Acquisition by CenturyLink

6 Months Ended

Jun. 30, 2011

Acquisition by CenturyLink

Acquisition by CenturyLink

(2) Acquisition by CenturyLink

On April 1, 2011, we became a wholly owned subsidiary of CenturyLink. Each outstanding share of our common stock 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 estimated aggregate consideration was approximately $12.273 billion based on:

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

• the closing stock price of CenturyLink common stock as of 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 shares issued above); and

• 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 our preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. We expect to complete our final determinations no later than the first quarter of 2012. Our final determinations may be significantly different than those reflected in our consolidated financial statements as of June 30, 2011. Based on our preliminary estimate, the aggregate consideration exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities by $10.005 billion, which has been 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 CenturyLink and its consolidated subsidiaries, including us, to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.

The following is our preliminary assignment of the aggregate consideration based on currently available information (dollars in millions).

	April 1, 2011
Cash, accounts receivable and other current assets	$	2,036
Property, plant and equipment		9,525
Identifiable intangible assets
Customer relationships		7,625
Capitalized software		1,702
Other		366
Other noncurrent assets		373
Current liabilities, excluding current maturities of long-term debt		(2,424)
Current maturities of long-term debt		(2,422)
Long-term debt		(10,253)
Deferred credits and other liabilities		(4,260)
Goodwill		10,005
Aggregate consideration	$	12,273

We have recognized certain expenses that were contingent on completion of the CenturyLink acquisition, including $127 million of compensation expense comprised of severance, retention bonuses and share-based compensation for the successor three months ended June 30, 2011. During the predecessor three months ended March 31, 2011, we had recognized $3 million of expenses associated with our activities surrounding the acquisition. As of April 1, 2011, as part of acquisition accounting, we also included in our goodwill $35 million for financial advisory fees, $23 million for certain performance awards and $16 million related to retention bonuses, all of which were contingent on the completion of the acquisition and had no benefit to CenturyLink after the acquisition.

CenturyLink has cash management arrangements between certain of its subsidiaries, including us, under which the majority of our cash balance is transferred on a daily basis to CenturyLink.