Acquisition of QCII by CenturyLink

3 Months Ended

Mar. 31, 2012

Acquisition of QCII by CenturyLink

Acquisition of QCII by CenturyLink

(2) Acquisition of QCII by CenturyLink

        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 QCII and 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 payable to QCII's stockholders that is attributable to us exceeded the aggregate estimated fair value of the assets acquired and liabilities assumed by $9.369 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 aggregate consideration allocation is based on our final analysis of enterprise value of $18.639 billion less the fair value of our debt of $8.688 billion.

        The following is our assignment of the aggregate consideration:

	April 1, 2011
	(Dollars in millions)
Cash, accounts receivable and other current assets*	$	1,091
Property, plant and equipment		7,460
Identifiable intangible assets:
Customer relationships		5,699
Capitalized software		1,702
Other noncurrent assets		209
Current liabilities, excluding current maturities of long-term debt		(2,446	)
Current maturities of long-term debt		(2,378	)
Long-term debt		(6,310	)
Deferred credits and other liabilities		(4,445	)
Goodwill		9,369
Aggregate consideration	$	9,951

*

Includes estimated fair value of $674 million for accounts receivable, excluding affiliate accounts receivable, which had gross contractual value of $722 million on April 1, 2011. The $48 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. Property, plant and equipment decreased by $36 million primarily from a revision to our valuation of our buildings. Deferred credits and other liabilities decreased by $89 million primarily from changes in tax liabilities and a revision to one of our lease valuations. Goodwill decreased by $84 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.

        We have recognized $12 million of expenses associated with activities related to CenturyLink's indirect acquisition of us during the successor three months ended March 31, 2012. These expenses were comprised primarily of severance, retention bonuses, share-based compensation and system integration consulting. During the predecessor three months ended March 31, 2011, we recognized an immaterial amount of expenses associated with our activities related to the acquisition.