CENTURYLINK, INC, 10-Q filed on 8/6/2010
Quarterly Report
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (USD $)
In Thousands, except Per Share data
3 Months Ended
Jun. 30, 2010
6 Months Ended
Jun. 30, 2010
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
Income Statement [Abstract]
 
 
 
 
OPERATING REVENUES
$ 1,772,030 
$ 3,572,456 
$ 634,469 
$ 1,270,854 
OPERATING EXPENSES
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)
589,420 
1,208,525 
235,732 
470,363 
Selling, general and administrative
301,671 
584,600 
120,742 
230,587 
Depreciation and amortization
357,951 
711,113 
128,552 
256,124 
Total operating expenses
1,249,042 
2,504,238 
485,026 
957,074 
OPERATING INCOME
522,988 
1,068,218 
149,443 
313,780 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest expense
(143,249)
(285,474)
(44,937)
(96,969)
Other income (expense)
7,308 
17,808 
7,635 
5,817 
Total other income (expense)
(135,941)
(267,666)
(37,302)
(91,152)
INCOME BEFORE INCOME TAX EXPENSE
387,047 
800,552 
112,141 
222,628 
Income tax expense
147,921 
308,469 
42,813 
85,920 
NET INCOME
239,126 
492,083 
69,328 
136,708 
Less: Net income attributable to noncontrolling interests
(355)
(711)
(298)
(524)
NET INCOME ATTRIBUTABLE TO CENTURYLINK, INC.
238,771 
491,372 
69,030 
136,184 
BASIC EARNINGS PER SHARE
0.79 
1.63 
0.68 
1.35 
DILUTED EARNINGS PER SHARE
0.79 
1.63 
0.68 
1.35 
DIVIDENDS PER COMMON SHARE
0.725 
1.45 
0.70 
1.40 
AVERAGE BASIC SHARES OUTSTANDING
300,058 
299,736 
99,414 
99,270 
AVERAGE DILUTED SHARES OUTSTANDING
300,605 
300,301 
99,450 
99,297 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (USD $)
In Thousands
3 Months Ended
Jun. 30, 2010
6 Months Ended
Jun. 30, 2010
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
Statement of Income and Comprehensive Income [Abstract]
 
 
 
 
NET INCOME
$ 239,126 
$ 492,083 
$ 69,328 
$ 136,708 
Derivative instruments:
 
 
 
 
Reclassification adjustment for losses included in net income, net of $67, $67, $134 and $134 tax
107 
214 
107 
214 
Defined benefit pension and postretirement plans:
 
 
 
 
Defined benefit pension and postretirement plans, net of $1,510, $1,263, $(12,297) and $5,488 tax
2,422 
(6,982)
2,026 
8,803 
Net change in other comprehensive income (loss), net of tax
2,529 
(6,768)
2,133 
9,017 
COMPREHENSIVE INCOME
241,655 
485,315 
71,461 
145,725 
Comprehensive income attributable to noncontrolling interests
(355)
(711)
(298)
(524)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CENTURYLINK, INC.
$ 241,300 
$ 484,604 
$ 71,163 
$ 145,201 
PARENTHETICAL DATA TO THE CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (USD $)
In Thousands
3 Months Ended
Jun. 30, 2010
6 Months Ended
Jun. 30, 2010
3 Months Ended
Jun. 30, 2009
6 Months Ended
Jun. 30, 2009
Statement of Income and Comprehensive Income [Abstract]
 
 
 
 
Reclassification adjustment for losses included in net income, tax
$ 67 
$ 134 
$ 67 
$ 134 
Defined benefit pension and postretirement plans, tax
$ 1,510 
$ (12,297)
$ 1,263 
$ 5,488 
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (USD $)
In Thousands
Jun. 30, 2010
Dec. 31, 2009
ASSETS
 
 
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 186,357 
$ 161,807 
Accounts receivable, less allowance of $51,436 and $47,450
702,030 
685,589 
Income tax receivable
42,261 
115,684 
Materials and supplies, at average cost
35,599 
35,755 
Deferred income tax asset
73,890 
83,319 
Other
43,513 
41,437 
Total current assets
1,083,650 
1,123,591 
NET PROPERTY, PLANT AND EQUIPMENT
 
 
Property, plant and equipment
15,876,487 
15,556,763 
Accumulated depreciation
(7,010,016)
(6,459,624)
Net property, plant and equipment
8,866,471 
9,097,139 
GOODWILL AND OTHER ASSETS
 
 
Goodwill
10,260,640 
10,251,758 
Other
1,988,823 
2,090,241 
Total goodwill and other assets
12,249,463 
12,341,999 
TOTAL ASSETS
22,199,584 
22,562,729 
LIABILITIES AND EQUITY
 
 
CURRENT LIABILITIES
 
 
Current maturities of long-term debt
496,559 
500,065 
Accounts payable
299,066 
394,687 
Accrued expenses and other liabilities
 
 
Salaries and benefits
243,401 
255,103 
Other taxes
148,175 
98,743 
Interest
120,163 
108,020 
Other
141,169 
168,203 
Advance billings and customer deposits
181,053 
182,374 
Total current liabilities
1,629,586 
1,707,195 
LONG-TERM DEBT
7,178,646 
7,253,653 
DEFERRED CREDITS AND OTHER LIABILITIES
 
 
Deferred income taxes
2,216,831 
2,256,579 
Benefit plan obligations
1,229,006 
1,485,643 
Other deferred credits
394,419 
392,860 
Total deferred credits and other liabilities
3,840,256 
4,135,082 
STOCKHOLDERS' EQUITY
 
 
CenturyLink, Inc.
 
 
Common stock, $1.00 par value, authorized 800,000,000 shares, issued and outstanding 301,265,872 and 299,189,279 shares
301,266 
299,189 
Paid-in capital
6,048,168 
6,014,051 
Accumulated other comprehensive loss, net of tax
(92,074)
(85,306)
Retained earnings
3,287,225 
3,232,769 
Preferred stock - non-redeemable
236 
236 
Noncontrolling interests
6,275 
5,860 
Total stockholders' equity
9,551,096 
9,466,799 
TOTAL LIABILITIES AND EQUITY
$ 22,199,584 
$ 22,562,729 
PARENTHETICAL DATA TO THE CONSOLIDATED BALANCE SHEETS (UNAUDITED) (USD $)
In Thousands, except Share and Per Share data
Jun. 30, 2010
Dec. 31, 2009
CURRENT ASSETS
 
 
Accounts receivable, allowance
$ 51,436 
$ 47,450 
STOCKHOLDERS' EQUITY
 
 
Common stock, par value
1.00 
1.00 
Common stock, authorized shares
800,000,000 
800,000,000 
Common stock, issued shares
301,265,872 
299,189,279 
Common stock, outstanding shares
301,265,872 
299,189,279 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $)
In Thousands
6 Months Ended
Jun. 30,
2010
2009
Statement of Cash Flows [Abstract]
 
 
OPERATING ACTIVITIES
 
 
NET INCOME
$ 492,083 
$ 136,708 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
711,113 
256,124 
Deferred income taxes
(17,467)
25,831 
Share-based compensation
18,126 
9,859 
Income from unconsolidated cellular entity
(9,787)
(9,914)
Distributions from unconsolidated cellular entity
9,134 
9,602 
Changes in current assets and current liabilities:
 
 
Receivables
(16,441)
31,192 
Accounts payable
(95,621)
4,761 
Accrued income and other taxes
114,945 
31,094 
Other current assets and other current liabilities, net
(24,240)
(3,425)
Retirement benefits
(279,509)
(14,537)
Excess tax benefits from share-based compensation
(3,636)
(753)
(Increase) decrease in other noncurrent assets
(19,112)
2,542 
Increase (decrease) in other noncurrent liabilities
1,581 
(4,823)
Other, net
0 
7,944 
Net cash provided by operating activities
881,169 
482,205 
INVESTING ACTIVITIES
 
 
Payments for property, plant and equipment
(362,226)
(130,801)
Other, net
2,263 
210 
Net cash used in investing activities
(359,963)
(130,591)
FINANCING ACTIVITIES
 
 
Payments of debt
(78,513)
(394,666)
Proceeds from issuance of common stock
26,432 
7,295 
Repurchase of common stock
(13,394)
(4,786)
Cash dividends
(436,916)
(141,105)
Excess tax benefits from share-based compensation
3,636 
753 
Other, net
2,099 
(3,288)
Net cash used in financing activities
(496,656)
(535,797)
Net increase (decrease) in cash and cash equivalents
24,550 
(184,183)
Cash and cash equivalents at beginning of period
161,807 
243,327 
Cash and cash equivalents at end of period
186,357 
59,144 
Supplemental cash flow information
 
 
Income taxes paid
247,866 
24,168 
Interest paid (net of capitalized interest of $7,483 and $572)
$ 265,848 
$ 98,906 
PARENTHETICAL DATA TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $)
In Thousands
6 Months Ended
Jun. 30,
2010
2009
Supplemental cash flow information
 
 
Capitalized Interest
$ 7,483 
$ 572 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (USD $)
In Thousands
COMMON STOCK
PAID-IN CAPITAL
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX
RETAINED EARNINGS
PREFERRED STOCK - NON-REDEEMABLE
NONCONTROLLING INTERESTS
Total
1/1/2009 - 6/30/2009
 
 
 
 
 
 
 
Balance at beginning of period
$ 100,277 
$ 39,961 
$ (123,489)
$ 3,146,255 
$ 236 
$ 4,568 
$ 3,167,808 
Issuance of common stock through dividend reinvestment, incentive and benefit plans
1,043 
6,252 
 
 
 
 
7,295 
Shares withheld to satisfy tax withholdings
(180)
(4,606)
 
 
 
 
(4,786)
Excess tax benefits from share-based compensation
 
753 
 
 
 
 
753 
Share-based compensation and other
 
10,952 
 
 
 
 
10,952 
Change in other comprehensive loss (net of reclassification adjustment), net of tax
 
 
9,017 
 
 
 
9,017 
Net income attributable to CenturyLink, Inc.
 
 
 
136,184 
 
 
136,184 
Cash dividends declared
 
 
 
 
 
 
 
Common stock - $1.45 and $1.40 per share, respectively
 
 
 
(141,099)
 
 
(141,099)
Preferred stock
 
 
 
(6)
 
 
(6)
Net income attributable to noncontrolling interests
 
 
 
 
 
524 
524 
Distributions attributable to noncontrolling interests
 
 
 
 
 
(320)
(320)
Balance at end of period
101,140 
53,312 
(114,472)
3,141,334 
236 
4,772 
3,186,322 
1/1/2010 - 6/30/2010
 
 
 
 
 
 
 
Balance at beginning of period
299,189 
6,014,051 
(85,306)
3,232,769 
236 
5,860 
9,466,799 
Issuance of common stock through dividend reinvestment, incentive and benefit plans
2,460 
23,972 
 
 
 
 
26,432 
Shares withheld to satisfy tax withholdings
(383)
(13,011)
 
 
 
 
(13,394)
Excess tax benefits from share-based compensation
 
3,636 
 
 
 
 
3,636 
Share-based compensation and other
 
19,520 
 
 
 
 
19,520 
Change in other comprehensive loss (net of reclassification adjustment), net of tax
 
 
(6,768)
 
 
 
(6,768)
Net income attributable to CenturyLink, Inc.
 
 
 
491,372 
 
 
491,372 
Cash dividends declared
 
 
 
 
 
 
 
Common stock - $1.45 and $1.40 per share, respectively
 
 
 
(436,910)
 
 
(436,910)
Preferred stock
 
 
 
(6)
 
 
(6)
Net income attributable to noncontrolling interests
 
 
 
 
 
711 
711 
Distributions attributable to noncontrolling interests
 
 
 
 
 
(296)
(296)
Balance at end of period
$ 301,266 
$ 6,048,168 
$ (92,074)
$ 3,287,225 
$ 236 
$ 6,275 
$ 9,551,096 
PARENTHETICAL DATA TO THE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (USD $)
6 Months Ended
Jun. 30,
2010
2009
Cash dividends declared
 
 
Common stock, dividends per share
$ 1.45 
$ 1.40 
Basis of Financial Reporting
Basis of Financial Reporting
(1)
Basis of Financial Reporting

Our consolidated financial statements include the accounts of CenturyLink, Inc. ("CenturyLink", formerly named CenturyTel, Inc.) and its majority-owned subsidiaries.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission; however, in the opinion of management, the disclosures made are adequate to make the information presented not misleading. The consolidated financial statements and notes included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2009.

The financial information for the three months and six months ended June 30, 2010 and 2009 has not been audited by independent certified public accountants; however, in the opinion of management, all adjustments necessary to present fairly the results of operations for the three-month and six-month periods have been included therein. The results of operations for the first six months of the year are not necessarily indicative of the results of operations which might be expected for the entire year.

As more fully described in Note 9, we have reclassified subscriber line charge revenues to "Voice" revenues from "Network access" revenues for all periods presented.  In addition, we have included the revenues from our fiber transport, CLEC and security monitoring operations in "Other" revenues for all periods presented.

Embarq Acquisition
Embarq Acquisition
(2)
Embarq Acquisition

On July 1, 2009, we acquired Embarq Corporation (“Embarq”) through a merger transaction, with Embarq surviving the merger as a wholly-owned subsidiary of CenturyLink.  We accounted for such acquisition pursuant to Financial Accounting Standards Board guidance on business combinations, which has been effective for all business combinations consummated on or after January 1, 2009, as more fully described below.
 
As a result of the acquisition, each outstanding share of Embarq common stock was converted into the right to receive 1.37 shares of CenturyLink common stock (“CTL common stock”), with cash paid in lieu of fractional shares. Based on the number of CenturyLink common shares issued to consummate the merger (196.1 million), the closing stock price of CTL common stock as of June 30, 2009 ($30.70) and the pre-combination portion of share-based compensation awards assumed by CenturyLink ($50.2 million), the aggregate merger consideration approximated $6.1 billion.  The premium paid by us in this transaction is attributable to strategic benefits, including enhanced financial and operational scale, market diversification, leveraged combined networks and improved competitive positioning.  None of the goodwill associated with this transaction is deductible for income tax purposes.

The results of operations of Embarq are included in our consolidated results of operations beginning July 1, 2009.  Approximately $2.486 billion of operating revenues of Embarq are included in our consolidated results of operations for the first six months of 2010.  CenturyLink was the accounting acquirer in this transaction.  We have recognized Embarq’s assets and liabilities at their acquisition date estimated fair values pursuant to business combination accounting rules that are effective for acquisitions consummated on or after January 1, 2009.  The assignment of a fair value to the assets acquired and liabilities assumed of Embarq (and the related estimated lives of depreciable tangible and identifiable intangible assets) require a significant amount of judgment.  The fair value of property, plant and equipment and identifiable intangible assets were determined based upon analysis performed by an independent valuation firm.  The fair value of pension and postretirement obligations was determined by independent actuaries.  The fair value of long-term debt was determined by management based on a discounted cash flow analysis, using the rates and maturities of these obligations compared to terms and rates currently available in the long-term financing markets.  All other fair value determinations, which consisted primarily of current assets, current liabilities and deferred income taxes, were made by management.  The following is the assignment of the fair value of the assets acquired and liabilities assumed for the Embarq acquisition.
 
 
   
Fair value
 
   
as of July 1, 2009
 
   
(Dollars in thousands)
 
     
Current assets
 $675,720 
Net property, plant and equipment
  6,077,672 
Identifiable intangible assets
    
Customer list
  1,098,000 
Rights of way
  268,472 
Other (trademarks, internally developed software, licenses)
  26,817 
Other non-current assets
  24,131 
Current liabilities
  (837,132)
Long-term debt, including current maturities
  (4,886,708)
Other long-term liabilities
  (2,621,493)
Goodwill
  6,244,966 
        Total purchase price
 $6,070,445 
 
 
The following unaudited pro forma financial information presents the combined results of CenturyLink and Embarq as though the acquisition had been consummated as of January 1, 2009.
 
 
   
Six months
 
   
ended June 30,
 
   
2009
 
   
(Dollars in thousands,
except per share amounts)
 
     
Operating revenues
 $3,942,000 
Net income attributable to CenturyLink, Inc.
 $519,000 
Basic earnings per share before extraordinary item
 $1.75 
Diluted earnings per share before extraordinary item
 $1.75 
 
 
These results include certain adjustments, primarily due to adjustments to depreciation and amortization associated with the property, plant and equipment and identifiable intangible assets, increased retiree benefit costs due to the remeasurement of the benefit obligations, and the related income tax effects.  Pro forma operating revenues for the six months ended June 30, 2009 include approximately $104 million of revenues that would have been eliminated had our July 1, 2009 discontinuance of the application of regulatory accounting (discussed further in Part I, Item 2 of this report) been effective as of January 1, 2009.  The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the period indicated nor is it necessarily indicative of future operating results.  The pro forma information does not give effect to any (i) potential revenue enhancements or cost synergies or other operating efficiencies that could result from the acquisition or (ii) transaction or integration costs relating to the acquisition.
Pending Acquisition of Qwest
Pending Acquisition of Qwest
(3)
Pending Acquisition of Qwest

On April 21, 2010, we entered into a definitive agreement under which we propose to acquire Qwest Communications International Inc. (“Qwest”) in a tax-free stock-for-stock transaction.  Under the terms of the agreement, Qwest shareholders will receive 0.1664 CenturyLink shares for each share of Qwest common stock they own at closing.  CenturyLink shareholders are expected to own approximately 50.5% and Qwest shareholders are expected to own approximately 49.5% of the combined company at closing.  As of June 30, 2010, Qwest had outstanding approximately (i) 1.737 billion shares of common stock and (ii) $13.083 billion of long-term debt.

Completion of the transaction is subject to the receipt of regulatory approvals, including approvals from the Federal Communications Commission and certain state public service commissions.  The transaction is also subject to the approval of CenturyLink and Qwest shareholders at meetings scheduled for August 24, 2010, as well as other customary closing conditions.  Subject to these conditions, we anticipate closing this transaction in the first half of 2011.  If the merger agreement is terminated under certain circumstances, we may be obligated to pay Qwest a termination fee of $350 million or Qwest may be obligated to pay CenturyLink a termination fee of $350 million.
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
(4)
Goodwill and Other Intangible Assets

Goodwill and other intangible assets as of June 30, 2010 and December 31, 2009 were composed of the following:

   
June 30,
  
Dec. 31,
 
   
2010
  
2009
 
   
(Dollars in thousands)
 
        
Goodwill
 $10,260,640   10,251,758 
          
Intangible assets subject to amortization
        
   Customer list
        
Gross carrying amount
 $1,279,308   1,279,308 
Accumulated amortization
  (253,726)  (148,491)
Net carrying amount
 $1,025,582   1,130,817 
          
Other
        
Gross carrying amount
 $69,567   69,567 
Accumulated amortization
  (25,131)  (22,466)
Net carrying amount
 $44,436   47,101 
          
Other intangible assets not subject to amortization
 $268,500   268,500 
 
 
The change in the balance of goodwill from December 31, 2009 is attributable to the finalization of the assignment of fair value to Embarq's assets and liabilities acquired (primarily certain contingent liabilities and deferred income taxes) in connection with our July 1, 2009 acquisition of Embarq.

Total amortization expense related to the intangible assets subject to amortization for the first six months of 2010 was $107.9 million and is expected to be $206.3 million for the full year 2010, $185.6 million in 2011, $164.5 million in 2012, $145.2 million in 2013 and $126.0 million in 2014.
Postretirement Benefits
Postretirement Benefits
(5)
Postretirement Benefits

We sponsor health care plans that provide postretirement benefits to qualified retired employees.

Net periodic postretirement benefit cost for the three months and six months ended June 30, 2010 (which includes the effects of our July 1, 2009 acquisition of Embarq) and 2009 included the following components:

   
Three months
  
Six months
 
   
ended June 30,
  
ended June 30,
 
   
2010
  
2009
  
2010
  
2009
 
   
(Dollars in thousands)
 
              
Service cost
 $3,335   1,317   6,669   2,526 
Interest cost
  8,187   4,899   16,375   9,797 
Expected return on plan assets
  (981)  (346)  (1,962)  (693)
Amortization of unrecognized prior service cost
  (343)  (887)  (686)  (1,773)
Net periodic postretirement benefit cost
 $10,198   4,983   20,396   9,857 
Defined Benefit Retirement Plans
Defined Benefit Retirement Plans
(6)
Defined Benefit Retirement Plans

We sponsor defined benefit pension plans for substantially all employees, including separate plans for legacy CenturyLink employees and legacy Embarq employees.   Until such time as we elect to integrate Embarq's benefit plans with ours, we plan to continue to operate these plans independently.  Upon payment of certain lump sum distributions in early 2009, we recognized a settlement loss (which is included in selling, general and administrative expense) of approximately $7.7 million in the first quarter of 2009.

Net periodic pension expense for the three months and six months ended June 30, 2010 (which includes the effects of our July 1, 2009 acquisition of Embarq) and 2009 included the following components:

   
Three months
  
Six months
 
   
ended June 30,
  
ended June 30,
 
   
2010
  
2009
  
2010
  
2009
 
   
(Dollars in thousands)
 
              
Service cost
 $17,169   3,493   33,101   6,987 
Interest cost
  58,384   6,621   121,661   13,252 
Expected return on plan assets
  (71,478)  (6,964)  (141,514)  (13,928)
Settlement loss
  -   -   -   7,711 
Net amortization and deferral
  3,307   4,176   10,224   8,352 
Net periodic pension expense
 $7,382   7,326   23,472   22,374 
 
 
We contributed $300 million to the legacy Embarq pension plan in the first quarter of 2010.  Based on current actuarial estimates, we expect to be required to make a minimum contribution of approximately $37 million to the legacy Embarq pension plan in 2011.  Based on current circumstances, our minimum required contributions to our other pension plans are immaterial.  The actual level of contribution required in future years can change significantly depending on prevailing discount rates and actual returns on plan assets.
Stock-based Compensation
Stock Based Compensation
(7)
Stock-based Compensation

We recognize as compensation expense our cost of awarding employees with equity instruments by allocating the fair value of the award on the grant date over the period during which the employee is required to provide service in exchange for the award.

We currently maintain programs which allow the Board of Directors (through its Compensation Committee) and the Chief Executive Officer to grant incentives to certain employees and our outside directors in any one or a combination of several forms, including incentive and non-qualified stock options; stock appreciation rights; restricted stock; restricted stock units and performance shares.  As of June 30, 2010, we had reserved approximately 30.0 million shares of common stock which may be issued in connection with awards under our current incentive programs.  We also offer an Employee Stock Purchase Plan whereby employees can purchase our common stock at a 15% discount based on the lower of the beginning or ending stock price during recurring six-month periods stipulated in such program.
 
Our outstanding restricted stock awards generally vest over a three- or five-year period (for employees) or a three-year period (for outside directors).   During the first quarter of 2010, 396,753 shares of restricted stock were granted to certain executive-level employees, of which 198,374 were time-vested restricted stock that vests over a three-year period and 198,379 were performance-based restricted stock.   The performance-based restricted stock will vest over time only if specific performance measures are met for the applicable periods.  One half of the performance based restricted stock will vest in March 2012 based on our two-year total shareholder return for 2010 and 2011 as measured against the total shareholder return of the companies comprising the S&P 500 Index for the same period.  The other half will vest in March 2013 based on our three-year total shareholder return for 2010, 2011 and 2012 as measured against the total shareholder return of the companies comprising the S&P 500 Index for the same period.  The 198,379 shares of performance-based restricted stock issued represent the target award.  Each recipient has the opportunity to ultimately receive between 0% and 200% of the target restricted stock award depending on our total shareholder return in relation to that of the S&P 500 Index.   We valued these performance-based awards using Monte-Carlo simulations.  In addition, during the first half of 2010, 499,438 shares of time-vested restricted stock (which vest over a three-year period) were granted to certain other key employees and our outside directors.

As of June 30, 2010, there were 2,645,000 shares of nonvested restricted stock outstanding at an average grant date fair value of $32.34 per share.

The total compensation cost for all share-based payment arrangements for the first six months of 2010 and 2009 was $18.1 million and $9.9 million, respectively.  As of June 30, 2010, there was $61.6 million of total unrecognized compensation cost related to our share-based payment arrangements, which we expect to recognize over a weighted-average period of 2.2 years.
Income Taxes
Income Taxes
(8)
Income Taxes

Our effective income tax rate was 38.6% and 38.7% for the six months ended June 30, 2010 and 2009, respectively.

Included in income tax expense for the first quarter of 2010 is a $4.0 million charge related to the change in the tax treatment of the Medicare Part D subsidy as a result of the comprehensive health care reform legislation signed into law by the President in March 2010.  In addition, a portion of our transaction costs associated with our pending acquisition of Qwest is considered non-deductible for income tax purposes.  The treatment of these costs as non-deductible resulted in the recognition of approximately $1.4 million of higher income tax expense in the first six months of 2010 than would have been recognized had such costs been deductible for income tax purposes.

The lump sum distributions made to certain executive officers in the first quarter of 2009 in connection with discontinuing the Supplemental Executive Retirement Plan were non-deductible for income tax purposes pursuant to Internal Revenue Code Section 162(m) limitations.  Such treatment resulted in the recognition of approximately $6.7 million of income tax expense in the first quarter of 2009 above amounts that would have been recognized had such payments been deductible for income tax purposes.  Such increase in income tax expense was partially offset by a $5.8 million reduction in income tax expense caused by a reduction to our deferred tax asset valuation allowance associated with state net operating loss carryforwards due to a state law change that we believe will allow us to utilize net operating loss carryforwards in the future.  Prior to the law change, such net operating loss carryforwards were fully offset by a valuation allowance as it was more likely than not that we would not utilize these carryforwards prior to expiration.
Business Segments
Business Segments
(9)
Business Segments

We are an integrated communications company engaged primarily in providing an array of communications services to our retail, business and wholesale customers, including local exchange, long distance, Internet access and broadband services.  We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.  Because of the similar economic characteristics of our operations, we have utilized the aggregation criteria specified in the segment accounting guidance and concluded that we operate as one reportable segment.  Our operating revenues for our products and services include the following components:
 
   
Three months
  
Six months
 
   
ended June 30,
  
ended June 30,
 
   
2010
  
2009
  
2010
  
2009
 
   
(Dollars in thousands)
 
              
Voice
 $790,580   247,427   1,603,456   497,621 
Data
  472,999   142,923   940,439   282,860 
Network access
  274,956   150,542   561,184   303,110 
Other
  233,495   93,577   467,377   187,263 
Total operating revenues
 $1,772,030   634,469   3,572,456   1,270,854 
 

Beginning in 2010, we have reclassified revenues generated from subscriber line charges to "Voice" revenues from "Network access" revenues to better align our presentation of such revenues with others in our industry.  In addition, we have included revenues generated from our fiber transport, CLEC and security monitoring operations in "Other" revenues.  Prior periods have been restated to reflect this new presentation.

We derive our voice revenues by providing local exchange telephone and retail long distance services to our customers in our local exchange service areas.

We derive our data revenues primarily by providing high-speed Internet access services ("DSL") and data transmission services over special circuits and private lines in our local exchange service areas.

We derive our network access revenues primarily from (i) providing services to various carriers and customers in connection with the use of our facilities to originate and terminate their interstate and intrastate voice transmissions; (ii) receiving universal support funds which allows us to recover a portion of our costs under federal and state cost recovery mechanisms and (iii) receiving reciprocal compensation from competitive local exchange carriers and wireless service providers for terminating their calls.

We derive other revenues primarily by (i) providing fiber transport, CLEC and security monitoring services; (ii) leasing, selling, installing and maintaining customer premise telecommunications equipment and wiring, (iii) providing payphone services primarily within our local service territories and at various correctional facilities around the country, (iv) participating in the publication of local telephone directories, which allows us to share in revenues generated by the sale of yellow page and related advertising to businesses, (v) providing network database services and (vi) providing our video services, as well as other new product and service offerings.

We are required to contribute to several universal service fund programs and generally include a surcharge amount on our customers' bills which is designed to fully recover our contribution costs.  Such amounts are reflected on a gross basis in our statement of income (included in both operating revenues and expenses) and aggregated approximately $61 million for the six months ended June 30, 2010 and $20 million for the six months ended June 30, 2009.
Recent Accounting Pronouncements
Recent Accounting Pronouncements
(10)
Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board issued guidance on business combinations, which requires an acquiring entity to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions.  Such guidance also changes the accounting treatment for certain specific items, including acquisition costs, acquired contingent liabilities, restructuring costs, deferred tax asset valuation allowances and income tax uncertainties after the acquisition date and is effective for us for all business combinations for which the acquisition date is on or after January 1, 2009.  We have accounted for our acquisition of Embarq using this guidance.  See Note 2 for additional information related to our acquisition of Embarq.
 
As of June 30, 2010, we held life insurance contracts with cash surrender value that are required to be measured at fair value on a recurring basis.  The following table depicts these assets held and the related tier designation pursuant to the accounting guidance related to fair value disclosure.

   
Balance
     
Description
 
June 30, 2010
Level 1
Level 2
Level 3
   
(Dollars in thousands)
          
Cash surrender value of life insurance contracts
 
$100,288
100,288
-
-
Commitments and Contingencies
Commitments and Contingencies
(11)
Commitments and Contingencies

In Barbrasue Beattie and James Sovis, on behalf of themselves and all others similarly situated, v. CenturyTel, Inc., filed on October 28, 2002, in the United States District Court for the Eastern District of Michigan (Case No. 02-10277), the plaintiffs alleged that we unjustly and unreasonably billed customers for inside wire maintenance services, and sought unspecified monetary damages and injunctive relief under various legal theories on behalf of a purported class of over two million customers in our telephone markets.   In February 2010, we settled this case in an amount that exceeded our previously established reserves by $8 million and such amount was reflected as an expense in the fourth quarter of 2009.  The Court has approved the settlement and dismissed the lawsuit.

Over 60 years ago, one of our indirect subsidiaries, Centel Corporation, acquired entities that may have owned or operated seven former plant sites that produced "manufactured gas" under a process widely used through the mid-1900s.  Centel has been a subsidiary of Embarq since being spun-off in 2006 from Sprint Nextel, which acquired Centel in 1993.  None of these plant sites are currently owned or operated by either Sprint Nextel, Embarq or their subsidiaries.  On three sites, Embarq and the current landowners are working with the Environmental Protection Agency ("EPA") pursuant to administrative consent orders.  Remediation expenditures pursuant to the orders are not expected to be material. On five sites, including the three sites where the EPA is involved, Centel has entered into agreements with other potentially responsible parties to share remediation costs. Further, Sprint Nextel has agreed to indemnify Embarq for most of any eventual liability arising from all seven of these sites.  Based upon current circumstances, we do not expect this issue to have a material adverse impact on our results of operations or financial condition.
 
In William Douglas Fulghum, et al. v. Embarq Corporation, et al., filed on December 28, 2007 in the United States District Court for the District of Kansas (Civil Action No. 07-CV-2602), a group of retirees filed a putative class action lawsuit challenging the decision to make certain modifications to Embarq's retiree benefits programs generally effective January 1, 2008. Defendants include Embarq, certain of its benefit plans, its Employee Benefits Committee and the individual plan administrator of certain of its benefits plans. Additional defendants include Sprint Nextel and certain of its benefit plans. In 2009, a ruling in Embarq's favor was entered in an arbitration proceeding filed by 15 former Centel executives, similarly challenging the benefits changes.  Embarq and other defendants continue to vigorously contest these claims and charges.   Given that this litigation is still in discovery, it is premature to estimate the impact this lawsuit could have to our results of operation or financial condition.

In Robert M. Garst, Sr. et al. v. CenturyTel, Inc. et al., filed March 13, 2009 in the 142nd Judicial District Court of Texas, Midland County (Case No. CV-46861), certain of our former ten-vote shareholders challenged the effectiveness of the vote to eliminate our time-phase voting structure.  During the second quarter of 2010, we settled this case for an amount that was not material to our results of operations or financial condition.
 
In April 2010, a series of lawsuits were filed by shareholders of Qwest Communications International Inc. in Colorado state and federal courts and in Delaware federal court, alleging that Qwest's officers and directors breached their fiduciary duties by failing to maximize the value to be received by Qwest's stockholders in connection with CenturyLink's recently announced acquisition of Qwest.  CenturyLink was also named as a defendant in most of the lawsuits and was alleged to have aided and abetted these breaches of duty.  On July 16, 2010, the parties entered into a memorandum of understanding reflecting the terms of their agreement-in-principle for a settlement of all of the claims asserted in these actions. Pursuant to this agreement, defendants have included additional disclosures in the final joint proxy statement-prospectus, in response to allegations and claims asserted in certain of the complaints.  If the settlement is consummated, all of the actions relating to the proposed transaction will be dismissed, with prejudice.  We do not expect the settlement to have a material adverse impact to our results of operations or financial condition.
 
In December 2009, subsidiaries of CenturyLink filed two lawsuits against subsidiaries of Sprint Nextel to recover terminating access charges for VoIP traffic owed under various interconnection agreements and tariffs which presently are estimated to be in excess of $30 million.  One lawsuit, filed on behalf of all legacy Embarq operating entities, is pending in federal court in Virginia, and the other, filed on behalf of all legacy CenturyLink operating entities, is pending in federal court in Louisiana.  The lawsuits allege that Sprint Nextel has breached contracts, violated tariffs, and violated the Federal Communications Act by failing to pay these charges.  We have not recorded a reserve related to this issue.

From time to time, we are involved in other proceedings incidental to our business, including administrative hearings of state public utility commissions relating primarily to rate making, actions relating to employee claims, occasional grievance hearings before labor regulatory agencies and miscellaneous third party tort actions.   The outcome of these other proceedings is not predictable.  However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available insurance coverage, will have a material adverse effect on our financial position, results of operations or cash flows.
Document Information
6 Months Ended
Jun. 30, 2010
Document Information [Text Block]
 
Document Type
10-Q 
Amendment Flag
FALSE 
Document Period End Date
06/30/2010 
Entity Information (USD $)
Jul. 31, 2010
6 Months Ended
Jun. 30, 2010
Jun. 30, 2009
Entity [Text Block]
 
 
 
Entity Registrant Name
 
CENTURYTEL INC 
 
Entity Central Index Key
 
0000018926 
 
Current Fiscal Year End Date
 
12/31 
 
Entity Well-known Seasoned Issuer
 
Yes 
 
Entity Voluntary Filers
 
No 
 
Entity Current Reporting Status
 
No 
 
Entity Filer Category
 
Large Accelerated Filer 
 
Entity Public Float
 
 
$ 2,400,000,000 
Entity Common Stock, Shares Outstanding
301,445,975 
 
 
Document Fiscal Year Focus
 
2010 
 
Document Fiscal Period Focus
 
Q2