretax gain from the sale of the Companys equity
interest was $28 million, which is included in Equity (loss) income from joint venture, and the
net pretax gain from the sale of the Companys right was $158 million, which is included in
Directory services and other. Both transactions are included in the nine months ended
September 30, 2006 consolidated statement of operations. The proceeds were used to pay dividends
and long-term debt. The Company will continue sharing data for the publication of directories
under a new amended publishing agreement, and will also offer billing and collection services for
the directory advertising sales to its service subscribers.4.
    
    Property, Plant and EquipmentFollowing is a breakdown of Property Plant and Equipment:
 Remaining Useful
    
    September 30,
    
    
    December 31,Lives (Yrs)
    
    2006
    
    
    2005(In thousands)Outside plant
    
    
    9.0
    
    
    $
    2,225,690
    
    
    $
    2,198,892Central office and transmission equipment
    
    
    3.8
    
    
    
    1,295,392
    
    
    
    1,282,713Equipment and other
    
    
    2.7
    
    
    
    269,711
    
    
    
    273,245Buildings
    
    
    14.6
    
    
    
    329,072
    
    
    
    324,988Land
    
    
    N/A
    
    
    
    25,547
    
    
    
    25,500Gross plant in service
    
    
    
    
    
    
    4,145,412
    
    
    
    4,105,338Less: accumulated depreciation
    
    
    
    
    
    
    2,905,610
    
    
    
    2,772,489Net plant in service
    
    
    
    
    
    
    1,239,802
    
    
    
    1,332,849Construction in progress
    
    
    
    
    
    
    35,451
    
    
    
    18,661Total
    
    
    
    
    
    $
    1,275,253
    
    
    $
    1,351,510
 5.
    
    GoodwillFollowing is a breakdown of goodwill:
 CarryingValueSeptember 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Wireline (PRTC)
    
    $
    102,731
    
    
    $
    102,731Dial-up Internet (Coqui.net)
    
    
    24,196
    
    
    
    24,196Total
    
    $
    126,927
    
    
    $
    126,927
 10




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##### Table of Contents



6.
    
    Intangibles
  Carrying ValueSeptember 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Indefinite Life:Wireline concession
    
    $
    85,120
    
    
    $
    85,120FCC Cellular licenses
    
    
    23,855
    
    
    
    23,855Total Indefinite Life
    
    $
    108,975
    
    
    $
    108,975
 September 30, 2006
    
    
    December 31, 2005(In thousands)Cost
    
    
    Acc. Amort
    
    
    Book Value
    
    
    Cost
    
    
    Acc. Amort
    
    
    Book ValueDefinite Life:Wireline trade name
    
    $
    48,400
    
    
    $
    14,670
    
    
    $
    33,730
    
    
    $
    48,400
    
    
    $
    13,218
    
    
    $
    35,182Software licenses
    
    
    134,575
    
    
    
    78,739
    
    
    
    55,836
    
    
    
    126,720
    
    
    
    61,520
    
    
    
    65,200Total Definite Life
    
    $
    182,975
    
    
    $
    93,409
    
    
    $
    89,566
    
    
    $
    175,120
    
    
    $
    74,738
    
    
    $
    100,382Plus: Total Indefinite Life
    
    
    
    
    
    
    
    
    
    
    108,975
    
    
    
    
    
    
    
    
    
    
    
    108,975Total
    
    $
    182,975
    
    
    $
    93,409
    
    
    $
    198,541
    
    
    $
    175,120
    
    
    $
    74,738
    
    
    $
    209,357
  Aggregate Amortization expense:For the nine months ended September 30, 2006
    
    
    
    
    
    $
    18,662Expected amortization expense:For the remainder of 2006
    
    
    
    
    
    $
    2,627For the years ending December 31,2007
    
    
    
    19,2462008
    
    
    
    14,8322009
    
    
    
    9,8812010 and thereafter
    
    
    
    42,980
  11




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7.
    
    Other assetsFollowing is a breakdown of other assets:
 September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Deferred activation and installation costs
    
    $
    47,740
    
    
    $
    68,422Notes receivable-equipment sales
    
    
    141
    
    
    
    1,995Deferred pension asset
    
    
    41,729
    
    
    
    41,729Deferred financing costs, net
    
    
    895
    
    
    
    1,359Other assets
    
    
    2,823
    
    
    
    1,766Total
    
    $
    93,328
    
    
    $
    115,271
  8.
    
    Pension PlanThe Company has noncontributory pension plans for full-time employees, which are tax qualified as
they meet Employee Retirement Income Security Act of 1974 (the ERISA) requirements. The
Company realizes tax deductions when contributions are made to the trusts. The trusts invest in
equity and fixed income securities to meet benefit obligations.The pension benefit is composed of two elements. First, an employee receives an annuity at
retirement when they reach the rule of 85 (age plus years of service). The annuity is calculated
by applying a percentage times years of service to the last three years of salary. The second
element is a lump sum based on years of service, up to a maximum of nine months of salary for
hourly employees and twelve months of salary for salaried employees.There are separate trusts for the annuity and the lump sum benefits. Furthermore, annuity
benefit plans are segregated by two employee groups: Salaried and Hourly employees. Salaried
group includes HIETEL and management employees. Hourly employees group includes UIET union
employees. The Company also provides health care and life insurance benefits to retirees.The estimated components of the net pension and other post-employment benefit expenses for
the three months and nine months ended September 30, 2006 and 2005 are presented below.
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Pension and Lump Sum Benefits
    
    
    Post- Retirement BenefitsFor the Three Months Ended
    
    

For the Nine Months Ended
    
    
    For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    
    6,560
    
    
    $
    5,714
    
    
    
    19,680
    
    
    
    17,142
    
    
    $
    648
    
    
    $
    1,556
    
    
    $
    4,618
    
    
    $
    4,668Interest cost
    
    
    19,300
    
    
    
    18,259
    
    
    
    57,900
    
    
    
    54,777
    
    
    
    9,214
    
    
    
    8,218
    
    
    
    27,642
    
    
    
    24,654Expected return on plan assets
    
    
    (19,474
    )
    
    
    (18,135
    )
    
    
    (58,422
    )
    
    
    (54,405
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unrecognized:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transition obligation
    
    
    90
    
    
    
    90
    
    
    
    270
    
    
    
    270
    
    
    
    551
    
    
    
    551
    
    
    
    1,653
    
    
    
    1,653Prior service cost (benefit)
    
    
    912
    
    
    
    783
    
    
    
    2,736
    
    
    
    2,349
    
    
    
    (2,306
    )
    
    
    (2,463
    )
    
    
    (6,918
    )
    
    
    (7,389
    )Actuarial loss, net
    
    
    5,922
    
    
    
    5,549
    
    
    
    17,766
    
    
    
    16,647
    
    
    
    5,120
    
    
    
    4,579
    
    
    
    15,360
    
    
    
    13,737Total
    
    $
    13,310
    
    
    $
    12,260
    
    
    $
    39,930
    
    
    $
    36,780
    
    
    $
    13,227
    
    
    $
    12,441
    
    
    $
    42,355
    
    
    $
    37,323
 Cash FlowsOur estimate of the amount required for qualified pension trust contributions for 2006 is
approximately $102 million. We anticipate approximately $1 million in contributions to the
non-qualified pension plans and approximately $24 million for the other post-retirement benefits
in 2006. As of September 30, 2006, we have contributed approximately $102 million to the
qualified pension trust and approximately $21 million to the other post-retirement benefits. We
have sufficient liquid resources to fund the remainder of the contribution.9.
    
    Deferred ESOP CompensationThe Employee Stock Ownership Plan (ESOP) acquired a 3% interest in the Company in 1999, which
was financed by a $26 million, twenty-year note borrowed from the Company to establish a
contributory investment fund for employees. The ESOP only invests in shares of the Companys
common stock. Shares are held by the ESOPs trustee and maintained in a suspense account until
they are released to employee participants. The yearly release of shares to participants is
based on the greater of participant contributions plus a Company match of 30% up to 5% of wages
or a minimum based on an amortization schedule. The minimum is based on the ratio of annual debt
service to total debt service multiplied by the initial 750,000 shares.During 2005, the ESOP entered into a new loan agreement amounting $2.0 million with the Company
to finance the ESOPs acquisition of the Companys stock. Also, during 2000 and 2001, subsequent
to ESOPs commencement, the ESOP entered into various loan agreements amounting to $4.9 million
with the Company to finance the ESOPs acquisition of the Companys stock from former employees.Salaried, regular, full and part-time employees of the Company actively employed on March 2, 1999
were eligible to receive a portion of the Initial Grant of the Companys stock. Employees that
were not actively employed on March 2, 1999 were also eligible to receive the Initial Grant
provided that they met the following condition:Employees who were on short-term disability, workers compensation, Family and Medical Care Leave
Act (FMLA) leave, layoff with recall rights, or other Company approved leave of absence; and the
employees returned to active employment with the Company as soon as they were eligible to do so
and within 180 days after March 2, 1999.Compensation expense is recorded based on the release of shares at market value, which is based
on an independent appraisal performed annually. The release of shares, based upon the per share
price established at the Acquisition, amounted to $1 million for December 31, 2005, which was
reflected as a reduction of deferred ESOP compensation in equity.As of September 30, 2006 and 2005, the Employee Stock Ownership Plan (ESOP) owns 7% of the
outstanding capital stock of the Company.
 13




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##### Table of Contents



On November 1, 2006 Sercotel S.A. de C.V. offered to purchase the Companys stock held by
the plan. Pursuant to section 14.03 of the plan document each participant or beneficiary may
direct the Trustee either, to sell or not to sell the Companys stock allocated to the
participants or beneficiarys account. The Trustee on behalf of Sercotel S.A. de C.V. sent all ESOP participants and beneficiaries an information statement package disclosing the terms of the
offer and voting card. These documents should be reviewed, completed and returned to the Trustee
on or before November 29, 2006.10.
    
    Other Current LiabilitiesFollowing is a breakdown of current liabilities:
 September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Accounts payable
    
    $
    20,188
    
    
    $
    43,719Accrued expenses
    
    
    66,563
    
    
    
    74,805Employee benefit accruals
    
    
    49,323
    
    
    
    39,991Carrier payables
    
    
    10,828
    
    
    
    7,812Taxes
    
    
    9,466
    
    
    
    730Interest
    
    
    10,397
    
    
    
    5,904Total
    
    $
    166,765
    
    
    $
    172,961
 11.
    
    DebtFollowing is a breakdown of debt:
 September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Senior notesDue May 15, 2006 at 6.65%
    
    $
    
    
    
    $
    399,990Due May 15, 2009 at 6.80%
    
    
    299,942
    
    
    
    299,929Term credit facilities:Due February 28, 2011 at 55 basis points
over LIBOR at September 30, 2006
    
    
    275,000
    
    
    
    Commercial paper
    
    
    
    
    
    
    52,000Deferred derivative and interest rate swap
    
    
    
    
    
    
    (107
    )Capital leases
    
    
    
    
    
    
    42Total
    
    
    574,942
    
    
    
    751,854Less short-term debt
    
    
    
    
    
    
    452,042Long-term debt
    
    $
    574,942
    
    
    $
    299,812
   14




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##### Table of Contents



Year
    
    Amount(In thousands)2009
    Senor Note
    $
    300,0002011
    Term loan
    
    275,000Total
    
    $
    575,000
  15




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##### Table of Contents



12.
    
    Other Non-Current LiabilitiesFollowing is a breakdown of other non-current liabilities:
 September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Deferred activation and installation revenues
    
    $
    47,740
    
    
    $
    68,422Customer deposits
    
    
    25,962
    
    
    
    26,297Other liabilities
    
    
    41,969
    
    
    
    41,626Total
    
    $
    115,671
    
    
    $
    136,345
 13.
    
    Shareholders EquityCommon StockCommon stock consists of fifty million authorized shares, no par value, of which twenty five
million shares were outstanding at September 30, 2006 and December 31, 2005.Accumulated Other Comprehensive LossThe accumulated other comprehensive loss represents unrecognized losses, other than unrecognized
prior service costs which are reflected as an other asset, associated with the hourly employee
pension fund, since the accumulated benefit obligation exceeds the fair value of plan assets.DividendsTo the extent funds are legally available, the Companys shareholders agreement requires the
payment of dividends equal to at least 50% of consolidated net income to be paid in the following
quarter.Declared dividends for financial reporting purposes were the following:
 2006
    
    
    2005(In thousands)
    
    
    (In thousands)(Unaudited)4thQuarter
    
    $
    
    
    
    4th  Quarter
    
    $
    27,1443rdQuarter
    
    
    10,812
    
    
    3rd  Quarter
    
    
    16,2002ndQuarter
    
    
    84,717
    
    
    2nd Quarter
    
    
    14,8751stQuarter
    
    
    15,559
    
    
    1st  Quarter
    
    
    3,248Total
    
    $
    111,088
    
    
    Total
    
    $
    61,467
  16




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##### Table of Contents



14.
    
    Fair Value of Financial InstrumentsThe carrying amounts and fair values of the Companys financial instruments at September
30, 2006 and December 31, 2005 are as follows:
 September 30,
    
    
    December 31,2006
    
    
    2005Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(Unaudited)(In thousands)Assets:Cash and cash equivalents
    
    $
    106,276
    
    
    $
    106,276
    
    
    $
    55,086
    
    
    $
    55,086Accounts receivable, net
    
    
    193,194
    
    
    
    193,194
    
    
    
    227,629
    
    
    
    227,629Liabilities:Other current liabilities
    
    
    166,765
    
    
    
    166,765
    
    
    
    172,961
    
    
    
    172,961Short-term debt
    
    
    
    
    
    
    
    
    
    
    452,042
    
    
    
    454,172Long-term debt, including interest rate swap
    
    
    574,942
    
    
    
    582,782
    
    
    
    299,812
    
    
    
    308,883
 15. Segment Reporting
   
    
    Local services, including basic voice, telephone and telecommunications equipment
rentals, value-added services, high-speed private line services, and Internet access;
    
    Access services to long distance carriers, competitive local exchange carriers, and
wireless operators for originating and terminating calls on the Companys network;
    
    Long distance services including direct dial on-island and off-island, operator assisted
calls, and prepaid calling card;
    
    Directory publishing rights services; and
    
    Telecommunication equipment sales and billing and collection services to competing long
distance operators in Puerto Rico.
  
    
    Postpaid and Prepaid services; and
    
    Wireless equipment sales.
 17




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##### Table of Contents



For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,(Unaudited)
    
    
    
    
    
    
    (Unaudited)2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Wireline:Revenues-Local services
    
    $
    147,709
    
    
    $
    158,858
    
    
    $
    461,316
    
    
    $
    465,092Access services
    
    
    52,023
    
    
    
    62,739
    
    
    
    162,349
    
    
    
    183,376Long distance services
    
    
    15,138
    
    
    
    17,817
    
    
    
    49,015
    
    
    
    48,474Directory services and other
    
    
    14,432
    
    
    
    18,689
    
    
    
    208,808
    
    
    
    48,589Total revenues
    
    $
    229,302
    
    
    $
    258,103
    
    
    $
    881,488
    
    
    $
    745,531Operating income
    
    $
    33,220
    
    
    $
    46,045
    
    
    $
    244,815
    
    
    $
    121,145Wireless:Revenues-Cellular services
    
    $
    96,059
    
    
    $
    72,689
    
    
    $
    273,997
    
    
    $
    204,766Operating income
    
    $
    21,097
    
    
    $
    2,835
    
    
    $
    56,422
    
    
    $
    4,307Consolidated:Revenues for reportable segments
    
    $
    325,361
    
    
    $
    330,792
    
    
    $
    1,155,485
    
    
    $
    950,297Elimination of intersegment revenues
    
    
    (8,158
    )
    
    
    (8,401
    )
    
    
    (22,952
    )
    
    
    (19,927
    )Consolidated revenues
    
    $
    317,203
    
    
    $
    322,391
    
    
    $
    1,132,533
    
    
    $
    930,370Operating income
    
    $
    54,317
    
    
    $
    48,880
    
    
    $
    301,237
    
    
    $
    125,452
 As of
    
    
    As ofSeptember 30,
    
    
    December 31,Assets
    
    2006
    
    
    2005(Unaudited)Wireline assets
    
    $
    2,237,284
    
    
    $
    2,331,252Wireless assets
    
    
    414,177
    
    
    
    422,557Segment assets
    
    $
    2,651,461
    
    
    $
    2,753,809Elimination of intersegment assets
    
    
    (408,638
    )
    
    
    (375,850
    )Consolidated assets
    
    $
    2,242,823
    
    
    $
    2,377,959
 18




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##### Table of Contents



16.
    
    Condensed Consolidating InformationThe following summarizes the condensed consolidating financial information as of September 30,
2006, unaudited and December 31, 2005 and for the quarters then ended presents the financial
position, results of operations and cash flows of (i) the Company as if it had accounted for its
subsidiaries using the equity method, (ii) the Guarantor Subsidiary (as defined below); and
(iii) the Non-Guarantor Subsidiaries (as defined below) on a combined basis. The consolidation
entries eliminate investments in subsidiaries and intercompany balances and transactions.The Notes are guaranteed by PRTC (the Guarantor Subsidiary), a wholly-owned subsidiary of
the Company, but not guaranteed by the Companys other subsidiaries, Coqui.net, PRTLD and
Datacom (the Non-Guarantor Subsidiaries). The guarantee by the Guarantor Subsidiary is full
and unconditional.
 19




---



##### Table of Contents



Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    77,503
    
    
    $
    28,773
    
    
    $
    
    
    
    $
    106,276Intercompany accounts receivable
    
    
    57,115
    
    
    
    47,413
    
    
    
    65,403
    
    
    
    (169,931
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    193,382
    
    
    
    (188
    )
    
    
    
    
    
    
    193,194Deferred income tax
    
    
    
    
    
    
    32,398
    
    
    
    33
    
    
    
    
    
    
    
    32,431Inventory and supplies, net
    
    
    
    
    
    
    23,805
    
    
    
    1
    
    
    
    
    
    
    
    23,806Prepaid expenses
    
    
    
    
    
    
    26,915
    
    
    
    1,450
    
    
    
    
    
    
    
    28,365Total current assets
    
    
    57,115
    
    
    
    401,416
    
    
    
    95,472
    
    
    
    (169,931
    )
    
    
    384,072PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,267,833
    
    
    
    7,420
    
    
    
    
    
    
    
    1,275,253GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    301,091
    
    
    
    24,377
    
    
    
    
    
    
    
    325,468DEFERRED INCOME TAX
    
    
    
    
    
    
    164,168
    
    
    
    942
    
    
    
    (408
    )
    
    
    164,702INVESTMENT IN SUBSIDIARIES
    
    
    828,066
    
    
    
    
    
    
    
    
    
    
    
    (828,066
    )
    
    
    OTHER ASSETS
    
    
    575,895
    
    
    
    93,325
    
    
    
    
    
    
    
    (575,892
    )
    
    
    93,328TOTAL ASSETS
    
    $
    1,461,076
    
    
    $
    2,227,833
    
    
    $
    128,211
    
    
    $
    (1,574,297
    )
    
    $
    2,242,823LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Intercompany accounts payable
    
    $
    31,646
    
    
    $
    89,618
    
    
    $
    53,748
    
    
    $
    (175,012
    )
    
    $
    Other current liabilities
    
    
    10,513
    
    
    
    149,855
    
    
    
    6,392
    
    
    
    5
    
    
    
    166,765Total current liabilities
    
    
    42,159
    
    
    
    239,473
    
    
    
    60,140
    
    
    
    (175,007
    )
    
    
    166,765LONG-TERM DEBT, excluding current portion
    
    
    574,942
    
    
    
    574,940
    
    
    
    
    
    
    
    (574,940
    )
    
    
    574,942OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    634,488
    
    
    
    561
    
    
    
    3,721
    
    
    
    638,770Total liabilities
    
    
    617,101
    
    
    
    1,448,901
    
    
    
    60,701
    
    
    
    (746,226
    )
    
    
    1,380,477MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,373
    
    
    
    18,373SHAREHOLDERS EQUITY:Common stock, additional paid in capital and treasury stock
    
    
    705,516
    
    
    
    646,783
    
    
    
    41,143
    
    
    
    (687,926
    )
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,042
    )Retained earnings
    
    
    335,810
    
    
    
    303,458
    
    
    
    26,367
    
    
    
    (329,825
    )
    
    
    335,810Accumulated other comprehensive loss
    
    
    (171,309
    )
    
    
    (171,309
    )
    
    
    
    
    
    
    171,307
    
    
    
    (171,311
    )Total shareholders equity
    
    
    843,975
    
    
    
    778,932
    
    
    
    67,510
    
    
    
    (846,444
    )
    
    
    843,973TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,461,076
    
    
    $
    2,227,833
    
    
    $
    128,211
    
    
    $
    (1,574,297
    )
    
    $
    2,242,823
 20




---



##### Table of Contents



Condensed Consolidating Balance Sheet
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    135
    
    
    $
    31,130
    
    
    $
    23,821
    
    
    $
    
    
    
    $
    55,086Intercompany accounts receivable
    
    
    504,484
    
    
    
    46,610
    
    
    
    54,995
    
    
    
    (606,089
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    227,804
    
    
    
    (175
    )
    
    
    
    
    
    
    227,629Deferred income tax
    
    
    718
    
    
    
    17,573
    
    
    
    33
    
    
    
    
    
    
    
    18,324Inventory and supplies, net
    
    
    
    
    
    
    47,430
    
    
    
    1
    
    
    
    
    
    
    
    47,431Prepaid expenses
    
    
    
    
    
    
    19,814
    
    
    
    757
    
    
    
    
    
    
    
    20,571Total current assets
    
    
    505,337
    
    
    
    390,361
    
    
    
    79,432
    
    
    
    (606,089
    )
    
    
    369,041PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,342,915
    
    
    
    8,595
    
    
    
    
    
    
    
    1,351,510GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    311,819
    
    
    
    24,465
    
    
    
    
    
    
    
    336,284DEFERRED INCOME TAX
    
    
    
    
    
    
    207,038
    
    
    
    (33
    )
    
    
    (1,152
    )
    
    
    205,853INVESTMENT IN SUBSIDIARIES
    
    
    720,228
    
    
    
    
    
    
    
    
    
    
    
    (720,228
    )
    
    
    OTHER ASSETS
    
    
    300,977
    
    
    
    115,542
    
    
    
    
    
    
    
    (301,248
    )
    
    
    115,271TOTAL ASSETS
    
    $
    1,526,542
    
    
    $
    2,367,675
    
    
    $
    112,459
    
    
    $
    (1,628,717
    )
    
    $
    2,377,959LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    452,000
    
    
    $
    452,042
    
    
    $
    
    
    
    $
    (452,000
    )
    
    $
    452,042Intercompany accounts payable
    
    
    32,136
    
    
    
    86,430
    
    
    
    41,370
    
    
    
    (159,936
    )
    
    
    Other current liabilities
    
    
    5,745
    
    
    
    161,143
    
    
    
    5,793
    
    
    
    280
    
    
    
    172,961Total current liabilities
    
    
    489,881
    
    
    
    699,615
    
    
    
    47,163
    
    
    
    (611,656
    )
    
    
    625,003LONG-TERM DEBT, excluding current portion
    
    
    299,812
    
    
    
    299,917
    
    
    
    
    
    
    
    (299,917
    )
    
    
    299,812OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    695,273
    
    
    
    1,383
    
    
    
    3,084
    
    
    
    699,740Total liabilities
    
    
    789,693
    
    
    
    1,694,805
    
    
    
    48,546
    
    
    
    (908,489
    )
    
    
    1,624,555MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,555
    
    
    
    16,555SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    705,516
    
    
    
    645,298
    
    
    
    41,143
    
    
    
    (686,441
    )
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,042
    )Retained earnings
    
    
    228,877
    
    
    
    199,074
    
    
    
    22,770
    
    
    
    (221,844
    )
    
    
    228,877Accumulated other comprehensive loss
    
    
    (171,502
    )
    
    
    (171,502
    )
    
    
    
    
    
    
    171,502
    
    
    
    (171,502
    )Total shareholders equity
    
    
    736,849
    
    
    
    672,870
    
    
    
    63,913
    
    
    
    (736,783
    )
    
    
    736,849TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,526,542
    
    
    $
    2,367,675
    
    
    $
    112,459
    
    
    $
    (1,628,717
    )
    
    $
    2,377,959
 21




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Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    136,661
    
    
    $
    7,962
    
    
    $
    (2,363
    )
    
    $
    142,260Access services
    
    
    
    
    
    
    51,814
    
    
    
    
    
    
    
    (966
    )
    
    
    50,848Long distance services
    
    
    
    
    
    
    6,345
    
    
    
    8,821
    
    
    
    (512
    )
    
    
    14,654Cellular services
    
    
    
    
    
    
    95,214
    
    
    
    
    
    
    
    (118
    )
    
    
    95,096Directory and other services and sales
    
    
    
    
    
    
    17,149
    
    
    
    628
    
    
    
    (3,432
    )
    
    
    14,345Total revenues
    
    
    
    
    
    
    307,183
    
    
    
    17,411
    
    
    
    (7,391
    )
    
    
    317,203OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    46
    
    
    
    254,516
    
    
    
    15,444
    
    
    
    (7,120
    )
    
    
    262,886OPERATING (LOSS) INCOME
    
    
    (46
    )
    
    
    52,667
    
    
    
    1,967
    
    
    
    (271
    )
    
    
    54,317OTHER INCOME (EXPENSE), NET
    
    
    27,010
    
    
    
    (10,376
    )
    
    
    561
    
    
    
    (27,471
    )
    
    
    (10,276
    )INCOME TAX EXPENSE
    
    
    
    
    
    
    16,933
    
    
    
    144
    
    
    
    
    
    
    
    17,077NET INCOME
    
    $
    26,964
    
    
    $
    25,358
    
    
    $
    2,384
    
    
    $
    (27,742
    )
    
    $
    26,964
 22




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Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    148,589
    
    
    $
    8,210
    
    
    $
    (2,662
    )
    
    $
    154,137Access services
    
    
    
    
    
    
    63,513
    
    
    
    
    
    
    
    (1,668
    )
    
    
    61,845Long distance services
    
    
    
    
    
    
    6,864
    
    
    
    10,973
    
    
    
    (1,027
    )
    
    
    16,810Cellular services
    
    
    
    
    
    
    72,109
    
    
    
    
    
    
    
    (1,192
    )
    
    
    70,917Directory and other services and sales
    
    
    
    
    
    
    20,947
    
    
    
    332
    
    
    
    (2,597
    )
    
    
    18,682Total revenues
    
    
    
    
    
    
    312,022
    
    
    
    19,515
    
    
    
    (9,146
    )
    
    
    322,391OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    3
    
    
    
    267,008
    
    
    
    15,646
    
    
    
    (9,146
    )
    
    
    273,511OPERATING (LOSS) INCOME
    
    
    (3
    )
    
    
    45,014
    
    
    
    3,869
    
    
    
    
    
    
    
    48,880OTHER INCOME (EXPENSE), NET
    
    
    22,219
    
    
    
    (11,427
    )
    
    
    345
    
    
    
    (22,944
    )
    
    
    (11,807
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    22,216
    
    
    
    33,587
    
    
    
    4,214
    
    
    
    (22,944
    )
    
    
    37,073INCOME TAX EXPENSE
    
    
    
    
    
    
    13,288
    
    
    
    1,569
    
    
    
    
    
    
    
    14,857NET INCOME
    
    $
    22,216
    
    
    $
    20,299
    
    
    $
    2,645
    
    
    $
    (22,944
    )
    
    $
    22,216
 23




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Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    429,407
    
    
    $
    23,864
    
    
    $
    (7,171
    )
    
    $
    446,100Access services
    
    
    
    
    
    
    161,885
    
    
    
    
    
    
    
    (2,891
    )
    
    
    158,994Long distance services
    
    
    
    
    
    
    21,370
    
    
    
    27,736
    
    
    
    (1,484
    )
    
    
    47,622Cellular services
    
    
    
    
    
    
    271,970
    
    
    
    
    
    
    
    (558
    )
    
    
    271,412Directory and other services and sales
    
    
    
    
    
    
    222,676
    
    
    
    1,414
    
    
    
    (15,685
    )
    
    
    208,405Total revenues
    
    
    
    
    
    
    1,107,308
    
    
    
    53,014
    
    
    
    (27,789
    )
    
    
    1,132,533OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    (15
    )
    
    
    811,039
    
    
    
    47,791
    
    
    
    (27,519
    )
    
    
    831,296OPERATING INCOME
    
    
    15
    
    
    
    296,269
    
    
    
    5,223
    
    
    
    (270
    )
    
    
    301,237OTHER INCOME (EXPENSE), NET
    
    
    217,240
    
    
    
    (4,342
    )
    
    
    1,222
    
    
    
    (218,800
    )
    
    
    (4,680
    )INCOME TAX (BENEFIT) EXPENSE
    
    
    (766
    )
    
    
    76,454
    
    
    
    2,848
    
    
    
    
    
    
    
    78,536NET INCOME
    
    $
    218,021
    
    
    $
    215,473
    
    
    $
    3,597
    
    
    $
    (219,070
    )
    
    $
    218,021
 24




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Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    436,314
    
    
    $
    24,291
    
    
    $
    (7,624
    )
    
    $
    452,981Access services
    
    
    
    
    
    
    184,344
    
    
    
    
    
    
    
    (4,510
    )
    
    
    179,834Long distance services
    
    
    
    
    
    
    20,504
    
    
    
    28,172
    
    
    
    (1,824
    )
    
    
    46,852Cellular services
    
    
    
    
    
    
    203,416
    
    
    
    
    
    
    
    (1,192
    )
    
    
    202,224Directory and other services and sales
    
    
    
    
    
    
    55,443
    
    
    
    1,116
    
    
    
    (8,080
    )
    
    
    48,479Total revenues
    
    
    
    
    
    
    900,021
    
    
    
    53,579
    
    
    
    (23,230
    )
    
    
    930,370OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    (4
    )
    
    
    787,303
    
    
    
    40,849
    
    
    
    (23,230
    )
    
    
    804,918OPERATING INCOME
    
    
    4
    
    
    
    112,718
    
    
    
    12,730
    
    
    
    
    
    
    
    125,452OTHER INCOME (EXPENSE), NET
    
    
    55,167
    
    
    
    (33,289
    )
    
    
    856
    
    
    
    (57,304
    )
    
    
    (34,570
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    55,171
    
    
    
    79,429
    
    
    
    13,586
    
    
    
    (57,304
    )
    
    
    90,882INCOME TAX EXPENSE
    
    
    
    
    
    
    30,633
    
    
    
    5,078
    
    
    
    
    
    
    
    35,711NET INCOME
    
    $
    55,171
    
    
    $
    48,796
    
    
    $
    8,508
    
    
    $
    (57,304
    )
    
    $
    55,171
 25




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Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    ConsolidatedCASH PROVIDED BY OPERATING ACTIVITIES
    
    $
    
    
    
    $
    432,441
    
    
    $
    (21,642
    )
    
    $
    410,799CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (98,115
    )
    
    
    (57
    )
    
    
    (98,172
    )Proceeds from sale of investment
    
    
    
    
    
    
    
    
    
    
    26,651
    
    
    
    26,651Net cash (used in) provided by investing activities
    
    
    
    
    
    
    (98,115
    )
    
    
    26,594
    
    
    
    (71,521
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments of short-term debt, including
capital leases
    
    
    (177,000
    )
    
    
    
    
    
    
    
    
    
    
    (177,000
    )Dividends paid
    
    
    (111,088
    )
    
    
    
    
    
    
    
    
    
    
    (111,088
    )Borrowings/(repayment) intercompany loans
    
    
    287,953
    
    
    
    (287,953
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (135
    )
    
    
    (287,953
    )
    
    
    
    
    
    
    (288,088
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (135
    )
    
    
    46,373
    
    
    
    4,952
    
    
    
    51,190CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    135
    
    
    
    31,130
    
    
    
    23,821
    
    
    
    55,086CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    
    
    
    $
    77,503
    
    
    $
    28,773
    
    
    $
    106,276
 26




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Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    ConsolidatedCASH
PROVIDED BY OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    176,832
    
    
    $
    2,914
    
    
    $
    179,746CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (114,450
    )
    
    
    (742
    )
    
    
    (115,192
    )Proceeds
from sale of fixed assets
    
    
    
    
    
    
    1,136
    
    
    
    
    
    
    
    1,136Net cash
used in investment investing activities
    
    
    
    
    
    
    (113,314
    )
    
    
    (742
    )
    
    
    (114,056
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments of short-term debt, including
capital leases
    
    
    (73,000
    )
    
    
    (129
    )
    
    
    
    
    
    
    (73,129
    )Dividends paid
    
    
    (18,123
    )
    
    
    
    
    
    
    
    
    
    
    (18,123
    )Borrowings/(repayment) intercompany loans
    
    
    91,036
    
    
    
    (91,036
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (87
    )
    
    
    (91,165
    )
    
    
    
    
    
    
    (91,252
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (87
    )
    
    
    (27,647
    )
    
    
    2,172
    
    
    
    (25,562
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    (149
    )
    
    
    44,658
    
    
    
    18,837
    
    
    
    63,346CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    (236
    )
    
    $
    17,011
    
    
    $
    21,009
    
    
    $
    37,784
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##### Table of Contents



17.
    
    Contingencies and Regulatory and Other MattersThe Company is a defendant in various legal matters arising in the ordinary course of business.
Management, after consultation with legal counsel, believes at this time that the resolution of
these matters will not have a material adverse effect on the Companys financial position and
results of operations. See Part I Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations  Regulatory and Other Matters for more information
regarding legal and regulatory matters.Regulatory activity at the federal and local levels has been primarily directed at meeting
challenges in maintaining support for local exchange rates and Universal Service while affecting
the rate rebalancing and regulatory restructuring required by an increasingly competitive
environment. Among the regulatory issues are: rate rebalancing, network interconnection,
inter-carrier compensation and insular relief.We continue to meet the wholesale requirements of new competitors and have signed agreements with
various wireless and wireline carriers. These agreements permit them to purchase unbundled
network elements, to resell retail services, and to interconnect their networks with ours.
 28




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
    
    
    Revenue Growth  Our emphasis is on revenue transformation, devoting more resources from
traditional markets, where we have been experiencing access line erosion, to higher growth
markets such as wireless and broadband, including digital subscriber lines (DSL), as well
as expanded data services to enterprise markets. For the quarter ended September 30, 2006,
our wireless and broadband services increased by 24% compared to the same period in 2005.For the quarter ended September 30, 2006, the growth of wireless
areas, in particular post-paid cellular services increased revenues
by 35% compared to the same period in 2005. This increase was
driven by the net increase of approximately 62,000 post-paid
wireless customers as of September 30, 2006 compared to the number
of customers as of September 30, 2005. The data and broadband
services revenues for the quarter ended September 30, 2006 increased
by 3% compared to the same period in 2005. This increase was driven
by DSL revenue growth. The number of the DSL customers as of
September 30, 2006 increased by approximately 40,000 compared to the
number of customers as of September 30, 2005.
    
    Operational Efficiency  While focusing resources on growth markets, we are continually
challenging our management team to reduce expenses, particularly through
technology-assisted productivity improvements. As of September 30, 2006, the Company had
reduced workforce levels compared to the same period in 2005, which we expect will provide
future benefits. At September 30, 2006, the Company had approximately 4,712 full-time
employees compared to 4,874 at September 30, 2005.
    
    Capital Allocation  Capital spending has been, and will continue to be, directed toward
growth markets, such as high-speed wireless data or Evolution Data Optimized (EV-DO)
technologies. Replacement of the TDMA network and expanded services offered to enterprise
markets are some examples of areas of capital spending which support these growth markets.
    
    Cash Flow Generation  The financial statements reflect the emphasis of management on
using cash provided by our operating and investing activities to significantly reduce debt
and to fund our pension plans.
  29




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30




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##### Table of Contents



CONSOLIDATED RESULTS OF OPERATIONS
  CONSOLIDATED REVENUES
 For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Local
    
    $
    142
    
    
    $
    154
    
    
    
    (8
    )%
    
    $
    446
    
    
    $
    453
    
    
    
    (2
    )%Network Access
    
    
    51
    
    
    
    62
    
    
    
    (18
    )
    
    
    159
    
    
    
    180
    
    
    
    (12
    )Long Distance
    
    
    15
    
    
    
    17
    
    
    
    (12
    )
    
    
    48
    
    
    
    47
    
    
    
    2Cellular
    
    
    95
    
    
    
    71
    
    
    
    34
    
    
    
    272
    
    
    
    202
    
    
    
    35Directory and Other
    
    
    14
    
    
    
    18
    
    
    
    (22
    )
    
    
    208
    
    
    
    48
    
    
    
    333Consolidated revenues
    
    $
    317
    
    
    $
    322
    
    
    
    (2
    )
    
    $
    1,133
    
    
    $
    930
    
    
    
    22
      CONSOLIDATED OPERATING EXPENSES
 For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    %Change
    
    
    2006
    
    
    2005
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Cost of services and sales
    
    $
    80
    
    
    $
    80
    
    
    
    (0
    )%
    
    $
    253
    
    
    $
    236
    
    
    
    7
    %Selling, general and administrative expenses
    
    
    121
    
    
    
    134
    
    
    
    (10
    )
    
    
    393
    
    
    
    388
    
    
    
    1Total consolidated operating expenses
    
    $
    201
    
    
    $
    214
    
    
    
    (6
    )
    
    $
    646
    
    
    $
    624
    
    
    
    3
 31




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##### Table of Contents



OTHER CONSOLIDATED RESULTS
 For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    %Change
    
    
    2006
    
    
    2005
    
    
    %Change(In millions)
    
    (In millions)Retirement and voluntary separation provision
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    $
    2
    
    
    
    (100
    )%Depreciation and amortization
    
    
    62
    
    
    
    60
    
    
    
    3
    
    
    
    185
    
    
    
    181
    
    
    
    2Interest expense and others
    
    
    10
    
    
    
    12
    
    
    
    (17
    )
    
    
    31
    
    
    
    34
    
    
    
    (9
    )Equity income in joint venture
    
    
    
    
    
    
    (1
    )
    
    
    (100
    )
    
    
    (28
    )
    
    
    (2
    )
    
    
    13Minority interest in consolidated subsidiary
    
    
    1
    
    
    
    1
    
    
    
    0
    
    
    
    2
    
    
    
    2
    
    
    
    0Income tax (benefit) expense
    
    
    17
    
    
    
    15
    
    
    
    13
    
    
    
    79
    
    
    
    36
    
    
    
    120Total Other Consolidated Results
    
    $
    90
    
    
    $
    87
    
    
    
    3
    
    
    $
    269
    
    
    $
    253
    
    
    
    6
 Retirement and Voluntary Separation Provisions
  Depreciation and Amortization Expense
  Interest Expense, net
  32




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##### Table of Contents



Equity Income From Joint Venture
  Gain On Sale Of Interest In Joint Venture
  Minority Interest In Consolidated Subsidiary
  Income Taxes
  SEGMENT RESULTS OF OPERATIONS
   
    
    Local services, including basic voice, telephone and telecommunications equipment
rentals, value-added services, high-speed data services, and Internet access;
    
    Long distance services including direct dial on-island and off-island, operator assisted
calls, and prepaid calling card;
    
    Access services to long distance carriers, competitive local exchange carriers, and
wireless operators for originating and terminating calls on the Companys network;
    
    Directory publishing rights services; and
    
    Telecommunication equipment sales and billing and collection services to competing long
distance operators in Puerto Rico.
  
    
    Postpaid and prepaid services; and
    
    Wireless equipment sales.
 33




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##### Table of Contents



WIRELINE REVENUES
 For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Local
    
    $
    148
    
    
    $
    159
    
    
    
    (7
    )%
    
    $
    461
    
    
    $
    465
    
    
    
    (1
    )%Network Access
    
    
    52
    
    
    
    63
    
    
    
    (17
    )
    
    
    162
    
    
    
    183
    
    
    
    (11
    )Long Distance
    
    
    15
    
    
    
    18
    
    
    
    (17
    )
    
    
    49
    
    
    
    49
    
    
    
    Directory and Other
    
    
    14
    
    
    
    18
    
    
    
    (22
    )
    
    
    209
    
    
    
    49
    
    
    
    327Total Wireline
    
    $
    229
    
    
    $
    258
    
    
    
    (11
    )
    
    $
    881
    
    
    $
    746
    
    
    
    18
 OPERATING DATA
 For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeAccess Lines in Service (000s):Residential
    
    
    789
    
    
    
    863
    
    
    
    -9
    %
    
    
    789
    
    
    
    863
    
    
    
    -9
    %Business
    
    
    256
    
    
    
    273
    
    
    
    -6
    %
    
    
    256
    
    
    
    273
    
    
    
    -6
    %Total
    
    
    1,045
    
    
    
    1,136
    
    
    
    -8
    %
    
    
    1,045
    
    
    
    1,136
    
    
    
    -8
    %
   Local Services
   Network Access
  34




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##### Table of Contents



Long Distance
   Directory and Other
   WIRELINE EXPENSES AND CHARGES
 For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    %Change
    
    
    2006
    
    
    2005
    
    
    %Change(In millions)
    
    
    (In millions)Cost of services and sales
    
    $
    49
    
    
    $
    55
    
    
    
    (11
    )%
    
    $
    166
    
    
    $
    162
    
    
    
    3
    %Selling, general and administrative expenses
    
    
    95
    
    
    
    106
    
    
    
    (11
    )
    
    
    315
    
    
    
    306
    
    
    
    3Total Wireline
    
    $
    144
    
    
    $
    161
    
    
    
    (11
    )
    
    $
    481
    
    
    $
    468
    
    
    
    3
  Cost of Services and Sales
   35




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##### Table of Contents



Selling, General and Administrative Expenses
   WIRELESS REVENUES
 For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % Change(In millions)
    
    
    
    
    
    
    (In millions)Postpaid Cellular
    
    $
    67
    
    
    $
    56
    
    
    
    20
    %
    
    $
    192
    
    
    $
    154
    
    
    
    25
    %Prepaid Cellular
    
    
    6
    
    
    
    4
    
    
    
    1
    
    
    
    15
    
    
    
    12
    
    
    
    25Total Cellular
    
    
    73
    
    
    
    60
    
    
    
    22
    
    
    
    207
    
    
    
    166
    
    
    
    25Wireless Equipment and Other
    
    
    23
    
    
    
    13
    
    
    
    77
    
    
    
    67
    
    
    
    39
    
    
    
    72Total Wireless
    
    $
    96
    
    
    $
    73
    
    
    
    32
    
    
    $
    274
    
    
    $
    205
    
    
    
    34
 OPERATING DATA
 For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeCellular Customers (000s):Postpaid
    
    
    425
    
    
    
    362
    
    
    
    17
    %
    
    
    425
    
    
    
    362
    
    
    
    17
    %Prepaid
    
    
    103
    
    
    
    96
    
    
    
    7
    
    
    
    103
    
    
    
    96
    
    
    
    7Total
    
    
    528
    
    
    
    458
    
    
    
    15
    
    
    
    528
    
    
    
    458
    
    
    
    15Postpaid Cellular Average Revenue Per Unit (ARPU)
    
    $
    53
    
    
    $
    53
    
    
    
    
    %
    
    $
    53
    
    
    $
    53
    
    
    
    
    %Prepaid Cellular ARPU
    
    
    20
    
    
    
    13
    
    
    
    54
    
    
    
    16
    
    
    
    14
    
    
    
    14Combined Cellular ARPU
    
    
    47
    
    
    
    43
    
    
    
    9
    
    
    
    46
    
    
    
    44
    
    
    
    5
  Total Cellular Revenues
   36




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Wireless Equipment and Other
   WIRELESS EXPENSES AND CHARGES
 For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    %Change(In millions)
    
    
    
    
    
    
    (In millions)Cost of services and sales
    
    $
    33
    
    
    $
    28
    
    
    
    18
    %
    
    $
    93
    
    
    $
    80
    
    
    
    16
    %Selling, general and administrative expenses
    
    
    33
    
    
    
    33
    
    
    
    0
    
    
    
    95
    
    
    
    93
    
    
    
    2Total Wireless
    
    $
    66
    
    
    $
    61
    
    
    
    8
    
    
    $
    188
    
    
    $
    173
    
    
    
    9
    %
  Cost of Services and Sales
   Selling, General and Administrative Expenses
   37




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 CONSOLIDATED FINANCIAL CONDITION
 For the Nine Months Ended September 30,2006
    
    2005
    
    Change(in millions)Cash flows from (used in):Operations
    
    $
    411
    
    
    $
    180
    
    
    $
    231Investing
    
    
    (72
    )
    
    
    (114
    )
    
    
    42Financing
    
    
    (288
    )
    
    
    (91
    )
    
    
    (197
    )
           38




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##### Table of Contents



REGULATORY AND OTHER MATTERS
 REGULATORY AND COMPETITIVE TRENDS
   RATE REBALANCING
    39




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##### Table of Contents



TOUCHTONE CHARGES
       CTI ASSET TRANSFER
   40




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##### Table of Contents



PRICE CAP REGULATION
    HIGH COST SUPPORT FOR INSULAR RELIEF
  MUNICIPAL RIGHT OF WAY FEES
  PRTC v. Guayanilla
 41




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##### Table of Contents



PRT v Municipality of Caguas PRTC v. Municipality of Ponce PRTC v. Municipality
of Utuado PRT v. Municipality of Cidra PRT v. Municipality of Vega Baja PRT v.
Municipality of Cataño
  INTERCONNECTION DISPUTE
  SUBSCRIBER LINE CHARGE (SLC)
   CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   42




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
 General
    Allowance for Doubtful Accounts
  Deferred Taxes
  43




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Property, Plant and Equipment and Depreciation
   44




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Fair ValueAssuming 100 Basis PointCarrying Amount
    
    
    Fair Value
    
    
    Increase
    
    
    Decrease(In thousands)September 30, 2006:Senior notes
    
    $
    299,942
    
    
    $
    307,782
    
    
    $
    300,544
    
    
    $
    315,238December 31, 2005:Senior notes
    
    $
    699,919
    
    
    $
    711,120
    
    
    $
    700,558
    
    
    $
    722,038Interest rate swap
    
    
    (1,080
    )
    
    
    (1,080
    )
    
    
    (1,446
    )
    
    
    (713
    )Total
    
    $
    698,839
    
    
    $
    710,040
    
    
    $
    699,112
    
    
    $
    721,325
 45




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   46




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  47




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##### Table of Contents



SIGNATURES
   By:
Name:
    
    /s/ Cristina M, Lambert

Cristina M. LambertTitle:
    
    President and Chief Executive OfficerDate:
    
    November 14, 2006By:
Name:
    
    /s/ Héctor Houssay

Héctor HoussayTitle:
    
    Vice President Finance and Chief Financial OfficerDate:
    
    November 14, 2006
 48




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##### Table of Contents



EXHIBIT INDEX
 EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    
    Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).3.2
    
    
    Certificate of Amendment to the Certificate of Incorporation
of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.2 of the Companys Annual Report on
Form 10-K for the year ended December 31, 1999
(File
333-85503)).3.3
    
    
    By-Laws of Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 3.4 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).4.1
    
    
    Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York. (Incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.1
    
    
    Shareholders Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc., GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority
and the shareholders of Telecomunicaciones de Puerto Rico,
Inc., who shall from time to time be parties thereto as
provided therein. (Incorporated by reference to Exhibit 10.5
of the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.2
    
    
    Non-Competition Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc, GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority,
and the Government Development Bank for Puerto Rico.
(Incorporated by reference to Exhibit 10.9 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.3
    
    
    Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of March 2,
1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.12 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.4
    
    
    ESOP Loan Agreement, dated as of March 2, 1999, by and
between the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.13 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.5
    
    
    Pledge Agreement, dated as of March 2, 1999, by and between
the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.15 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.6
    
    
    Tag Along Agreement, dated as of March 2, 1999, by and among
GTE Holdings (Puerto Rico) LLC, GTE International
Telecommunications Incorporated, and the Trust of the
Employee Stock Ownership Plan of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 10.16 of
the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.7
    
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Merrill Lynch Money Markets Inc., as
Dealer for notes with maturities up to 240 days; Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Dealer for
notes with maturities over 270 days up to 365 days.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.25 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).10.8
    
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Salomon Smith Barney Inc., as Dealer.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.26
of the Companys Annual Report on Form 10-K for the year
ended December 31, 2000 (File 333-85503)).
 49




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.9
    
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Banc of America Securities LLC.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.27 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).10.10
    
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Popular Securities, Inc., as Dealer for
notes with maturities up to 365 days. Concerning notes to be
issued pursuant to an Issuing and Paying Agency Agreement
dated as of November 9, 2000 between the Issuer and The Chase
Manhattan Bank, as Issuing and Paying Agent. (Incorporated
by reference to Exhibit 10.28 of the Companys Annual Report
on Form 10-K for the year ended December 31, 2000 (File
333-85503)).10.11
    
    
    Issuing and Paying Agency Agreement dated as of November 9,
2000, by and among Telecomunicaciones de Puerto Rico, Inc.,
as Issuer, Puerto Rico Telephone Company and Celulares
Telefónica, Inc., as Guarantors, and The Chase Manhattan
Bank, as Issuing and Paying Agent. (Incorporated by
reference to Exhibit 10.29 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2000 (File
333-85503)).10.12
    
    
    Letter Amendment, to the March 2, 1999 Shareholders
Agreement, dated as of May 25, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto
Rico) LLC, GTE International Telecommunications Incorporated,
Popular, Inc., and the Puerto Rico Telephone Authority.
(Incorporated by reference to Exhibit 10.25 of the Companys
Quarterly Report on Form 10-Q for the period ended June 30,
2001 (File 333-85503)).10.13
    
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc.,
as Guarantors, and Bank of America, N.A., as the Bank.
(Incorporated by reference to Exhibit 10.27 of the Companys
Quarterly Report on Form 10-Q for the period ended September
30, 2001 (File 333-85503)).10.14
    
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc.,
as Guarantors, and Citibank, N.A., as the Bank.
(Incorporated by reference to Exhibit 10.28 of the Companys
Quarterly Report on Form 10-Q for the period ended September
30, 2001 (File 333-85503)).10.15
    
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Brotherhood of
Telephone Company Employees effective from January 1, 2004
until December 31, 2008. Approved on April 15, 2004.
(Incorporated by reference to Exhibit 10.29 of the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 (File 333-85503)).10.16
    
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2003
until January 17, 2006. Approved on February 13, 2003.
English Version. (Incorporated by reference to Exhibit 10.31
of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.17
    
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Brotherhood of
Telephone Company Employees effective from January 1, 2004
until December 31, 2008. Approved on April 15, 2004.
English Version. (Incorporated by reference to Exhibit 10.32
of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.18
    
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2006
until January 17, 2011. Approved on October 20, 2005.
(Incorporated by reference to Exhibit 10.24 of the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (File 333-85503)).
 50




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EXHIBITNUMBER
    
    DESCRIPTION10.19
    
    
    $600,000,000 Credit Agreement dated as of February 28, 2006,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
Puerto Rico Telephone Company, Inc., as Guarantor, the
Initial Lenders named therein, Citibank, N.A., as
Administrative Agent, Banco Bilbao Vizcaya Argentaria Puerto
Rico and Scotiabank of Puerto Rico, as Co-Syndication Agents,
and Banco Popular de Puerto Rico and The Bank of
Tokyo-Mitsubishi UFG, LTD., New York Branch, as
Co-documentation Agents. (Incorporated by reference to
Exhibit 10.23 of the Companys Annual Report on Form 10-K for
the year ended December 31, 2005 (File 333-85503)).10.20
    
    
    ESOP Loan Agreement dated as of November 4, 2005, by and
between the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.24 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2005 (File
333-85503)).10.21
    
    
    Share and publication rights purchase agreement dated as of
February 28, 2006 by an d between PRTC Directories, Inc.,
Puerto Rico Telephone Company, Inc. and CII Acquisition Corp
(Incorporated by reference to Exhibit 10.24 of the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006 (File 333-85503)).31.1
    
    
    Certification of Principal Executive Officer (Filed herewith).31.2
    
    
    Certification of Principal Financial Officer (Filed herewith).32.1
    
    
    Certification Required by 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Filed herewith).
 51