CENTURYLINK, INC, 10-Q/A filed on 11/8/2010
Amended Quarterly Report
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (USD $)
In Thousands, except Per Share data
3 Months Ended
Sep. 30,		 9 Months Ended
Sep. 30,
2010
2009
2010
2009
Income Statement [Abstract]
 
 
 
 
OPERATING REVENUES
$ 1,747,101 
$ 1,874,325 
$ 5,319,557 
$ 3,145,179 
OPERATING EXPENSES
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)
605,548 
684,865 
1,814,073 
1,155,228 
Selling, general and administrative
278,331 
448,275 
862,931 
678,862 
Depreciation and amortization
357,867 
362,202 
1,068,980 
618,326 
Total operating expenses
1,241,746 
1,495,342 
3,745,984 
2,452,416 
OPERATING INCOME
505,355 
378,983 
1,573,573 
692,763 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest expense
(139,594)
(140,422)
(425,068)
(237,391)
Other income (expense)
6,911 
9,362 
24,719 
15,179 
Total other income (expense)
(132,683)
(131,060)
(400,349)
(222,212)
INCOME BEFORE INCOME TAX EXPENSE
372,672 
247,923 
1,173,224 
470,551 
Income tax expense
141,083 
99,876 
449,552 
185,796 
Income before non-controlling interests and extraordinary item
231,589 
148,047 
723,672 
284,755 
Less: Net income attributable to noncontrolling interests
(422)
(412)
(1,133)
(936)
NET INCOME BEFORE EXTRAORDINARY ITEM
231,167 
147,635 
722,539 
283,819 
Extraordinary item, net of income tax expense and noncontrolling interests (see Note 12)
0 
133,213 
0 
133,213 
NET INCOME ATTRIBUTABLE TO CENTURYLINK, INC.
231,167 
280,848 
722,539 
417,032 
BASIC EARNINGS PER SHARE
 
 
 
 
Income before extraordinary item
0.76 
0.49 
2.40 
1.70 
Extraordinary item
0 
0.44 
0 
0.80 
Basic earnings per share
0.76 
0.94 
2.40 
2.50 
DILUTED EARNINGS PER SHARE
 
 
 
 
Income before extraordinary item
0.76 
0.49 
2.39 
1.70 
Extraordinary item
0 
0.44 
0 
0.80 
Diluted earnings per share
0.76 
0.94 
2.39 
2.50 
DIVIDENDS PER COMMON SHARE
$ 0.725 
$ 0.70 
$ 2.175 
$ 2.10 
AVERAGE BASIC SHARES OUTSTANDING
300,702 
298,133 
300,058 
165,558 
AVERAGE DILUTED SHARES OUTSTANDING
301,386 
298,403 
300,663 
165,666 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (USD $)
In Thousands
3 Months Ended
Sep. 30,		 9 Months Ended
Sep. 30,
2010
2009
2010
2009
Statement of Income and Comprehensive Income [Abstract]
 
 
 
 
Net Income Before Non-Controlling Interests
$ 231,589 
$ 282,805 
$ 723,672 
$ 419,513 
Derivative instruments:
 
 
 
 
Reclassification adjustment for losses included in net income, net of $67, $67, $200 and $200 tax
107 
107 
321 
321 
Defined benefit pension and postretirement plans:
 
 
 
 
Defined benefit pension and postretirement plans, net of $1,510, $1,673, ($10,788) and $7,161 tax
2,422 
2,684 
(4,559)
11,487 
Net change in other comprehensive income (loss), net of tax
2,529 
2,791 
(4,238)
11,808 
COMPREHENSIVE INCOME
234,118 
285,596 
719,434 
431,321 
Comprehensive income attributable to noncontrolling interests
(422)
(1,957)
(1,133)
(2,481)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CENTURYLINK, INC.
$ 233,696 
$ 283,639 
$ 718,301 
$ 428,840 
PARENTHETICAL DATA TO THE CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (USD $)
In Thousands
3 Months Ended
Sep. 30,		 9 Months Ended
Sep. 30,
2010
2009
2010
2009
Statement of Income and Comprehensive Income [Abstract]
 
 
 
 
Reclassification adjustment for losses included in net income, tax
$ 67 
$ 67 
$ 200 
$ 200 
Defined benefit pension and postretirement plans, tax
$ 1,510 
$ 1,673 
$ (10,788)
$ 7,161 
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (USD $)
In Thousands
Sep. 30, 2010
Dec. 31, 2009
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 243,061 
$ 161,807 
Accounts receivable, less allowance of $51,722 and $47,450
749,653 
685,589 
Income tax receivable
85,435 
115,684 
Materials and supplies, at average cost
35,135 
35,755 
Deferred income tax asset
79,468 
83,319 
Other
34,355 
41,437 
Total current assets
1,227,107 
1,123,591 
NET PROPERTY, PLANT AND EQUIPMENT
 
 
Property, plant and equipment
16,101,285 
15,556,763 
Accumulated depreciation
(7,299,542)
(6,459,624)
Net property, plant and equipment
8,801,743 
9,097,139 
GOODWILL AND OTHER ASSETS
 
 
Goodwill
10,260,640 
10,251,758 
Other
1,930,720 
2,090,241 
Total goodwill and other assets
12,191,360 
12,341,999 
TOTAL ASSETS
22,220,210 
22,562,729 
CURRENT LIABILITIES
 
 
Current maturities of long-term debt
496,552 
500,065 
Accounts payable
292,675 
394,687 
Accrued expenses and other liabilities
 
 
Salaries and benefits
197,898 
255,103 
Other taxes
167,233 
98,743 
Interest
178,348 
108,020 
Other
139,107 
168,203 
Advance billings and customer deposits
177,915 
182,374 
Total current liabilities
1,649,728 
1,707,195 
LONG-TERM DEBT
7,061,744 
7,253,653 
DEFERRED CREDITS AND OTHER LIABILITIES
 
 
Deferred income taxes
2,260,097 
2,256,579 
Benefit plan obligations
1,242,322 
1,485,643 
Other deferred credits
400,465 
392,860 
Total deferred credits and other liabilities
3,902,884 
4,135,082 
CenturyLink, Inc.
 
 
Common stock, $1.00 par value, authorized 800,000,000 shares, issued and outstanding 302,684,801 and 299,189,279 shares
302,685 
299,189 
Paid-in capital
6,087,136 
6,014,051 
Accumulated other comprehensive loss, net of tax
(89,544)
(85,306)
Retained earnings
3,298,643 
3,232,769 
Preferred stock - non-redeemable
236 
236 
Noncontrolling interests
6,698 
5,860 
Total stockholders' equity
9,605,854 
9,466,799 
TOTAL LIABILITIES AND EQUITY
$ 22,220,210 
$ 22,562,729 
PARENTHETICAL DATA TO THE CONSOLIDATED BALANCE SHEETS (UNAUDITED) (USD $)
In Thousands, except Share data
Sep. 30, 2010
Dec. 31, 2009
CURRENT ASSETS
 
 
Accounts receivable, allowance
$ 51,722 
$ 47,450 
STOCKHOLDERS' EQUITY
 
 
Common stock, par value
$ 1 
$ 1 
Common stock, authorized shares
800,000,000 
800,000,000 
Common stock, issued shares
302,684,801 
299,189,279 
Common stock, outstanding shares
302,684,801 
299,189,279 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $)
In Thousands
9 Months Ended
Sep. 30,
2010
2009
OPERATING ACTIVITIES
 
 
Net Income
$ 723,672 
$ 417,968 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
1,068,980 
618,326 
Extraordinary item
0 
(133,213)
Deferred income taxes
18,875 
38,237 
Share-based compensation
27,988 
39,618 
Income from unconsolidated cellular entity
(13,882)
(15,353)
Distributions from unconsolidated cellular entity
13,793 
14,137 
Changes in current assets and current liabilities:
 
 
Receivables
(64,064)
(2,782)
Accounts payable
(102,012)
(93,283)
Accrued income and other taxes
94,817 
36,734 
Other current assets and other current liabilities, net
(7,137)
147,874 
Retirement benefits
(261,351)
(100,300)
Excess tax benefits from share-based compensation
(6,026)
(1,105)
Increase in other noncurrent assets
(17,448)
(547)
Increase (decrease) in other noncurrent liabilities
5,254 
(12,494)
Other, net
0 
7,944 
Net cash provided by operating activities
1,481,459 
961,761 
INVESTING ACTIVITIES
 
 
Payments for property, plant and equipment
(599,779)
(417,127)
Cash acquired from Embarq acquisition
0 
76,906 
Other, net
1,916 
3,025 
Net cash used in investing activities
(597,863)
(337,196)
FINANCING ACTIVITIES
 
 
Payments of debt
(195,422)
(626,616)
Net proceeds from issuance of long-term debt
0 
644,423 
Proceeds from issuance of common stock
54,412 
12,672 
Repurchase of common stock
(14,321)
(8,774)
Cash dividends
(656,665)
(350,959)
Excess tax benefits from share-based compensation
6,026 
1,105 
Other, net
3,628 
(8,554)
Net cash used in financing activities
(802,342)
(336,703)
Net increase in cash and cash equivalents
81,254 
287,862 
Cash and cash equivalents at beginning of period
161,807 
243,327 
Cash and cash equivalents at end of period
243,061 
531,189 
Supplemental cash flow information
 
 
Income taxes paid
397,565 
126,706 
Interest paid (net of capitalized interest of $10,034 and $909)
$ 344,706 
$ 158,964 
PARENTHETICAL DATA TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $)
In Thousands
9 Months Ended
Sep. 30,
2010
2009
Supplemental cash flow information
 
 
Capitalized Interest
$ 10,034 
$ 909 
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
Balance at beginning of period at Dec. 31, 2008
$ 100,277 
$ 39,961 
$ (123,489)
$ 3,146,255 
$ 236 
$ 4,568 
$ 3,167,808 
Issuance of common stock to acquire Embarq Corporation
196,083 
 
 
 
 
 
196,083 
Issuance of common stock to acquire Embarq Corporation, including portion of share-based compensation awards assumed by CenturyLink
 
5,873,904 
 
 
 
 
5,873,904 
Issuance of common stock through dividend reinvestment, incentive and benefit plans
1,417 
11,255 
 
 
 
 
12,672 
Shares withheld to satisfy tax withholdings
(310)
(8,464)
 
 
 
 
(8,774)
Excess tax benefits from share-based compensation
 
1,105 
 
 
 
 
1,105 
Share-based compensation and other
 
41,189 
 
 
 
 
41,189 
Change in other comprehensive loss (net of reclassification adjustment), net of tax
 
 
11,808 
 
 
 
11,808 
Net income attributable to CenturyLink, Inc.
 
 
 
417,032 
 
 
417,032 
Cash dividends declared
 
 
 
 
 
 
 
Common stock - $2.175 and $2.10 per share, respectively
 
 
 
(350,950)
 
 
(350,950)
Preferred stock
 
 
 
(9)
 
 
(9)
Net income attributable to noncontrolling interests
 
 
 
 
 
936 
936 
Extraordinary gain attributable to noncontrolling interests
 
 
 
 
 
1,545 
1,545 
Distributions attributable to noncontrolling interests
 
 
 
 
 
(320)
(320)
Balance at end of period at Sep. 30, 2009
297,467 
5,958,950 
(111,681)
3,212,328 
236 
6,729 
9,364,029 
Balance at beginning of period at Dec. 31, 2009
299,189 
6,014,051 
(85,306)
3,232,769 
236 
5,860 
9,466,799 
Issuance of common stock to acquire Embarq Corporation
0 
 
 
 
 
 
0 
Issuance of common stock to acquire Embarq Corporation, including portion of share-based compensation awards assumed by CenturyLink
 
0 
 
 
 
 
0 
Issuance of common stock through dividend reinvestment, incentive and benefit plans
3,901 
50,511 
 
 
 
 
54,412 
Shares withheld to satisfy tax withholdings
(405)
(13,916)
 
 
 
 
(14,321)
Excess tax benefits from share-based compensation
 
6,026 
 
 
 
 
6,026 
Share-based compensation and other
 
30,464 
 
 
 
 
30,464 
Change in other comprehensive loss (net of reclassification adjustment), net of tax
 
 
(4,238)
 
 
 
(4,238)
Net income attributable to CenturyLink, Inc.
 
 
 
722,539 
 
 
722,539 
Cash dividends declared
 
 
 
 
 
 
 
Common stock - $2.175 and $2.10 per share, respectively
 
 
 
(656,656)
 
 
(656,656)
Preferred stock
 
 
 
(9)
 
 
(9)
Net income attributable to noncontrolling interests
 
 
 
 
 
1,133 
1,133 
Extraordinary gain attributable to noncontrolling interests
 
 
 
 
 
0 
0 
Distributions attributable to noncontrolling interests
 
 
 
 
 
(295)
(295)
Balance at end of period at Sep. 30, 2010
$ 302,685 
$ 6,087,136 
$ (89,544)
$ 3,298,643 
$ 236 
$ 6,698 
$ 9,605,854 
PARENTHETICAL DATA TO THE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (USD $)
9 Months Ended
Sep. 30,
2010
2009
Cash dividends declared
 
 
Common stock, dividends per share
$ 2.175 
$ 2.10 
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 nine months ended September 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 nine-month periods have been included therein. The results of operations for the first nine 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 and we have included the revenues from our fiber transport, CLEC and security monitoring operations in "Other" revenues for all periods presented.  In addition, certain revenues presented in third quarter 2009 attributable to our Embarq properties (acquired in the transaction described in Note 2) have been reclassified to conform to the current presentation.
 
Recent accounting pronouncements. In September 2009, the accounting standard update regarding revenue recognition for multiple deliverable arrangements was issued. This update requires the use of the relative selling price method when allocating revenue in these types of arrangements. This method allows a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update is effective January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented. We are currently evaluating the impact that this standard update will have on our consolidated financial statements.
 
In January 2010, we adopted the accounting standard update regarding fair value measurements and disclosures, which requires additional disclosures regarding assets and liabilities measured at fair value. The adoption of this accounting standard update did not have a material impact on our condensed consolidated financial statements.
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 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 changed 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 with acquisition dates after January 1, 2009.

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 $3.687 billion of operating revenues of Embarq are included in our consolidated results of operations for the first nine 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 Embarq's property, plant and equipment and identifiable intangible assets were determined based upon analysis performed by an independent valuation firm.  The fair value of Embarq's pension and postretirement obligations was determined by independent actuaries.  The fair value of Embarq's 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 available in the long-term financing markets at the time of acquisition.  All other fair value determinations, which consisted primarily of Embarq's 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.

 
   
Nine months ended
 
   
September 30, 2009
 
   
(Dollars in thousands, except per share amounts)
 
     
Operating revenues
 $5,816,000 
Net income attributable to CenturyLink, Inc.
 $667,000 
Basic earnings per share before extraordinary item
 $2.24 
Diluted earnings per share before extraordinary item
 $2.24 

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 nine months ended September 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.  Other than those actually realized during the quarter ended September 30, 2009, the pro forma information does not give effect to any potential revenue enhancements or cost synergies or other operating efficiencies that could result from 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 September 30, 2010, Qwest had outstanding approximately (i) 1.742 billion shares of common stock and (ii) $12.979 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, 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 September 30, 2010 and December 31, 2009 were composed of the following:

   
Sept. 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
  (301,564)  (148,491)
         Net carrying amount
 $977,744   1,130,817 
          
   Other
        
         Gross carrying amount
 $69,567   69,567 
         Accumulated amortization
  (26,514)  (22,466)
         Net carrying amount
 $43,053   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.
 
The vast majority of our goodwill is attributable to our telephone operations, which we internally operate and manage based on five geographic regions.  We test for goodwill impairment for our telephone operations at the region level due to the similar economic characteristics of the individual reporting units that comprise each region.  Impairment of goodwill is tested by comparing the fair value of the reporting unit to its carrying value (including goodwill).  Estimates of the fair value of the reporting unit of our telephone operations are based on valuation models using techniques such as multiples of earnings (before interest, taxes and depreciation and amortization).  We also evaluate goodwill impairment of our other operations primarily based on multiples of earnings and revenues.  If the fair value of the reporting unit is less than its carrying value, a second calculation is required in which the implied fair value of goodwill is compared to its carrying value.  If the implied fair value is less than its carrying value, goodwill must be written down to its implied fair value.  As of September 30, 2010, we completed our annual impairment test of goodwill and concluded that our goodwill was not impaired as of September 30, 2010.
 
Total amortization expense related to the intangible assets subject to amortization for the first nine months of 2010 was $157.1 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 cost for the nine months ended September 30, 2009 only includes the effect of our Embarq acquisition subsequent to July 1, 2009.  Net periodic postretirement benefit cost for the three months and nine months ended September 30, 2010 and 2009 included the following components:

   
Three months
  
Nine months
 
   
ended September 30,
  
ended September 30,
 
   
2010
  
2009
  
2010
  
2009
 
   
(Dollars in thousands)
 
              
Service cost
 $3,306   3,175   9,975   5,701 
Interest cost
  8,187   8,448   24,562   18,245 
Expected return on plan assets
  (981)  (847)  (2,943)  (1,540)
Amortization of unrecognized prior service cost
  (343)  (887)  (1,029)  (2,660)
Net periodic postretirement benefit cost
 $10,169   9,889   30,565   19,746 
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 under a supplemental executive retirement plan in early 2009, we recognized a curtailment loss (which is included in selling, general and administrative expense) of approximately $7.7 million in the first quarter of 2009.

Due to change of control provisions that were triggered upon the consummation of the Embarq acquisition on July 1, 2009, certain retirees who were receiving monthly annuity payments under a supplemental executive retirement plan were paid a lump sum distribution calculated in accordance with the provisions of the plan.  A settlement expense of approximately $8.9 million was recognized in the third quarter of 2009 as a result of these actions.

The legacy Embarq pension plan contains a provision that grants early retirement benefits for certain participants affected by workforce reductions.  During the third quarter of 2009, we recognized approximately $14.7 million of additional pension expense related to these contractual benefits.

Net periodic pension cost for the nine months ended September 30, 2009 only includes the effect of our Embarq acquisition subsequent to July 1, 2009.  Net periodic pension expense for the three months and nine months ended September 30, 2010 and 2009 included the following components:
 
 
   
Three months
  
Nine months
 
   
ended September 30,
  
ended September 30,
 
   
2010
  
2009
  
2010
  
2009
 
   
(Dollars in thousands)
 
              
Service cost
 $13,974   14,373   47,075   21,360 
Interest cost
  62,589   60,723   184,250   73,975 
Expected return on plan assets
  (70,757)  (56,857)  (212,270)  (70,785)
Curtailment loss
  -   -   -   7,711 
Settlement loss
  -   8,890   -   8,890 
Contractual retirement benefits
  -   14,676   -   14,676 
Net amortization and deferral
  3,803   4,101   14,027   12,453 
Net periodic pension expense
 $9,609   45,906   33,082   68,280 

We contributed $300 million to the legacy Embarq pension plan in the first quarter of 2010.  Based on current actuarial estimates, we expect to make a contribution of approximately $100 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 September 30, 2010, we had reserved approximately 27.5 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 nine-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, we granted 396,753 shares of restricted stock 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 nine months of 2010, we granted 525,377 shares of time-vested restricted stock (which vest over a three-year period) to certain other key employees and our outside directors as part of our normal recurring annual equity compensation programs.

During the third quarter of 2010, we granted 407,236 shares of restricted stock and approximately $15.2 million of deferred cash compensation awards to certain executive officers and other key employees as part of a retention program in connection with our pending acquisition of Qwest.  The shares of restricted stock will vest in equal installments on the first, second and third anniversaries of the closing date.  Each employee receiving a deferred cash award will be entitled to receive one-half of the award on the closing date of the Qwest merger and the other half on the first anniversary of the closing date.  Both the restricted stock grant and the deferred cash award will accelerate if we terminate the recipient without cause or under certain other conditions, and will be forfeited if the Qwest merger is not consummated.  In addition to the above retention awards, 75,000 shares of restricted stock were granted to an incoming executive officer during the third quarter of 2010 (which vests fully at the end of the officer's term of employment).
 
As of September 30, 2010, there were 3,054,000 shares of nonvested restricted stock outstanding at an average grant date fair value of $33.60 per share.

The total compensation cost for all share-based payment arrangements for the first nine months of 2010 and 2009 was $28.0 million and $39.6 million, respectively.  As of September 30, 2010, there was $71.2 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.   The $15.2 million of deferred cash compensation awards mentioned above is also unrecognized as of September 30, 2010.
Income Taxes
Income Taxes
(8)
Income Taxes

Our effective income tax rate was 38.4% and 39.3% for the nine months ended September 30, 2010 and 2009, respectively.
 
Included in income tax expense is a $4.0 million charge incurred in the first quarter of 2010 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 nine 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.  Our 2009 effective tax rate is also higher because a portion of our merger-related transaction costs incurred during the first nine months of 2009 are non-deductible for income tax purposes (with such treatment resulting in a $6.9 million increase to income tax expense).  Such increases in income tax expense were 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
  
Nine months
 
   
ended September 30,
  
ended September 30,
 
   
2010
  
2009
  
2010
  
2009
 
   
(Dollars in thousands)
 
              
Voice
 $777,367   849,357   2,380,823   1,346,978 
Data
  480,111   460,213   1,420,550   743,073 
Network access
  264,319   317,529   825,503   620,639 
Other
  225,304   247,226   692,681   434,489 
Total operating revenues
 $1,747,101   1,874,325   5,319,557   3,145,179 
 
 
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 and we have included revenues generated from our fiber transport, CLEC and security monitoring operations in "Other" revenues.  In addition, certain third quarter 2009 revenues attributable to our legacy Embarq properties have been reclassified to conform to current presentation.  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 statements of income (included in both operating revenues and expenses) and aggregated approximately $88 million for the nine months ended September 30, 2010 and $52 million for the nine months ended September 30, 2009.
Fair Value Disclosure
Fair Value Disclosure
(10)
Fair Value Disclosure

As of September 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
 
Sept. 30, 2010
Level 1
Level 2
Level 3
   
(Dollars in thousands)
          
Cash surrender value of life insurance contracts
 
$99,751
99,751
-
-
Commitments and Contingencies
Commitments and Contingencies
(11)
Commitments and Contingencies

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 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.  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 included additional disclosures in the final joint proxy statement-prospectus dated July 19, 2010, 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 approximate $32 million.  One lawsuit, filed on behalf of all legacy Embarq operating entities, was tried in federal court in Virginia earlier this year and a ruling is expected in the fourth quarter of 2010.  The other lawsuit, 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.
Discontinuance of Regulatory Accounting
Discontinuance of Regulatory Accounting
(12)
Discontinuance of Regulatory Accounting

Through June 30, 2009, we accounted for our regulated telephone operations (except for the properties acquired from Verizon in 2002) in accordance with the provisions of Accounting Standards Codification 980-10 which addresses regulatory accounting under which actions by regulators can provide reasonable assurance of the recognition of an asset, reduce or eliminate the value of an asset and impose a liability on a regulated enterprise.  Such regulatory assets and liabilities were required to be recorded and, accordingly, reflected in the balance sheet of an entity subject to regulatory accounting.

On July 1, 2009, we discontinued the accounting requirements of regulatory accounting upon the conversion of substantially all of our rate-of-return study areas to federal price cap regulation (based on the FCC's approval of our petition to convert our study areas to price cap regulation).

Upon the discontinuance of regulatory accounting, we reversed previously established regulatory assets and liabilities.  Depreciation rates of certain assets established by regulatory authorities for our telephone operations subject to regulatory accounting have historically included a component for removal costs in excess of the related salvage value.  Notwithstanding the adoption of accounting guidance related to the accounting for asset retirement obligations, regulatory accounting required us to continue to reflect this accumulated liability for removal costs in excess of salvage value even though there was no legal obligation to remove the assets.  Therefore, we did not adopt the asset retirement obligation provisions for our telephone operations that were subject to regulatory accounting.  Upon the discontinuance of regulatory accounting, such accumulated liability for removal costs included in accumulated depreciation was removed and an asset retirement obligation was established.  Upon the discontinuance of regulatory accounting, we were required to adjust the carrying amounts of property, plant and equipment only to the extent the assets are impaired, as judged in the same manner applicable to nonregulated enterprises. We did not record an impairment charge related to the carrying value of the property, plant and equipment of our regulated telephone operations as a result of the discontinuance of regulatory accounting.
 
In the third quarter of 2009, upon the discontinuance of regulatory accounting, we recorded a non-cash extraordinary gain in our consolidated statements of income comprised of the following components (dollars, except per share amounts, in thousands):
 
   
Gain (loss)
Elimination of removal costs embedded in accumulated depreciation
 $222,703
Establishment of asset retirement obligation
  (1,556)
Elimination of other regulatory assets and liabilities
  (2,585)
Net extraordinary gain before income tax expense and noncontrolling interests
  218,562
Income tax expense associated with extraordinary gain
  (83,804)
Net extraordinary gain before noncontrolling interests
  134,758
Less: extraordinary gain attributable to noncontrolling interests
  (1,545)
Extraordinary gain attributable to CenturyLink, Inc.
 $133,213
     
Basic earnings per share of extraordinary gain
 $.44
Diluted earnings per share of extraordinary gain
 $.44
 
 
Upon the discontinuance of regulatory accounting, we revised the lives of our property, plant and equipment to reflect the economic estimated remaining useful lives of the assets.  In general, the estimated remaining useful lives of our telephone property were lengthened as compared to the rates used that were established by regulatory authorities.

Upon the discontinuance of regulatory accounting, we eliminated certain intercompany transactions with regulated affiliates that previously were not eliminated under the application of regulatory accounting.  This has caused our operating revenues and operating expenses to be lower by equivalent amounts beginning in the third quarter of 2009.
Document Information
9 Months Ended
Sep. 30, 2010
Document Type
10-Q 
Amendment Flag
FALSE 
Document Period End Date
2010-09-30 
Entity Information
9 Months Ended
Sep. 30, 2010
Oct. 29, 2010
Jun. 30, 2009
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
 
303,246,592 
 
Document Fiscal Year Focus
2010 
 
 
Document Fiscal Period Focus
Q3