Acquisition by CenturyLink

6 Months Ended

Jun. 30, 2012

Acquisition by CenturyLink

Acquisition by CenturyLink

(2) Acquisition by CenturyLink

        On April 1, 2011, we became a wholly owned subsidiary of CenturyLink. Each share of our common stock outstanding immediately prior to the acquisition converted into the right to receive 0.1664 shares of CenturyLink common stock, with cash paid in lieu of fractional shares. The aggregate consideration of $12.273 billion was based on:

• •

  the 294 million shares of CenturyLink common stock issued to consummate the acquisition;

  •

  the closing stock price of CenturyLink common stock at March 31, 2011 of $41.55;

  •

  the estimated net value of the pre-combination portion of share-based compensation awards assumed by CenturyLink of $52 million (excluding the value of restricted stock included in the number of issued shares specified above); and

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  cash paid in lieu of the issuance of fractional shares of $5 million.

        Since April 1, 2011, our results of operations have been included in the consolidated results of operations of CenturyLink. CenturyLink has accounted for its acquisition of us under the acquisition method of accounting, which resulted in the assignment of the purchase price to the assets acquired and liabilities assumed based on their acquisition date fair values. In the first quarter of 2012, we completed our valuation of the assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets.

        The aggregate consideration exceeded the aggregate estimated fair value of the assets acquired and liabilities assumed by $10.123 billion, which we have recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that we expect to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.

        The following is our assignment of the aggregate consideration:

	April 1, 2011
	(Dollars in millions)
Cash, accounts receivable and other current assets*	$	2,121
Property, plant and equipment		9,529
Identifiable intangible assets:
Customer relationships		7,558
Capitalized software		1,702
Other		189
Other noncurrent assets		390
Current liabilities, excluding current maturities of long-term debt		(2,463	)
Current maturities of long-term debt		(2,422	)
Long-term debt		(10,253	)
Deferred credits and other liabilities		(4,201	)
Goodwill		10,123
Aggregate consideration	$	12,273

*

Includes estimated fair value of $1.194 billion for accounts receivable which had gross contractual value of $1.274 billion on April 1, 2011. The $80 million difference between the gross contractual value and the estimated fair value assigned represents our best estimate as of April 1, 2011 of contractual cash flows that would not be collected.

        During the first quarter of 2012, we retrospectively adjusted our previously reported preliminary assignment of the aggregate Qwest consideration for changes to our original estimates of the fair value of certain items at the acquisition date. These changes are the result of additional information obtained since the filing of our Form 10-K for the year ended December 31, 2011. Due to these revisions of our estimates, (i) identifiable intangible assets decreased due to a $67 million decrease in our customer relationships valuation, (ii) property, plant and equipment decreased by $25 million primarily from a revision to our valuation of our buildings, (iii) deferred credits and other liabilities decreased by $100 million primarily from a revision to one of our lease valuations and changes in tax liabilities, and (iv) current liabilities, excluding current maturities of long-term debt, increased by $35 million due to an addition to our accounts payable-affiliates, net to account for the difference in tax rates between CenturyLink and us at the acquisition date. Among other minor revisions, goodwill increased by $17 million as an offset to the above-mentioned changes. The depreciation and amortization expense impact of the adjustments to intangible assets and property, plant and equipment valuations did not result in a material change to previously-reported amounts.

Acquisition-Related Expenses

        We have incurred operating expenses related to CenturyLink's acquisition of us, which consist primarily of integration and severance expenses. The table below summarizes our acquisition-related expenses:

	Successor						Predecessor
	Three Months Ended June 30, 2012		Six Months Ended June 30, 2012		Three Months Ended June 30, 2011		Three Months Ended March 31, 2011
	(Dollars in millions)
Acquisition-related expenses	$	3		29		127		3