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AZ Contract With CenturyLink 2014-2019 Part 2

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CTL 10-K 12/31/2011

Section 1: 10-K (10-K)
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TABLE OF CONTENTS
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File No. 001-7784

CENTURYLINK, INC.
(Exact name of registrant as specified in its charter)

Louisiana
(State or other jurisdiction of
incorporation or organization)

72-0651161
(I.R.S. Employer
Identification No.)

100 CenturyLink Drive, Monroe, Louisiana
(Address of principal executive offices)

71203
(Zip Code)

(318) 388-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Common Stock, par value $1.00

Name of Each Exchange on Which
Registered
New York Stock Exchange
Berlin Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Stock Options
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o

No o
No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o

Smaller reporting company o

No ý

On February 21, 2012, 619,614,139 shares of common stock were outstanding. The aggregate market value of the voting stock held by non-affiliates as of June 30, 2011 was $24.2 billion.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be furnished in connection with the 2012 annual meeting of shareholders are incorporated by reference in Part III of this Annual Report.

Table of Contents

TABLE OF CONTENTS
PART I
Item 1. Business

3

Item 1A. Risk Factors

20

Item 1B. Unresolved Staff Comments

36

Item 2. Properties

37

Item 3. Legal Proceedings

37

Item 4. Mine Safety Disclosures

40
PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities

41

Item 6. Selected Financial Data

42

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

45

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

75

Item 8. Consolidated Financial Statements and Supplementary Data

76

Consolidated Statements of Operations

79

Consolidated Statements of Comprehensive (Loss) Income

80

Consolidated Balance Sheets

81

Consolidated Statements of Cash Flows

82

Consolidated Statements of Stockholders' Equity

83

Notes to Consolidated Financial Statements

84

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

145

Item 9A. Controls and Procedures

145

Item 9B. Other Information

145
PART III

Item 10. Directors, Executive Officers and Corporate Governance

145

Item 11. Executive Compensation

145

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

146

Item 13. Certain Relationships and Related Transactions and Director Independence

146

Item 14. Principal Accountant Fees and Services

146
PART IV

Item 15. Exhibits and Financial Statement Schedules

147

Signatures

159
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Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us," and "our" refer to CenturyLink, Inc. and its
consolidated subsidiaries, including SAVVIS, Inc. and its consolidated subsidiaries (referred to as "Savvis") for periods on or after July 15,
2011, Qwest Communications International Inc. and its consolidated subsidiaries (referred to as "Qwest") for periods on or after April 1, 2011
and Embarq Corporation and its consolidated subsidiaries (referred to as "Embarq") for periods on or after July 1, 2009.

PART I
ITEM 1. BUSINESS
Overview
We are an integrated communications company engaged primarily in providing an array of communications services to our residential,
business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line
(including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless and video services. In
certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security
monitoring. 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.
Based on total access lines at December 31, 2011, we were the third largest telecommunications company in the United States. We operate
almost 75% of our total access lines in portions of Colorado, Washington, Arizona, Minnesota, Florida, North Carolina, Oregon, Iowa, Utah, New
Mexico, Missouri and Nevada. We also provide local service in portions of Idaho, Ohio, Wisconsin, Virginia, Texas, Pennsylvania, Montana,
Alabama, Nebraska, Indiana, Arkansas, Tennessee, Wyoming, New Jersey, North Dakota, South Dakota, Kansas, Michigan, Louisiana, South
Carolina, Illinois, Georgia, Mississippi, Oklahoma and California. In the portion of these 37 states where we have access lines, which we refer to as
our local service area, we are the incumbent local telephone company. We also operate 68 data centers throughout North America, South America,
Europe and Asia.
We were incorporated under the laws of the State of Louisiana in 1968. Our principal executive offices are located at 100 CenturyLink Drive,
Monroe, Louisiana 71203 and our telephone number is (318) 388-9000.
For a discussion of certain risks applicable to our business, financial condition and results of operations, see "Risk Factors" in Item 1A of this
report. The summary financial information in this section should be read in conjunction with, and is qualified by reference to, our consolidated
financial statements and notes thereto in Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this report.
Acquisitions
Acquisition of Savvis
On July 15, 2011, we acquired all of the outstanding common stock of Savvis, a provider of cloud hosting, managed hosting, colocation and
network services in domestic and international markets. We believe this acquisition enhances our ability to be an information technology partner
with our existing business customers and strengthens our opportunities to attract new business customers in the future. Each share of Savvis
common stock outstanding immediately prior to the acquisition converted into the right to receive $30 per share in cash and 0.2479 shares of
CenturyLink common stock. The aggregate consideration of $2.382 billion consisted of:
•

cash payments of $1.732 billion;
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•

the 14.313 million shares of CenturyLink common stock issued to consummate the acquisition,

•

the closing stock price of CenturyLink common stock at July 14, 2011 of $38.54; and

•

the estimated net value of the pre-combination portion of certain share-based compensation awards assumed by CenturyLink of
$98 million, of which $33 million was paid in cash.

Upon completing the acquisition, we also paid $547 million to retire certain pre-existing Savvis debt and accrued interest, and paid related
transaction expenses totaling $15 million. The cash payments required on or about the closing date were funded using existing cash balances,
which included the net proceeds from the June 2011 issuance of senior notes with an aggregate principal amount of $2 billion.
Acquisition of Qwest
On April 1, 2011, we acquired all of the outstanding common stock of Qwest Communications International Inc. ("Qwest"), a provider of data,
Internet, video and voice services nationwide and globally. As of the acquisition date, Qwest served approximately 9.0 million access lines and
approximately 3.0 million broadband subscribers across 14 states. Each share of Qwest 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 was $12.273 billion 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

•

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

We assumed approximately $12.7 billion of long-term debt in connection with our acquisition of Qwest.
Acquisition of Embarq
On July 1, 2009, we acquired all of the outstanding common stock of Embarq Corporation ("Embarq"), a provider of data, Internet, video and
voice services. As of the acquisition date, Embarq served approximately 5.4 million access lines and approximately 1.5 million broadband
subscribers across 18 states. Each share of Embarq common stock outstanding immediately prior to the acquisition converted into the right to
receive 1.37 shares of CenturyLink common stock, with cash paid in lieu of fractional shares. The aggregate consideration of $6.070 billion was
based on:
•

the 196 million shares of CenturyLink common stock issued to consummate the acquisition;

•

the closing stock price of CenturyLink common stock at June 30, 2009 of $30.70; and

•

the estimated net value of the pre-combination portion of share-based compensation awards assumed by CenturyLink of $50 million
(excluding the value of restricted stock included in the number of issued shares specified above).

We assumed approximately $4.9 billion of long-term debt in connection with our acquisition of Embarq.
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In connection with the Embarq acquisition, we amended our charter to eliminate our time-phase voting structure, which previously entitled
persons who beneficially owned shares of our common stock continuously since May 30, 1987 to ten votes per share.
Effect of Recent Acquisitions
Our acquisitions since 2009 resulted in several important changes to our operations, including:
•

providing services to an expanded number of densely-populated markets, which tend to afford consumers access to a greater range
of competitive communications products than less dense markets;

•

reducing the percentage of our total revenue derived from governmental support programs, which typically focus on disbursing
payments to companies operating in less densely-populated areas;

•

expanding and reconfiguring our operating regions to incorporate the Embarq and Qwest service areas in order to provide day-today decision making at the regional level as opposed to the more centralized structures formerly used by Embarq and Qwest; and

•

offering certain services, such as cloud computing, that CenturyLink did not historically provide.

Other Acquisitions
On April 30, 2007, we acquired all of the outstanding stock of Madison River Communications Corp. ("Madison River") for approximately
$322 million in cash. In connection with the acquisition, we also paid approximately $522 million to retire all pre-existing Madison River debt and
accrued interest. At the time of this acquisition, Madison River operated approximately 164,000 predominantly rural access lines in four states.
In June 2005, we acquired fiber assets in 16 metropolitan markets from KMC Telecom Holdings, Inc. for approximately $76 million in cash,
which has enabled us to offer broadband and competitive local exchange services to customers in these markets. During 2008, we sold the assets
in six of these markets in two separate transactions.
We regularly evaluate the possibility of acquiring additional assets in exchange for cash, securities or other properties, and at any given time
may be engaged in discussions or negotiations regarding additional acquisitions. We generally do not announce our acquisitions or dispositions
until we have entered into a preliminary or definitive agreement.
References to Acquired Businesses
In the discussion that follows, we refer to the business that we operated prior to the Qwest acquisition (including Embarq's business) as
"Legacy CenturyLink" and refer to the incremental business activities that we now operate as a result of the Savvis acquisition and the Qwest
acquisition as "Legacy Savvis" and "Legacy Qwest", respectively.
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Financial and Operational Highlights
The following table summarizes the results of our consolidated operations. Our operating results include operations of Savvis for periods after
July 15, 2011, Qwest for periods after April 1, 2011 and Embarq for periods after July 1, 2009.
Years Ended December 31,
2010
(Dollars in millions)
15,351
7,042
13,326
4,982
2,025
2,060

2011
Operating revenues
Operating expenses
Operating income

$

Net income

$

$

573

2009
4,974
3,741
1,233

948

647

December 31,
2011
2010
(Dollars in millions)
Balance sheet data:
Total assets
Total long-term debt(1)
Total stockholders' equity

(1)

$

56,139
21,836
20,827

22,038
7,328
9,647

Total long-term debt is the sum of current maturities of long-term debt and long-term debt on our consolidated balance sheets. For total obligations, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Future Contractual Obligations" in Item 7 of this report.

The following table presents some of our operational metrics:

2011
Operational metrics:
Total broadband subscribers
Total access lines(1)

(1)

5,554
14,584

December 31,
2010
(in thousands)
2,349
6,489

2009

2,186
7,025

Access lines are telephone lines reaching from the customers' premises to a connection with the public switched telephone network, or PSTN.

Substantially all of our revenues are from customers located in the United States, and substantially all of our long-lived assets are located in
the United States.
Operations
Segments
For several years prior to 2011, we reported our operations as a single segment. However, after our acquisitions of Qwest on April 1, 2011 and
Savvis on July 15, 2011, we have reorganized our business into the following operating segments:
•

Regional markets. Consists generally of providing strategic and legacy products and services to residential consumers, small to
medium-sized businesses and regional enterprise customers. Our
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strategic products and services offered to these customers include our private line, broadband, Multi-Protocol Label Switching
("MPLS"), hosting, video and wireless services. Our legacy services offered to these customers include local and long-distance
service;
•

Business markets. Consists generally of providing strategic and legacy products and services to enterprise and government
customers. Our strategic products and services offered to these customers include our private line, broadband, MPLS, hosting and
video services. Our legacy services offered to these customers include local and long-distance service;

•

Wholesale markets. Consists generally of providing strategic and legacy products and services to other communications
providers. Our strategic products and services offered to these customers are mainly private line (including special access) and
MPLS. Our legacy services offered to these customers include unbundled network elements ("UNEs") which allow our wholesale
customers the use of our network or a combination of our network and their own networks to provide voice and data services to
their customers, long-distance and switched access services; and

•

Savvis operations. Consists generally of the entire centrally-managed operations of our Savvis subsidiaries, which provides
hosting and network services primarily to business customers. Some of these services are the same as those provided through our
business markets segment. In the future, we may reclassify the revenues and expenses associated with those business markets
services as part of our Savvis operations segment. However, until we are able to further integrate Legacy Savvis, we will continue to
classify those services as part of the business markets segment.

The following table shows the composition of our revenues by segment. Due to system limitations, we have determined that it is impracticable
to restate 2009's reportable segments, as for several years prior to 2011 we reported our operations as a single segment. For additional information
on our segment data, see Item 8 "Notes to Consolidated Financial Statements" of this report.
Years Ended December 31,
2011
2010
(Dollars in millions)
Percentage of revenue:
Regional markets
Business markets
Wholesale markets
Savvis operations
Other operating revenues
Total

51%
19%
21%
3%
6%
100%

66%
4%
22%
—
8%
100%

Change

(15%)
15%
(1%)
3%
(2%)

Although we now report financial information separately for each of our segments, our segment information does not include total assets and
capital expenditures, which we manage on a centralized basis and are only reviewed by our chief operating decision maker ("CODM") on a
consolidated basis. As we continue to integrate our recent acquisitions, we may make further changes to our segment reporting. Our segment
results are not necessarily indicative of the results of operations that our segments would have achieved had they operated as stand-alone entities
during the periods presented.
Products and Services
Our products and services include a variety of voice, broadband, data, information technology ("IT"), video and other communications
services. In 2011, we expanded our IT services to include cloud hosting, managed hosting, colocation and network services. Through our strategic
partnership
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with DIRECTV, we offer satellite digital television to customers in our local service area. We also offer wireless services to customers through our
strategic partnership with Verizon Wireless.
We offer our customers the ability to bundle together several products and services. For example, we offer integrated and unlimited local and
long-distance services. Our customers can also bundle two or more services such as broadband, video (including DIRECTV), voice and Verizon
Wireless services. We believe our customers value the convenience of and price discounts associated with receiving multiple services through a
single company.
Most of our products and services are provided using our telecommunications network, which consists of voice and data switches, copper
cables, fiber-optic cables and other equipment. Our network serves approximately 14.6 million access lines and forms a portion of the public
switched telephone network, or PSTN.
Described below are our key products and services.
Strategic Services
Our customers use our strategic services to access the Internet, connect to private networks and transmit data. We also provide value-added
services and integrated solutions that make communications more secure, reliable and efficient for our customers. We focus our marketing and
sales efforts on these services:
•

Private line. Private line is a direct circuit or channel specifically dedicated for the purpose of directly connecting two or more sites.
Private line offers a high-speed, secure solution for frequent transmission of large amounts of data between sites. We also provide
private line services to wireless service providers that use our fiber to the tower services, commonly referred to as wireless
backhaul, to support their next generation wireless networks.

•

Broadband. Our broadband services allow customers to connect to the Internet through their existing telephone lines and fiberoptic cables at high speeds. Substantially all of our broadband subscribers are located within our local service area.

•

MPLS. Multi-Protocol Label Switching is standards-approved data networking technology, compatible with existing asynchronous
transfer mode, or ATM, and frame relay networks we provide to support real-time voice and video. This technology allows network
operators flexibility to divert and route traffic around link failures, congestion and bottlenecks.

•

Hosting. Hosting includes providing space, power, bandwidth and managed services in our data centers. We also offer a variety of
server and application management services, including cloud, back-up, disaster recovery and professional web design.

•

Video. Our video services include our facilities-based video, marketed as CenturyLink™ Prism™, which is an advanced
entertainment service option that allows our customers to watch hundreds of channels and record up to four shows on one home
digital video recorder. We also offer satellite digital television under an arrangement with DIRECTV that allows us to market, sell
and bill for its services under its brand name.

•

VoIP. Voice over Internet Protocol, or VoIP, is a real-time, two-way voice communication service (similar to our traditional voice
services) that originates over a broadband connection and often terminates on the PSTN.

•

Wireless services. Our wireless services are offered under an agency arrangement with Verizon Wireless that allows us to market,
sell and bill for its services under its brand name, primarily to customers who buy these services as part of a bundle with one or
more of our other products and services. This arrangement allows us to sell the full complement of Verizon Wireless
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services. Our current arrangement with Verizon Wireless has a five-year term ending in 2015 and is terminable by either party
thereafter.
Legacy Services
Our legacy services represent our traditional phone services, which include the following:
•

Local. We offer local calling services for our regional and business markets customers within our local service area, generally for a
fixed monthly charge. These services include a number of enhanced calling features and other services, such as call forwarding,
caller identification, conference calling, voicemail, selective call ringing, call waiting and maintenance services, for which we
generally charge an additional monthly fee. We also generate revenues from non-recurring services, such as inside wire installation,
service activation and reactivation.
For our wholesale customers, local calling services include primarily resale and UNEs, which allow our wholesale customers to use
our network or a combination of our network and their own networks to provide voice and data services to their customers. It also
includes network transport, billing services and access to our network by other telecommunications providers and wireless carriers.
Local calling services provided to our wholesale customers allow other telecommunications companies the ability to originate or
terminate telecommunications services on our network;

•

Long-distance. We offer our residential and business customers domestic and international long-distance services and toll free
services. Our international long-distance services include voice calls that either terminate or originate with our customers in the
United States; and

•

Switched access services. We sell various forms of switched access services to wireline and wireless service providers for the use
of our facilities to originate and terminate their interstate and intrastate voice transmissions.

Data Integration
Data integration involves the sale of telecommunications equipment located on customers' premises and related professional services. These
services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks
for our governmental and other business customers.
Other Revenues
We also generate other operating revenues from Universal Service Fund ("USF") revenues and surcharges and the leasing and subleasing of
space in our office buildings, warehouses and other properties. We centrally manage this revenue, and consequently it is not assigned to any of
our three categories described above. The majority of our real estate properties are located in our local service area.
Additional Information
During 2008, we paid an aggregate of approximately $149 million for 69 licenses in the FCC's auction of 700 megahertz wireless spectrum. We
are continuing to evaluate our options associated with owning this spectrum.
From time to time, we also make investments in other communications companies.
For further information on regulatory, technological and competitive changes that could impact our revenues, see "Regulation" and
"Competition" under this Item 1 below and "Risk Factors" under
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Item 1A below. For more information on the financial contributions of our various services, see Item 7 of this annual report.
Importance, Duration and Effect of Patents, Trademarks and Copyrights
Either directly or through our subsidiaries, we own several patents, tradenames, trademarks, copyrights and other intellectual property
necessary to conduct our business, such as our CenturyLink™ and Prism™ brand names. Our services often use the intellectual property of
others, including licensed software. We also occasionally license our intellectual property to others.
Sales and Marketing
We maintain local offices in most of the larger population centers within our local service area. These offices provide sales and customer
support services in the community. We also rely on our call center personnel to promote sales of services that meet the needs of our customers.
Our strategy is to enhance our communications services by offering a comprehensive bundle of services and deploying new technologies to build
upon our reputation and to further enhance customer loyalty.
We conduct most of our operations under the brand name "CenturyLink." Our satellite television service is offered on a co-branded basis
under the "DIRECTV" name. Our switched digital television service offering is branded under the name "Prism™." The wireless service that we
offer under our agency agreement with Verizon Wireless is marketed under the "Verizon Wireless" brand name. Currently, all IT and other services
furnished through our Savvis operations are marketed under the "Savvis" brand name.
Our approach to our residential customers emphasizes customer-oriented sales, marketing and service with a local presence. We market our
products and services primarily through direct sales representatives, inbound call centers, local retail stores, telemarketing and third parties. We
support our distribution with direct mail, bill inserts, newspaper advertising, website promotions, public relations activities and sponsorship of
community events.
Our approach to our business customers includes a commitment to deliver communications solutions that meet existing and future business
needs through bundles of services and integrated service offerings. Our focus is to be a comprehensive customer communications solution for
small businesses to large enterprises.
Our approach to our wholesale customers includes a commitment to deliver communications solutions that meet existing and future national
telecommunications providers' needs through bandwidth growth and quality of services.
Our Savvis operations utilize a solution-based selling approach. By working directly with potential and existing clients, we are able to
understand our clients' IT infrastructure and long-term goals. We also market through indirect channels, including collaborations with existing
clients and technology providers, telecommunications companies and system integrators.
Network Architecture
Most of our products and services are provided using our telecommunications network, which consists of voice and data switches, copper
cables, fiber-optic cables and other equipment. Our local exchange carrier networks also include central offices and remote sites, all with advanced
digital switches and operating with licensed software. Our fiber-optic cable is the primary transport technology between our central offices and
interconnection points with other incumbent carriers. We also maintain separate networks in connection with providing fiber transport services.
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We continue to enhance and expand our network as broadband enabled technologies are being deployed to provide significant capacity to
our customers. Rapid and significant changes in technology are expected to continue in the telecommunications industry. Our future success will
depend, in part, on our ability to anticipate and adapt to technological changes.
Regulation
We are subject to significant regulation by the Federal Communications Commission ("FCC"), which regulates interstate communications, and
state utility commissions, which regulate intrastate communications in our local service area. These agencies issue rules to protect consumers and
promote competition; they set the rates that telecommunication companies charge each other for exchanging traffic; and they have established
funds (called universal service funds or USF) to support the provision of services to high-cost areas. In most states, local voice service, switched
and special access services and interconnection services are subject to price regulation, although the extent of regulation varies by type of service
and geographic region. In addition, we are required to maintain licenses with the FCC and with the utility commissions of most of the states in our
local service area. Laws and regulations in many states restrict the manner in which a licensed entity can interact with affiliates, transfer assets,
issue debt and engage in other business activities and many mergers and acquisitions require approval by the FCC and some state commissions.
Historically, incumbent local exchange carriers, or ILECs, operated as regulated monopolies having the exclusive right and responsibility to
provide local telephone services in their franchised service territories. As we discuss in greater detail below, passage of the Telecommunications
Act of 1996, coupled with state legislative and regulatory initiatives and technological change, fundamentally altered the telephone industry by
generally reducing the regulation of ILECs and creating a substantial increase in the number of competitors. We are considered an ILEC. The
following description discusses some of the major industry regulations that affect our traditional telephone operations, but numerous other
regulations not discussed below could also impact us. Some legislation and regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proceedings which could substantially change the manner in which the telecommunications industry operates and the
amount of revenues we receive for our services. Neither the outcome of these proceedings, nor their potential impact on us, can be predicted at
this time. The impact of regulatory changes in the telecommunications industry could have a substantial impact on our operations. For further
information, see Item 1A of this annual report below.
State Regulation
In recent years, most states have substantially reduced their regulation of ILECs. Nonetheless, state regulatory commissions generally
continue to regulate local service rates, intrastate access charges, and in some cases service quality, as they continue to grant and revoke
certifications authorizing companies to provide communications services. State commissions traditionally regulated pricing through "rate of
return" regulation that focused on authorized levels of earnings by ILECs. Several states continue to regulate us in this manner. In most of our
states, we are generally regulated under various forms of alternative regulation that typically limit our ability to increase rates for basic local voice
service, but relieve us from the requirement to meet certain earnings tests. In a few states, we have recently gained pricing freedom for the majority
of retail services except for the most basic of services, such as stand-alone basic residential voice service. In most of the states in which we
operate, we have gained pricing flexibility for certain enhanced calling services, such as caller identification and for bundled services that also
include local voice service. State commissions periodically conduct proceedings to review the rates that we charge other telecommunications
providers for using our network or for reselling our service pursuant to the Telecommunications Act of 1996, and those proceedings can result in
revenue reductions.
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We are currently responding to carrier complaints, legislation or generic investigations regarding our intrastate switched access charge rates
in several of our states. In particular, certain long-distance providers have disputed existing intercarrier compensation rates payable to us and
other ILECs with respect to VoIP traffic or refused to pay access charges, based on the contention that tariffed switched access charges should
not apply to VoIP traffic. On October 27, 2011, the FCC adopted an order comprehensively reforming federal intercarrier compensation and
universal service policies and rules, as discussed further below under the heading "Federal Regulation." Among other things, this order preempted
state regulatory commissions' jurisdiction over all terminating access charges, however, intrastate access charges have historically been subject to
exclusive state jurisdiction. Furthermore, the FCC decreed that on a prospective basis, intercarrier compensation rates for VoIP traffic are
established at interstate access rates in the event intrastate switched access rates exceed interstate rates.
The FCC order requires all terminating access rates including intrastate, interstate and reciprocal compensation rates to be reduced and unified
over time. Excluding the rate implications contemplated on a prospective basis by the recent FCC order, we will continue to vigorously defend and
seek to collect our intrastate switched access revenue subject to outstanding disputes. These historical disputes are primarily over access charge
compensation for VoIP traffic terminating on the public switched telephone network. The outcomes of these disputes cannot be determined at this
time. If we are required to reduce our intrastate switched access rates as a result of any of these disputes or state initiatives, we will seek to recover
displaced switched access revenues from state universal service funds or other services. However, the amount of such recovery, particularly from
residential customers, is not assured.
Under state law, our telephone operating subsidiaries are typically governed by laws and regulations that (i) regulate the purchase and sale of
ILECs, (ii) prescribe certain reporting requirements, (iii) require ILECs to provide service under publicly-filed tariffs setting forth the terms,
conditions and prices of regulated services, (iv) limit ILECs' ability to borrow and establish asset liens (v) regulate transactions between ILECs and
their affiliates, and (vi) impose various other service standards.
As an ILEC, we generally face "carrier of last resort" obligations which include an ongoing requirement to provide service to all prospective
and current customers in our service area who request service and are willing to pay rates prescribed in our tariffs. In competitively-bid situations,
such as newly-constructed housing developments or multi-tenant dwellings, this may constitute a competitive disadvantage to us if competitors
can choose to focus on low-risk profitable customers and withhold service from high-risk unprofitable customers. Strict adherence to carrier of last
resort requirements may force us to construct facilities with a low likelihood of positive economic return. In certain cases, we seek to mitigate these
risks by receiving regulatory approval to use less costly alternative technologies, such as fixed wireless, or by sharing network construction costs
with our customers. In addition, a few of our states provide relief from these obligations under certain specific circumstances, and in certain areas
our costs to build and maintain network infrastructure are partially offset by payments from universal service programs.
We operate in states where traditional cost recovery mechanisms, including rate structures, are under evaluation or have been modified. There
can be no assurance that these states will continue to provide for cost recovery at current levels.
Federal Regulation
We are required to comply with the Communications Act of 1934, which requires us to offer services at just and reasonable rates and on nondiscriminatory terms, as well as the Telecommunications Act of 1996, which amended the Communications Act of 1934 primarily to promote
competition.
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The FCC regulates interstate services provided by us, including the special access charges we bill for wholesale network transmission and the
interstate access charges that we bill to long-distance companies and other communications companies in connection with the origination and
termination of interstate voice and data transmissions. Additionally, the FCC regulates a number of aspects of our business related to privacy,
homeland security and network infrastructure, including access to and use of local telephone numbers. The FCC has responsibility for maintaining
and administering the federal USF, which provides substantial support for maintaining networks in high-cost areas, as well as supporting service
to low-income households, schools and libraries, and rural health care providers. Like other communications network operators, ILECs must obtain
FCC approval to use certain radio frequencies, or to transfer control of any such licenses. The FCC retains the right to revoke these licenses if a
carrier materially violates relevant legal requirements.
We, like other large and mid-sized ILECs, operate under price-cap regulation of interstate access rates. Under price-cap regulation, limits
imposed on a company's interstate rates are adjusted periodically to reflect inflation, productivity improvement and changes in certain noncontrollable costs.
Our operations and those of all telecommunications carriers also may be impacted by legislation and regulation imposing new or greater
obligations on us. The most likely areas of impact include regulations or laws related to providing broadband service, bolstering homeland
security, increasing disaster recovery requirements, minimizing environmental impacts, enhancing privacy, or addressing other issues that impact
our business, including the Communications Assistance for Law Enforcement Act, and laws governing local telephone number portability and
customer proprietary network information requirements. These laws and regulations may cause us to incur additional costs and could impact our
ability to compete effectively.
From time-to-time, the FCC reviews the rates and terms under which ILECs provide special access services. If the FCC were to adopt
significant changes in regulations affecting special access services, this could adversely impact our operations or financial results.
Universal Service Fund and Other Related Matters
For decades, the FCC has regularly considered various intercarrier compensation reforms, generally with a goal to create a uniform mechanism
to be used by the entire telecommunications industry for payments between carriers originating, terminating, or carrying telecommunications
traffic. In connection therewith, the FCC has received intercarrier compensation proposals from several industry groups, and solicited public
comments on a variety of topics related to access charges and intercarrier compensation. In early 2011, the FCC issued a notice of proposed
rulemaking focused on modernizing its universal service policies and intercarrier compensation rules.
On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order ("CAF order") intended to reform the
existing regulatory regime to recognize ongoing shifts to new technologies, including VoIP, and gradually re-direct universal service funding to
foster nationwide broadband coverage. This initial ruling provides for a multi-year transition over the next decade as intercarrier compensation
charges are reduced, universal service funding is explicitly targeted to broadband deployment, and subscriber line charges paid by end user
customers are gradually increased. These changes will substantially increase the pace of reductions in the amount of switched access revenues we
receive in our wholesale segment, while creating opportunities for increases in federal USF and retail revenue streams. The ultimate effect of this
order on communications companies is largely dependent on future FCC proceedings designed to implement the order, the most significant of
which are scheduled to be determined in 2012 and 2013.
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On December 29, 2011, the CAF order went into effect. At the same time, numerous parties filed a Petition For Reconsideration ("PFR") with
the FCC seeking numerous revisions to the order. In January 2012, we joined more than two dozen parties in appealing certain aspects of the order
by filing a PFR that will be heard by the United States Tenth Circuit Court of Appeals. Future judicial challenges to the CAF order are possible,
which could alter or delay the FCC's proposed changes. In addition, based on the outcome of the FCC proceedings, various state commissions
may consider changes to their universal service funds or intrastate access rates. For these reasons, we cannot predict the ultimate impact of these
proceedings on us at this time.
The following table reflects the minute-driven components of our intercarrier compensation revenues for the year ended December 31, 2011:
Originating Traffic
Minutes
Yield
(in thousands)
Revenues:
Interstate switched
access
Intrastate switched
access
Local interconnection

Terminating Traffic
Minutes
Yield
(in thousands)

11,397,310

$

0.0041

12,960,384

$

0.0057

2,054,012

$

0.0250

5,911,023
14,911,205

$
$

0.0297
0.0070

The American Recovery and Reinvestment Act of 2009 (the "Recovery Act") includes certain broadband initiatives that are intended to
accelerate broadband deployment across the United States. The Recovery Act approved $7.2 billion in funding for broadband stimulus projects
across the United States to be administered by two governmental agencies. The programs provide grants and loans to applicants for construction
of certain broadband infrastructure, provision of certain broadband services, and support of certain broadband adoption initiatives. This program
has attracted a wide range of applicants including states, municipalities, start-up companies and consortiums. The participation of other parties in
these programs could increase competition in selected areas, which may increase our marketing costs and decrease our revenues in those areas.
We cannot at this time estimate the impact these programs may have on our operations.
On January 31, 2012 the FCC adopted an order modernizing the program that provides assistance to qualifying low-income individuals for local
voice service. These changes also affect state-specific programs that provide assistance to qualifying individuals. The impact of these changes
cannot be quantified at this time, but we may face increased administrative costs and audit requirements as a result of this FCC order and its
implementation.
For several years, Congress has passed bills granting successive short-term exemptions from a federal law that could otherwise delay or block
funding of the USF's E-rate program, including a bill extending the exemption through December 31, 2012. Although we expect funding from this
program to continue, we cannot assure you that the lack of a definitive resolution of this issue will not delay or impede the disbursement of funds
in the future.
We received approximately $510 million, $431 million and $385 million of revenue from federal and state universal service programs for the
years ended December 31, 2011, 2010 and 2009 respectively. Such amounts represented approximately 3.3%, 6.1% and 7.7% of our 2011, 2010 and
2009 total operating revenues, respectively.
Competition
We compete in a rapidly evolving and highly competitive market and we expect intense competition to continue. We compete with cable
companies, wireless providers, and national telecommunications providers, such as AT&T, Inc. and Verizon Communications Inc. Technological
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advances, regulatory and legislative changes have increased opportunities for alternative communications service providers, which in turn have
increased competitive pressures on our business. These alternate providers often face fewer regulations and have lower cost structures than we
do. In addition, the telecommunications industry has experienced substantial consolidation over the past decade and some of our competitors are
generally larger, may have more financial and business resources and have broader service offerings than we currently do.
Over the past decade, fundamental technological, regulatory and legislative changes have significantly impacted the communications
industry, and we expect these changes will continue. Primarily as a result of regulatory and technological changes, competition has been
introduced and encouraged in each sector of the communications industry in recent years. As a result, we increasingly face competition from other
communication service providers, as further described below.
Wireless telephone services increasingly constitute a significant source of competition with our ILEC services, especially since wireless
carriers have begun to compete effectively on the basis of price with more traditional telephone services. As a result, some customers have chosen
to completely forego use of traditional wireline phone service and instead rely solely on wireless service for voice services. We anticipate this
trend will continue, particularly if wireless service providers continue to expand their coverage areas, reduce their rates, improve the quality of their
services, and offer enhanced new services. Substantially all of our access line customers are currently capable of receiving wireless services from
at least one competitive service provider. Technological and regulatory developments in wireless services, personal communications services,
digital microwave, satellite, coaxial cable, fiber optics, local multipoint distribution services, WiFi, and other wired and wireless technologies are
expected to further permit the development of alternatives to traditional landline services. Moreover, the growing prevalence of electronic mail, text
messaging, social networking, and similar digital communications continues to reduce the demand for traditional landline voice services.
The Telecommunications Act of 1996, which obligates ILECs to permit competitors to interconnect their facilities to the ILEC's network and to
take various other steps that are designed to promote competition, imposes several duties on an ILEC if it receives a specific request from another
entity which seeks to connect with or provide services using the ILEC's network. In addition, each ILEC is obligated to (i) negotiate
interconnection agreements in good faith, (ii) provide nondiscriminatory "unbundled" access to all aspects of the ILEC's network, (iii) offer resale
of its telecommunications services at wholesale rates and (iv) permit competitors, on terms and conditions (including rates) that are just,
reasonable and nondiscriminatory, to collocate their physical plant on the ILEC's property, or provide virtual collocation if physical collocation is
not practicable. Current FCC rules require ILECs to lease a network element only in those situations where competing carriers genuinely would be
impaired without access to such network elements, and where the unbundling would not interfere with the development of facilities-based
competition.
As a result of these regulatory, consumer and technological developments, ILECs also face competition from competitive local exchange
carriers, or CLECs, particularly in densely populated areas. CLECs provide competing services through reselling the ILECs' local services, through
use of the ILECs' unbundled network elements or through their own facilities.
As noted above, wireless and other competitive services providers have been increasingly aggressive in seeking and obtaining USF support
funds. This support is likely to encourage additional competitors to enter our high-cost service areas.
Technological developments have led to the development of new services that compete with traditional ILEC services. Technological
improvements have enabled cable television companies to provide traditional circuit-switched telephone service over their cable networks, and
several national cable companies have aggressively pursued this opportunity.
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Similar to us, many cable, technology or other communications companies that previously offered a limited range of services are now offering
diversified bundles of services, either through their own networks, reselling arrangements or joint ventures. As such, a growing number of
companies are competing to serve the communications needs of the same customer base. Such activities will continue to place downward pressure
on the demand for our access lines and the pricing of our services.
In addition to facing direct competition from those providers described above, ILECs increasingly face competition from alternate
communication systems constructed by long distance carriers, large customers or alternative access vendors. These systems are capable of
originating or terminating calls without use of the ILECs' networks or switching services. Other potential sources of competition include non-carrier
systems that are capable of bypassing ILECs' local networks, either partially or completely, through various means, including the provision of
special access or independent switching services and the concentration of telecommunications traffic on a few of the ILECs' access lines. We
anticipate that all these trends will continue and lead to decreased use of our networks.
Below is more specific information on how these trends in competition have impacted our segments.
Regional Markets
Strategic Services
With respect to our strategic services, competition is based on price, bandwidth, service, promotions and bundled offerings. Wireless carriers'
fourth generation, or 4G, services are allowing them to more directly compete with our strategic services. In reselling DIRECTV video services, we
compete primarily with cable and other satellite companies as well as other sales agents and resellers. Many of our competitors for these strategic
services are not subject to the same regulatory requirements as we are and therefore they are able to avoid significant regulatory costs and
obligations.
Our strategy is to focus on increasing the subscribers of our broadband services. In order to remain competitive, we believe continually
increasing connection speeds is important. As a result, we continue to invest in our fiber to the node, or FTTN, deployment, which allows for the
delivery of higher speed broadband services. While traditional ATM-based broadband services are declining, they have been more than offset by
growth in fiber-based broadband services. We also continue to expand our product offerings including facilities-based video services and enhance
our marketing efforts as we compete in a maturing market in which a significant portion of consumers already have broadband services.
Legacy Services
Although our status as an ILEC continues to provide us some advantages in providing legacy services in our local service area, we
increasingly face significant competition as an increasing number of consumers are willing to substitute cable, wireless and electronic
communications for traditional voice telecommunications services. This has led to an increase in the number and type of competitors within our
industry and a decrease in our market share. As a result of this product substitution, we face greater competition in providing local and longdistance services from wireless providers, resellers and sales agents (including ourselves) and from broadband service providers, including cable
companies. We also continue to compete with traditional telecommunications providers, such as national carriers, smaller regional providers,
CLECs and independent telephone companies.
Our strategy to reduce access line loss is based primarily on our pricing, packaging of services and features, quality of service and meeting
customer care needs. While bundle price discounts have resulted in lower average revenues for our individual services, we believe service bundles
continue to positively impact our customer retention. In addition to our bundle discounts, we also offer limited
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time promotions on our broadband service for prospective customers who want our broadband service in their bundle which further aids our
ability to attract and retain customers and increase usage of our services.
Business Markets
Strategic Services
In connection with providing strategic services to our business customers, we compete primarily with cable companies, interexchange carriers
and other broadband service providers. Competition is based on price, bandwidth, service, promotions and bundled offerings. In addition, our mix
of total revenues derived from business customers continues to migrate from legacy services to strategic services as our enterprise and
government customers increasingly demand customized and integrated data, Internet and voice services.
Our strategy is based primarily on pricing, packaging of services and features, quality of service and meeting customer care needs. Although
we are experiencing price compression on our strategic services, we expect overall revenues from these services to grow.
Legacy Services
In providing our legacy services to our business market customers, we face the same competitive pressures as we face in providing our
strategic services, as discussed above.
Data Integration
In providing data integration to our customers, we compete primarily with large integrators, equipment providers and national
telecommunication providers. Competition is based on package offerings and as such we focus on providing these customers individualized and
customizable packages. Our strategy is to provide our data integration through packages that include other strategic and legacy services. As such,
in providing data integration we often face many of the same competitive pressures as we face in providing strategic and legacy services, as
discussed above.
Wholesale Markets
Strategic Services
In providing private line (including special access) services to our wholesale markets customers, we compete with large cable companies, as
well as other regional and national carriers and other fiber providers and CLECs. Demand for our private line services continues to increase, despite
our customers' optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue
to impact our wholesale markets segment, we ultimately believe the growth in fiber-based special access provided to wireless carriers for backhaul
will, over time, offset the decline in copper-based special access provided to wireless carriers as they migrate to Ethernet services, although the
timing and magnitude of this technological migration is uncertain.
Legacy Services
The provision of our legacy services to other communications providers is highly competitive, and has been and will continue to be adversely
affected by technological migration, industry consolidation and rate reductions. We face significant competition for access services from CLECs,
cable companies, resellers and wireless service providers as well as some of our own wholesale markets customers, which are deploying their own
networks to provide customers with local services. By doing so, these competitors reduce traffic on our network. In addition, our long-distance
revenues continue to decline
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as a result of customer migration to more technologically advanced services, price compression, and declining demand for traditional voice
services.
Savvis Operations
Our competitors for hosting, colocation and other IT services range from telecommunications companies, hardware manufacturers and system
integrators that support the in-house IT operations for a business or offer outsourcing solutions. Due to the size and capacity of some of these
companies, they may be able to offer more inexpensive solutions to our customers. To compete, we focus on providing complex, secure and
performance-driven services to our business customers through our global infrastructure. Our services can be purchased individually or as part of
a total outsourcing arrangement. Our keys to growth include targeting the right clients, offering targeted business solutions to solve specific client
needs and delivering compelling and comprehensive technical capabilities.
For our colocation services, we continue to see pricing pressures with respect to these services as low-cost wholesale colocation providers
continue to enter our market, and we expect this trend to continue. Our Savvis network services continue to see pricing pressures on virtual private
network and bandwidth services offset by increases in network services that support our colocation and managed hosting service offerings.
Environmental Compliance
As discussed in greater detail in Item 3 of this report, several decades ago one of our subsidiaries acquired entities that may have owned or
operated seven former "manufactured gas" plant sites that may require environmental remediation. From time to time we may incur other
environmental compliance and remediation expenses, mainly resulting from the ownership of other prior industrial sites or the operation of vehicle
fleets or power supplies for our communications equipment. Although we cannot assess with certainty the impact of any future compliance and
remediation obligations, we do not believe that future environmental compliance and remediation expenditures will have a material adverse effect
on our financial condition or results of operations.
Seasonality
Overall, our business is not significantly impacted by seasonality. From time to time weather related problems have resulted in increased costs
to repair our network and respond to service calls in some of our markets. The amount and timing of these costs are subject to the weather patterns
of any given year, but have generally been highest during the third quarter and have been related to damage from severe storms, including
hurricanes, tropical storms and tornadoes in our markets along the lower Atlantic and Gulf of Mexico coastlines.
Employees
At December 31, 2011, we had approximately 49,000 employees, of which approximately 20,000 were members of either the International
Brotherhood of Electrical Workers ("IBEW") or the Communications Workers of America ("CWA"). We believe that relations with our employees
continue to be generally good.
Approximately 15,000 of the union-represented employees are subject to collective bargaining agreements that expire throughout 2012. See the
discussion of risks relating to our labor relations in "Risk Factors—Other Risks" in Item 1A of this report.
Our headcount is significantly higher than previous years due to our acquisition of Qwest on April 1, 2011 and Savvis on July 15, 2011. We
have partially offset these increases with reductions of
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our workforce primarily due to (i) integration efforts from our acquisitions of Qwest and Savvis; (ii) increased competitive pressures; and (iii) the
loss of access lines over the last several years.
Website Access and Important Investor Information
Our website is www.centurylink.com. The information contained on, or that may be accessed through, our website is not part of this annual
report. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports in the "Investor Relations" section of our website (ir.centurylink.com) under the heading "SEC Filings." These
reports are available on our website as soon as reasonably practicable after we electronically file them with the Securities and Exchange
Commission, or SEC.
We have adopted written codes of conduct that serve as the code of ethics applicable to our directors, officers and employees, including our
principal executive officer and senior financial officers, in accordance with applicable laws and rules promulgated by the SEC and the New York
Stock Exchange. In the event that we make any changes (other than by a technical, administrative or non-substantive amendment) to, or provide
any waivers from, the provisions of our code of conduct applicable to our directors or executive officers, we intend to disclose these events on our
website or in a report on Form 8-K filed with the SEC. These codes of conduct, as well as copies of our guidelines on significant governance issues
and the charters of our audit committee, compensation committee, nominating and corporate governance committee and risk evaluation committee,
are also available in the "Corporate Governance" section of our website at www.centurylink.com/Pages/AboutUs/Governance/ or in print to any
shareholder who requests them by sending a written request to our Corporate Secretary at CenturyLink, Inc., 100 CenturyLink Drive, Monroe,
Louisiana, 71203.
Investors may also read and copy any materials filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. For information on the operation of the Public Reference Room, you are encouraged to call the SEC at 1-800-SEC-0330. For all of our
electronic filings, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
In connection with filing this annual report, our chief executive officer and chief financial officer made the certifications regarding our financial
disclosures required under the Sarbanes-Oxley Act of 2002, and the Act's related regulations. In addition, during 2011, our chief executive officer
certified to the New York Stock Exchange that he was unaware of any violations by us of the New York Stock Exchange's corporate governance
listing standards.
Special Note Regarding Forward-Looking Statements
This report and other documents filed by us under the federal securities law include, and future oral or written statements or press releases by
us and our management may include, forward-looking statements about our financial condition, operating results and business. These statements
include, among others:
•

statements concerning the benefits that we expect will result from our business activities and certain transactions we have
completed, such as increased revenue and decreased capital or operating expenditures;

•

statements about our anticipated future operating and financial performance, financial position and liquidity, tax position,
contingent liabilities, growth opportunities and growth rates, acquisition and divestiture opportunities, business prospects,
regulatory and competitive outlook, investment and expenditure plans, investment results, financing alternatives and sources and
pricing plans; and
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•

other similar statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that
are not historical facts, many of which are highlighted by words such as "may," "would," "could," "should," "plan," "believes,"
"expects," "anticipates," "estimates," "projects," "intends," "likely," "seeks," "hopes," or variations or similar expressions.

These forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future
developments and events, many of which are outside of our control. These forward-looking statements, and the assumptions upon which they are
based, are inherently speculative and are subject to uncertainties that may cause our actual results to be materially different from any future results
expressed or implied by us in those statements. Some of these uncertainties and risks are described in "Risk Factors" in Item 1A of this report.
These risk factors should be considered in connection with any written or oral forward-looking statements that we or persons acting on our
behalf may issue. Anticipated events may not occur and our actual results or performance may differ materially from those anticipated, estimated or
projected if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Additional risks that we currently
deem immaterial or that are not presently known to us could also cause our actual results to differ materially from our expected results. Given these
uncertainties, we caution investors not to unduly rely on our forward-looking statements. We undertake no obligation to update or revise any
forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or
otherwise. Further, the information about our intentions contained in this document is a statement of our intentions as of the date of this document
and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in
general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such
factors, in our assumptions or otherwise.
Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to
them selectively any material non-public information or other confidential information. Accordingly, investors should not assume that we agree
with any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Unless otherwise indicated, information contained in this report and other documents filed by us under the federal securities laws concerning
our views and expectations regarding the communications industry are based on estimates made by us using data from industry sources, and on
assumptions made by us based on our management's knowledge and experience in the markets in which we operate and the communications
industry generally. You should be aware that we have not independently verified data from industry or other third-party sources and cannot
guarantee its accuracy or completeness. Our estimates and assumptions involve risks and uncertainties and are subject to change based on
various factors, including those discussed in Item 1A of this report.
ITEM 1A. RISK FACTORS
Any of the following risks could materially and adversely affect our business, financial condition, results of operations, liquidity or prospects.
The risks described below are not the only risks facing us. Please be aware that additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial could also materially and adversely affect our business operations.
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Risks Affecting Our Business
Increasing competition, including product substitution, continues to cause access line losses, which has adversely affected and could continue
to adversely affect our operating results and financial condition.
We compete in a rapidly evolving and highly competitive market, and we expect competition to continue to intensify. We are facing greater
competition from cable companies, wireless providers, broadband companies, resellers and sales agents (including ourselves) and facilities-based
providers using their own networks as well as those leasing parts of our network. In addition, regulatory developments over the past several years
have generally increased competitive pressures on our business. Due to some of these and other factors, we continue to lose access lines.
Some of our current and potential competitors (i) offer a more comprehensive range of communications products and services, (ii) have market
presence, engineering and technical capabilities, and financial and other resources greater than ours, (iii) own larger and more diverse networks,
(iv) conduct operations or raise capital at a lower cost than us, (v) are subject to less regulation, (vi) offer greater online content services or
(vii) have substantially stronger brand names. Consequently, these competitors may be better equipped to charge lower prices for their products
and services, to provide more attractive offerings, to develop and expand their communications and network infrastructures more quickly, to adapt
more swiftly to new or emerging technologies and changes in customer requirements, and to devote greater resources to the marketing and sale of
their products and services.
Competition could adversely impact us in several ways, including (i) the loss of customers and market share, (ii) the possibility of customers
reducing their usage of our services or shifting to less profitable services, (iii) reduced traffic on our networks, (iv) our need to expend substantial
time or money on new capital improvement projects, (v) our need to lower prices or increase marketing expenses to remain competitive and (vi) our
inability to diversify by successfully offering new products or services.
We are continually taking steps to respond to these competitive pressures, but these efforts may not be successful. Our operating results and
financial condition would be adversely affected if these initiatives are unsuccessful or insufficient and if we otherwise are unable to sufficiently
stem or offset our continuing access line losses and our revenue declines significantly without corresponding cost reductions. If this occurred, our
ability to service debt and pay other obligations would also be adversely affected.
Our legacy services continue to generate declining revenues, and our efforts to offset these declines may not be successful.
The telephone industry has experienced a decline in access lines and network access revenues, which, coupled with the other changes
resulting from competitive, technological and regulatory developments, continue to place downward pressure on the revenues we generate from
our legacy services.
We have taken a variety of steps to counter these declines, including:
•

an increased focus on selling a broader range of strategic services, including broadband, satellite television provided by DIRECTV
and wireless voice services provided by Verizon Wireless, as well as our own facilities-based digital video services;

•

greater use of service bundles; and

•

acquisitions to increase our scale and strengthen our product offerings, including new products and services provided by our
Savvis operations.
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However, some of these strategic services generate lower profit margins than our traditional services, and some can be expected to experience
slowing growth as increasing numbers of our existing or potential customers subscribe to these newer products. Moreover, we cannot assure you
that the revenues generated from our new offerings will offset revenue losses associated from reduced sales of our legacy products, nor can we
assure you that we will be able to continue to grow through acquisitions. In addition, our reliance on services provided by others could constrain
our flexibility, as described further below.
Our future results will suffer if we do not effectively adjust to changes in our business, and will further suffer if we do not effectively manage
our expanded operations.
The above-described changes in our industry have placed a higher premium on marketing, technological, engineering and provisioning skills.
Our recent acquisitions also significantly changed the composition of our markets and product mix. Our future success depends, in part, on our
ability to retrain our staff to acquire or strengthen skills necessary to address these changes, and, where necessary, to attract and retain new
personnel that possess these skills.
Unfavorable general economic conditions could negatively impact our operating results and financial condition.
Unfavorable general economic conditions, including the unstable economy and the current credit market environment, could negatively affect
our business. Worldwide economic growth has been sluggish since 2008, and many experts believe that a confluence of factors in the United
States, Europe and developing countries may result in a prolonged period of economic downturn, slow growth or economic uncertainty. While it is
difficult to predict the ultimate impact of these general economic conditions, these conditions could adversely affect the affordability of and
consumer demand for some of our products and services and could cause customers to shift to lower priced products and services or to delay or
forgo purchases of our products and services. One or more of these circumstances could cause our revenues to continue declining. Also, our
customers may encounter financial hardships or may not be able to obtain adequate access to credit, which could affect their ability to make timely
payments to us. In addition, as discussed below, unstable economic and credit markets may preclude us from refinancing maturing debt at terms
that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at all. For these reasons, among others, if
the current economic conditions persist or decline, this could adversely affect our operating results and financial condition, as well as our ability to
raise capital.
We may need to defend ourselves against claims that we infringe upon others' intellectual property rights, or may need to seek third-party
licenses to expand our product offerings.
From time to time, we receive notices from third parties or are named in lawsuits filed by third parties claiming we have infringed or are
infringing upon their intellectual property rights. We may receive similar notices or be involved in similar lawsuits in the future. Responding to
these claims may require us to expend significant time and money defending our use of affected technology, may require us to enter into licensing
agreements requiring royalty payments that we would not otherwise have to pay or may require us to pay damages. If we are required to take one
or more of these actions, our profit margins may decline. In addition, in responding to these claims, we may be required to stop selling or redesign
one or more of our products or services, which could significantly and adversely affect the way we conduct business.
Similarly, from time to time, we may need to obtain the right to use certain patents or other intellectual property from third parties to be able to
offer new products and services. If we cannot license or otherwise obtain rights to use any required technology from a third party on reasonable
terms, our ability to offer new products and services may be restricted, made more costly or delayed.
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Our reseller and sales agency arrangements expose us to a number of risks, one or more of which may adversely affect our business and
operating results.
We rely on reseller and sales agency arrangements with other companies to provide some of the services that we sell to our customers,
including video services and wireless products and services. If we fail to extend or renegotiate these arrangements as they expire from time to time
or if these other companies fail to fulfill their contractual obligations to us or our customers, we may have difficulty finding alternative
arrangements and our customers may experience disruptions to their services. In addition, as a reseller or sales agent, we do not control the
availability, retail price, design, function, quality, reliability, customer service or branding of these products and services, nor do we directly control
all of the marketing and promotion of these products and services. To the extent that these other companies make decisions that negatively impact
our ability to market and sell their products and services, our business plans and goals and our reputation could be negatively impacted. If these
reseller and sales agency arrangements are unsuccessful due to one or more of these risks, our business and operating results may be adversely
affected.
We could be harmed by network disruptions, security breaches, or other significant disruptions or failures of our IT infrastructure and related
systems or of those we operate for certain of our customers.
To be successful, we will need to continue providing our customers with a high capacity, reliable and secure network. We face the risk, as
does any company, of a security breach, whether through cyber attack, malware, computer viruses, sabotage, or other significant disruption of our
IT infrastructure and related systems. We face an added risk of a security breach or other significant disruption of the IT infrastructure and related
systems that we develop, install, operate and maintain for certain of our business and governmental customers. As a communications and IT
company, we face a heightened risk of a security breach or disruption from unauthorized access to our and our customers' proprietary or classified
information on our systems or the systems that we operate and maintain for certain of our customers.
Although we make significant efforts to maintain the security and integrity of these types of information and systems, there can be no
assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or
damaging, especially in light of the growing sophistication of cyber attacks and intrusions. We may be unable to anticipate all potential types of
attacks or intrusions or to implement adequate security barriers or other preventative measures.
Additional risks to our network and infrastructure include:
•

power losses or physical damage, whether caused by fire, adverse weather conditions, terrorism or otherwise;

•

capacity limitations;

•

software and hardware defects or malfunctions;

•

programming, processing and other human error; and

•

other disruptions that are beyond our control.

Network disruptions, security breaches and other significant failures of the above-described systems could:
•

disrupt the proper functioning of these networks and systems and therefore our operations or those of certain of our customers;

•

result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or
otherwise valuable information of ours or our customers,
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including trade secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes
and outcomes;
•

require significant management attention or financial resources to remedy the damages that result or to change our systems;

•

subject us to claims for contract breach, damages, credits, fines, penalties, termination or other remedies, particularly with respect to
service standards set by state regulatory commissions; or

•

result in a loss of business, damage our reputation among our customers and the public generally, subject us to additional
regulatory scrutiny or expose us to litigation.

Any or all of which could have a negative impact on our results of operations, financial condition and cash flows.
Any failure or inadequacy of our information technology infrastructure could harm our business.
The capacity, reliability and security of our internal information technology hardware and software infrastructure (including our billing
systems) are important to the operation of our current business, which would suffer in the event of system failures. Likewise, our ability to expand
and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation
of our new service offering initiatives. Our inability to expand or upgrade our technology infrastructure could have adverse consequences, which
could include the delayed implementation of new service offerings, increased acquisition integration costs, service or billing interruptions, and the
diversion of development resources.
Rapid changes in technology and markets could require substantial expenditure of financial and other resources in excess of contemplated
levels, and any inability to respond to those changes could reduce our market share and adversely affect our operating results and financial
condition.
The communications industry is experiencing significant technological changes, many of which are reducing demand for our traditional voice
services or are enabling our current customers to reduce or bypass use of our networks. Technological change could also require us to expend
capital or other resources in excess of currently contemplated levels, or to forego the development or provision of products or services that others
can provide more efficiently. If we are not able to develop new products and services to keep pace with technological advances, or if those
products and services are not widely accepted by customers, our ability to compete could be adversely affected and our market share could
decline. Any inability to keep up with changes in technology and markets could also adversely affect our operating results and financial condition,
as well as our ability to service debt and pay other obligations.
Consolidation among other participants in the telecommunications industry may allow our competitors to compete more effectively against
us, which could adversely affect our operating results and financial condition.
The telecommunications industry has experienced substantial consolidation over the last decade, and some of our competitors have combined
with other telecommunications providers, resulting in competitors that are larger, have more financial and business resources, and have broader
service offerings. Further consolidation could increase competitive pressures, and could adversely affect our operating results and financial
condition, as well as our ability to service debt and pay other obligations.
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We have a significant amount of goodwill and other intangible assets on our balance sheet. If our goodwill or other intangible assets become
impaired, we may be required to record a significant charge to earnings and reduce our stockholders' equity.
Under generally accepted accounting principles, intangible assets are reviewed for impairment on an annual basis or more frequently
whenever events or circumstances indicate that its carrying value may not be recoverable. If our intangible assets are determined to be impaired in
the future, we may be required to record a significant, non-cash charge to earnings during the period in which the impairment is determined.
We cannot assure you that we will be able to continue paying dividends at the current rate.
Based on current circumstances, we plan to continue our current dividend practices. However, you should be aware that these practices are
subject to change for reasons that may include any of the following factors:
•

we may not have enough cash to pay such dividends due to changes in our cash requirements, capital spending plans, cash flows
or financial position;

•

decisions on whether, when and in which amounts to make any future distributions will remain at all times entirely at the discretion
of our Board of Directors, which reserves the right to change our dividend practices at any time and for any reason;

•

the effects of regulatory reform, including any changes to intercarrier compensation, Universal Service Fund or special access rules;

•

our desire to maintain or improve the credit ratings on our debt;

•

the amount of dividends that we may distribute to our shareholders is subject to restrictions under Louisiana law and is limited by
restricted payment and leverage covenants in our credit facilities and, potentially, the terms of any future indebtedness that we may
incur; and

•

the amount of dividends that our subsidiaries may distribute to us is subject to restrictions imposed by state law, restrictions that
have been or may be imposed by state regulators in connection with obtaining necessary approvals for our recent acquisitions, and
restrictions imposed by the terms of credit facilities applicable to certain subsidiaries and, potentially, the terms of any future
indebtedness that these subsidiaries may incur.

Our Board of Directors is free to change or suspend our dividend practices at any time. Our common shareholders should be aware that they
have no contractual or other legal right to dividends.
Our current dividend practices could limit our ability to pursue growth opportunities.
The current practice of our Board of Directors to pay an annual $2.90 per common share dividend reflects an intention to distribute to our
shareholders a substantial portion of our cash flow. As a result, we may not retain a sufficient amount of cash to finance a material expansion of
our business in the future. In addition, our ability to pursue any material expansion of our business, through acquisitions or increased capital
spending will depend more than it otherwise would on our ability to obtain third party financing. We cannot assure you that such financing will be
available to us at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at all.
We rely on a limited number of key suppliers, vendors, landlords and other third parties to operate our business.
We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure. Our local
exchange carrier networks consist of central office and remote
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sites, all with advanced digital switches. If any of these suppliers experience interruptions or other problems delivering or servicing these network
components on a timely basis, our operations could suffer significantly. To the extent that proprietary technology of a supplier is an integral
component of our network, we may have limited flexibility to purchase key network components from alternative suppliers. Similarly, our data
center operations are materially reliant on leasing space from landlords and power services from utility companies, and being able to renew these
arrangements from time to time on favorable terms. In addition, we rely on a limited number of software vendors to support our business
management systems. In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory
replacement supplies, services, space or utilities on economically attractive terms, on a timely basis, or at all, which could increase costs or cause
disruptions in our services.
Portions of our property, plant and equipment are located on property owned by third parties.
Over the past few years, certain utilities, cooperatives and municipalities in certain of the states in which we operate have requested
significant rate increases for attaching our plant to their facilities. To the extent that these entities are successful in increasing the amount we pay
for these attachments, our future operating costs will increase.
In addition, we rely on rights-of-way, colocation agreements and other authorizations granted by governmental bodies and other third parties
to locate our cable, conduit and other network equipment on their respective properties. If any of these authorizations terminate or lapse, our
operations could be adversely affected.
We depend on key members of our senior management team.
Our success depends largely on the skills, experience and performance of a limited number of senior officers. Competition for senior
management in our industry is intense and we may have difficulty retaining our current senior officers or attracting new ones in the event of
terminations or resignations. For a discussion of similar retention concerns relating to our recent mergers, please see the risks described below
under the heading "Risks Relating to Our Recent Acquisitions."
As a holding company, we rely on payments from our operating companies to meet our obligations.
As a holding company, substantially all of our income and operating cash flow is dependent upon the earnings of our subsidiaries and their
distribution of those earnings to us in the form of dividends, loans or other payments. As a result, we rely upon our subsidiaries to generate the
funds necessary to meet our obligations, including the payment of amounts owed under our long-term debt. Our subsidiaries are separate and
distinct legal entities and have no obligation to pay any amounts owed by us or, subject to exceptions for tax-sharing purposes, to make any funds
available to us to repay our obligations, whether by dividends, loans or other payments. Certain of our subsidiaries may be restricted under loan
agreements or regulatory orders from transferring funds to us, including certain restrictions on the amount of dividends that may be paid to us.
Moreover, our rights to receive assets of any subsidiary upon its liquidation or reorganization will be effectively subordinated to the claims of
creditors of that subsidiary, including trade creditors. The notes to our consolidated financial statements included in this report describe these
matters in additional detail.
Risks Relating to our Recent Acquisitions
We expect to incur substantial expenses related to the integration of Qwest and Savvis.
We have incurred, and expect to continue to incur, substantial expenses in connection with the integration of Qwest's and Savvis' business,
operations, networks, systems, technologies, policies and procedures with our own. There are a large number of systems that need to be
integrated, including
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billing, management information, purchasing, accounting and finance, sales, payroll and benefits, fixed asset, lease administration and regulatory
compliance. While we have assumed that a certain level of transaction and integration expenses will be incurred, there are a number of factors
beyond our control that could affect the total amount or the timing of our integration expenses. Many of the expenses that will be incurred, by their
nature, are difficult to estimate accurately at the present time. Moreover, we commenced some of these integration initiatives before we completed
our integration of Embarq, which we acquired in 2009. This has delayed some of our pending integration initiatives, and increased their cost and
complexity. Due to these factors, we expect the integration expenses associated with our acquisitions to exceed in the near term our anticipated
post-acquisition integration savings resulting from the elimination of duplicative expenses and the realization of economies of scale, many of which
cannot be attained until several years after the acquisition. These acquisition-related expenses continue to reduce our earnings. These charges
have been, and are expected to continue to be, significant, although the aggregate amount and timing of these charges are still uncertain.
We may be unable to integrate successfully the Legacy CenturyLink, Qwest and Savvis businesses and realize the anticipated benefits of the
acquisitions.
The Qwest and Savvis acquisitions involved the combination of companies which previously operated as independent public companies. We
have devoted, and will continue to devote, significant management attention and resources to integrating the business practices and operations of
Legacy CenturyLink, Qwest and Savvis. We may encounter difficulties in the integration process, including the following:
•

the inability to successfully combine our businesses in a manner that permits the combined company to achieve the cost savings
and operating synergies anticipated to result from the acquisitions, either due to technological challenges, personnel shortages,
strikes or otherwise, any of which would result in the anticipated benefits of the acquisitions not being realized partly or wholly in
the time frame currently anticipated or at all;

•

lost sales as a result of customers of any of the three companies deciding not to do business with the combined company;

•

the complexities associated with managing the combined businesses out of several different locations and integrating personnel
from the three companies, while at the same time attempting to provide consistent, high quality products and services under a
unified culture;

•

the additional complexities of combining companies with different histories, regulatory restrictions, product markets and customer
bases, and initiating this process before we had fully completed the integration of our operations with those of Embarq;

•

the failure to retain key employees, some of whom could be critical to integrating the companies;

•

potential unknown liabilities and unforeseen increased expenses or regulatory conditions associated with the acquisitions; and

•

performance shortfalls at one or all of the companies as a result of the diversion of management's attention caused by integrating
the companies' operations.

For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of our management,
the disruption of our ongoing business or inconsistencies in our products, services, standards, controls, procedures and policies, any of which
could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of our
recent acquisitions, or could otherwise adversely affect our business and financial results.
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Our final determinations of the acquisition date fair value of the assets and liabilities acquired from Qwest and Savvis may be significantly
different from our current estimates, which could have a material adverse effect on our operating results.
We have recognized the assets and liabilities of Qwest and Savvis based on our preliminary estimates of their respective 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. As such, we have not completed our valuation analysis and
calculations in sufficient detail necessary to arrive at the final estimates of the fair value of the assets acquired and liabilities assumed, along with
the related allocations to goodwill and intangible assets. As such, all information presented in this report is preliminary and subject to revision
pending the final valuation analysis. We expect to complete our final fair value determinations no later than the first quarter of 2012 for Qwest and
the second quarter of 2012 for Savvis. Our final fair value determinations may be significantly different than those reflected in this report, which
could have a material adverse effect on our operating results.
The Qwest and Embarq acquisitions changed the profile of our local exchange markets to include more large urban areas, with which we
have limited operating experience.
Prior to the Embarq acquisition, we provided local exchange telephone services to predominantly rural areas and small to mid-size cities.
Embarq's local exchange markets included Las Vegas, Nevada and suburbs of Orlando and several other large U.S. cities, and we have operated
these more dense markets only since mid-2009. Qwest's markets included Phoenix, Arizona, Denver, Colorado, Minneapolis—St. Paul, Minnesota,
Seattle, Washington, Salt Lake City, Utah, and Portland, Oregon. Compared to our legacy markets, these urban markets, on average, are
substantially denser and have experienced greater access line losses in recent years. While we believe our strategies and operating models
developed serving rural and smaller markets can successfully be applied to larger markets, we cannot assure you of this. Our business, financial
performance and prospects could be harmed if our current strategies or operating models cannot be successfully applied to larger markets, or are
required to be changed or abandoned to adjust to differences in these larger markets.
We cannot assure you whether, when or in what amounts we will be able to use Qwest's and Savvis' net operating losses.
At December 31, 2011, we had approximately $6.2 billion of federal net operating losses, or NOLs, of which, approximately $5.6 billion and
$212 million relate to pre-acquisition losses of Qwest and Savvis, respectively. These NOLs can be used to offset our future federal and certain
taxable income.
The acquisition of Qwest and Savvis caused an "ownership change" under federal tax laws relating to the use of NOLs. As a result, these laws
could limit our ability to use their NOLs and certain other deferred tax attributes. Further limitations could apply if we are deemed to undergo an
ownership change in the future. Despite this, we expect to use substantially all of these NOLs and certain other deferred tax attributes as an offset
to our federal future taxable income by 2015, although the timing of that use will depend upon the consolidated group's future earnings and future
tax circumstances.
Our acquisitions have increased our exposure to the risks of fluctuations in energy costs, power outages and limited availability of electrical
resources.
Through the acquisitions of Qwest and Savvis, we have added a significant number of data center facilities, which are susceptible to regional
costs and supply of power and electrical power outages. We attempt to limit exposure to system downtime by using backup generators and power
supplies. However, we may not be able to limit our exposure entirely even with these protections in place. In addition, our energy costs can
fluctuate significantly or increase for a variety of reasons, including
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changes in legislation and regulation. As energy costs increase, we may not always be able to pass on the increased costs of energy to our clients,
which could harm our business. Power and cooling requirements at our data centers are also increasing as a result of the increasing power
demands of today's servers. Since we rely on third parties to provide our data centers with power sufficient to meet our clients' power needs, our
data centers could have a limited or inadequate amount of electrical resources. Our clients' demand for power may also exceed the power capacity
in older data centers, which may limit our ability to fully utilize these data centers. This could adversely affect our relationships with our clients and
hinder our ability to run our data centers, which could harm our business.
Our inability to renew data center leases, or renew on favorable terms, could have a negative impact on our financial results.
A significant majority of the data centers we acquired in the Qwest and Savvis acquisitions are leased and have lease terms that expire
between 2012 and 2031. The majority of these leases provide us with the opportunity to renew the lease at our option for periods generally ranging
from five to ten years. Many of these renewal options, however, provide that rent for the renewal period will be equal to the fair market rental rate at
the time of renewal. If the fair market rental rates are significantly higher than our current rental rates, we may be unable to offset these costs by
charging more for our services, which could have a negative impact on our financial results. Also, it is possible that a landlord may insist on other
financially unfavorable renewal terms or, where no further option to renew exists, elect not to renew altogether.
Our acquisitions of Qwest and Savvis has increased our exposure to the risks of operating internationally.
Prior to acquiring Qwest on April 1, 2011, substantially all of our operations were historically conducted within the continental United States.
Although Qwest has historically conducted some operations overseas, the acquisition of Savvis has increased the importance of international
operations to our future operations, growth and prospects.
As a result of our recent acquisitions, our non-domestic operations are subject to varying degrees of regulation in each of the foreign
jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those
jurisdictions, and can change significantly over time. Future regulatory, judicial and legislative changes or interpretations may have a material
adverse effect on our ability to deliver services within various foreign jurisdictions. Many of these foreign laws and regulations relating to
communications services are more restrictive than U.S. laws and regulations, particularly those relating to content distributed over the Internet. For
example, the European Union has enacted a data retention system that, once implemented by individual member states, will involve requirements to
retain certain Internet protocol, or IP, data that could have an impact on our operations in Europe. Moreover, national regulatory frameworks that
are consistent with the policies and requirements of the World Trade Organization have only recently been, or are still being, enacted in many
countries. Accordingly, many countries are still in the early stages of providing for and adapting to a liberalized telecommunications market. As a
result, in these markets we may encounter more protracted and difficult procedures to obtain licenses necessary to provide the full set of products
we offer.
In addition to these international regulatory risks, some of the other risks inherent in conducting business internationally include:
•

tax, licensing, currency, political or other business restrictions or requirements;

•

import and export restrictions;

•

longer payment cycles and problems collecting accounts receivable;
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•

additional U.S. and other regulation of non-domestic operations, including regulation under the Foreign Corrupt Practices Act, or
FCPA, as well as other anti-corruption laws;

•

fluctuations in currency exchange rates;

•

the ability to secure and maintain the necessary physical and telecommunications infrastructure; and

•

challenges in staffing and managing foreign operations.

Any one or more of these factors could adversely affect our international operations.
Moreover, in order to effectively compete in certain foreign jurisdictions, it is frequently necessary or required to establish joint ventures,
strategic alliances or marketing arrangements with local operators, partners or agents. Reliance on local operators, partners or agents could expose
us to the risk of being unable to control the scope or quality of our overseas services or products, or being held liable under the FCPA or other
anti-corruption laws for actions taken by our strategic or local partners or agents even though these partners or agents may not themselves be
subject to the FCPA or other applicable anti-corruption laws. Any determination that we have violated the FCPA or other anti-corruption laws
could have a material adverse effect on our business, results of operations, reputation or prospects.
Risks Relating to Legal and Regulatory Matters
Any adverse outcome of the KPNQwest litigation, or other material litigation of Qwest, Savvis or CenturyLink could have a material adverse
impact on our financial condition and operating results, on the trading price of our securities and on our ability to access the capital markets.
As described in Note 16—Commitments and Contingencies to our consolidated financial statements in Item 8 of this report, the KPNQwest
matters present material and significant risks to us. In the aggregate, the plaintiffs in the KPNQwest matters seek billions of euros (equating to
billions of dollars) in damages. In addition, the outcome of one of the two pending matters could have a negative impact on the other. We continue
to defend against these matters vigorously and are currently unable to provide any estimate as to the timing of their resolution.
We can give no assurance as to the impacts on our financial results or financial condition that may ultimately result from these matters. The
ultimate outcomes of these matters are still uncertain, and substantial settlements or judgments in these matters could have a significant impact on
us. The magnitude of such settlements or judgments resulting from these matters could materially and adversely affect our financial condition and
ability to meet our debt obligations, potentially impacting our credit ratings, our ability to access capital markets and our compliance with debt
covenants. In addition, the magnitude of any such settlements or judgments may cause us to draw down significantly on our cash balances, which
might force us to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional debt
securities or selling assets.
There are other material proceedings pending against us, as described in Note 16—Commitments and Contingencies to our consolidated
financial statements in Item 8 of this report. Depending on their outcome, any of these matters could have a material adverse effect on our financial
position or operating results. We can give you no assurances as to the impact of these matters on our operating results or financial condition.
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We operate in a highly regulated industry and are therefore exposed to restrictions on our manner of doing business and a variety of claims
relating to such regulation.
General
We are subject to significant regulation by the FCC, which regulates interstate communications, and state utility commissions, which regulate
intrastate communications. Generally, we must obtain and maintain certificates of authority from the FCC and regulatory bodies in most states
where we offer regulated services, and we are subject to numerous, and often quite detailed, requirements and interpretations under federal, state
and local laws, rules and regulations. Accordingly, we cannot ensure that we are always considered to be in compliance with all these requirements
at any single point in time. The agencies responsible for the enforcement of these laws, rules and regulations may initiate inquiries or actions based
on customer complaints or on their own initiative.
Regulation of the telecommunications industry is changing rapidly, and the regulatory environment varies substantially from jurisdiction to
jurisdiction. Notwithstanding a recent movement towards alternative regulation, a substantial portion of our local voice services revenue remains
subject to FCC and state utility commission pricing regulation, which periodically exposes us to pricing or earnings disputes and could expose us
to unanticipated price declines. Interexchange carriers have filed complaints in various forums requesting reductions in our access rates. In
addition, several long distance providers are disputing amounts owed to us for carrying VoIP traffic or traffic they claim is VoIP traffic and are
refusing to pay such amounts. There can be no assurance that future regulatory, judicial or legislative activities will not have a material adverse
effect on our operations, or that regulators or third parties will not raise material issues with regard to our compliance or noncompliance with
applicable regulations.
Risk associated with recent changes in federal regulation
On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order ("CAF order") intended to reform the
existing regulatory regime to recognize ongoing shifts to new technologies, including VoIP, and gradually re-direct universal service funding to
foster nationwide broadband coverage. This initial ruling provides for a multi-year transition over the next decade as intercarrier compensation
charges are reduced, universal service funding is explicitly targeted to broadband deployment, and subscriber line charges paid by end user
customers are gradually increased. These changes will substantially increase the pace of reductions in the amount of switched access revenues we
receive in our wholesale markets segment, while creating opportunities for increases in federal USF and retail revenue streams. The ultimate effect
of this order on communications companies is largely dependent on future FCC proceedings designed to implement the order, the most significant
of which are scheduled to be determined in 2012 and 2013. Several judicial challenges to the CAF order are pending and additional future
challenges are possible, any of which could alter or delay the FCC's proposed changes. In addition, based on the outcome of the FCC proceedings,
various state commissions may consider changes to their universal service funds or intrastate access rates. For these reasons, we cannot predict
the ultimate impact of these proceedings at this time.
Under other pending proceedings, the FCC may implement changes in the regulation or pricing of special access services, any of which could
adversely affect our operations or financial results.
Risks posed by costs of regulatory compliance
Regulations continue to create significant compliance costs for us. Challenges to our tariffs by regulators or third parties or delays in
obtaining certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and, if successful, such
challenges could adversely affect the rates that we are able to charge our customers. Our business also may be impacted by legislation and
regulation imposing new or greater obligations related to regulations or laws related to
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broadband deployment, bolstering homeland security, increasing disaster recovery requirements, minimizing environmental impacts, enhancing
privacy, or addressing other issues that impact our business, including the Communications Assistance for Law Enforcement Act (which requires
communications carriers to ensure that their equipment, facilities, and services are able to facilitate authorized electronic surveillance), and laws
governing local number portability and customer proprietary network information requirements. We expect our compliance costs to increase if
future laws or regulations continue to increase our obligations to assist other governmental agencies.
Risks posed by other regulations
All of our operations are also subject to a variety of environmental, safety, health and other governmental regulations. We monitor our
compliance with federal, state and local regulations governing the management, discharge and disposal of hazardous and environmentally
sensitive materials. Although we believe that we are in compliance with these regulations, our management, discharge or disposal of hazardous
and environmentally sensitive materials might expose us to claims or actions that could have a material adverse effect on our business, financial
condition and operating results.
Regulatory changes in the communications industry could adversely affect our business by facilitating greater competition against us.
Beginning in 1996, Congress and the FCC have taken several steps that have resulted in increased competition among service providers.
Many of the FCC's regulations remain subject to judicial review and additional rulemakings, thus making it difficult to predict what effect any
changes in interpretation of the 1996 Act may ultimately have on us and our competitors. We could be adversely affected by programs or
initiatives recently undertaken by Congress or the FCC, including (i) the federal broadband stimulus projects authorized by Congress in 2009;
(ii) the FCC's 2010 National Broadband Plan; (iii) new "network neutrality" rules; (iv) the proposed broadband "Connect America" replacement
support fund, and (v) the FCC's above-described October 27, 2011 order.
We are subject to significant regulations that limit our flexibility.
As a diversified full service ILEC, we have traditionally been subject to significant regulation that does not apply to many of our competitors.
This regulation imposes substantial compliance costs on us and restricts our ability to change rates, to compete and to respond rapidly to
changing industry conditions. As our business becomes increasingly competitive, regulatory disparities between us and our competitors could
impede our ability to compete.
We are exposed to risks arising out of recent legislation affecting U.S. public companies.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the
Dodd-Frank Wall Street Reform and Consumer Protection Act, and related regulations implemented by the SEC, the New York Stock Exchange and
the Public Company Accounting Oversight Board, are increasing legal and financial compliance costs and making some activities more time
consuming. Any future failure to successfully or timely complete annual assessments of our internal controls required by Section 404 of the
Sarbanes-Oxley Act could subject us to sanctions or investigation by regulatory authorities. Any such action could adversely affect our financial
results or investors' confidence in us.
For a more thorough discussion of the regulatory issues that may affect our business, see Item 1 of this report.
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Risks Affecting our Liquidity
Our high debt levels pose risks to our viability and may make us more vulnerable to adverse economic and competitive conditions, as well as
other adverse developments.
We continue to carry significant debt. As of December 31, 2011, our consolidated debt was approximately $21.8 billion. Approximately
$4.3 billion of our debt obligations comes due over the next three years. While we currently believe that we will have the financial resources to meet
or refinance our obligations when they come due, we cannot fully anticipate our future condition or the condition of the credit markets or the
economy generally. We may have unexpected expenses and liabilities, and we may have limited access to financing.
We expect to periodically require financing to meet our debt obligations as they come due. Due to the unstable economy and the current credit
market environment, we may not be able to refinance maturing debt at terms that are as favorable as those from which we previously benefited, at
terms that are acceptable to us or at all. We may also need to obtain additional financing or investigate other methods to generate cash (such as
further cost reductions or the sale of assets) if revenues and cash provided by operations decline, if economic conditions weaken, if competitive
pressures increase, if we are required to contribute a material amount of cash to our collective pension plans, if we are required to begin to pay
other post-retirement benefits significantly earlier than is anticipated, if we become subject to significant judgments or settlements in one or more
of the matters discussed in Note 16—Commitments and Contingencies to our consolidated financial statements in Item 8 of this report, or if we
engage in any acquisition or other initiatives that increase our cash requirements. We can give no assurance that this additional financing will be
available on terms that are acceptable to us or at all. If we are able to obtain additional financing, our credit ratings could be adversely affected,
which could further raise our borrowing costs and further limit our future access to capital and our ability to satisfy our debt obligations.
Our significant levels of debt can adversely affect us in several other respects, including (i) exposing us to the risk of credit rating
downgrades, which would raise our borrowing costs, (ii) hindering our ability to adjust to changing market, industry or economic conditions,
(iii) limiting our ability to access the capital markets, (iv) limiting the amount of free cash flow available for future operations, acquisitions,
dividends, stock repurchases or other uses, (v) making us more vulnerable to economic or industry downturns, including interest rate increases,
and (vi) placing us at a competitive disadvantage compared to less leveraged competitors.
Certain of our debt issues have cross payment default or cross acceleration provisions. When present, these provisions could have a wider
impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. Any such event could adversely affect our
ability to conduct business or access the capital markets and could adversely impact our credit ratings. See "Liquidity and Capital Resources" in
Item 7 of this report for additional information about our credit facility.
The degree to which we are leveraged may have other important limiting consequences, including the following:
•

placing us at a competitive disadvantage as compared with our less leveraged competitors;

•

making us more vulnerable to downturns in general economic conditions or in any of our businesses;

•

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

•

impairing our credit ratings or our ability to obtain additional financing in the future for working capital, capital expenditures or
general corporate purposes.
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We may be unable to significantly reduce the substantial capital requirements or operating expenses necessary to continue to operate our
business, which may in turn affect our operating results.
The industry in which we operate is capital intensive, and we anticipate that our capital requirements will continue to be significant in the
coming years. Although we have reduced our operating expenses over the past few years, we may be unable to further significantly reduce these
costs, even if revenues in some areas of our business are decreasing. While we believe that our planned level of capital expenditures will meet both
our maintenance and our core growth requirements going forward, this may not be the case if circumstances underlying our expectations change.
Adverse changes in the value of assets or obligations associated with our pension and post-retirement benefit plans could negatively impact
our liquidity.
We maintain one or more qualified pension plans, non-qualified pension plans and post-retirement benefit plans, several of which are currently
underfunded. The accounting unfunded status of our pension plans was $1.8 billion as of December 31, 2011. Adverse changes in interest rates or
market conditions, among other assumptions and factors, could cause a significant increase in our benefit obligation or a significant decrease in
the value of plan assets. These adverse changes could require us to contribute a material amount of cash to our pension plans or could accelerate
the timing of required cash payments. During 2011, we contributed an aggregate of $587 million to our pension plans and we expect to make a
contribution of less than $50 million in 2012. We currently expect that required and voluntary contributions for 2013 will be approximately $500
million, based on current laws and circumstances. The actual amounts of required contributions to our plans in 2013 and beyond are subject to
several variables, many of which are beyond our control, including earnings on plan investments, discount rates, demographic experience, changes
in plans benefits and changes in funding laws and regulations. Any future material cash contributions could have a negative impact on our
liquidity by reducing our cash flows.
Our debt agreements and the debt agreements of our subsidiaries allow us to incur significantly more debt, which could exacerbate the other
risks described in this report.
The terms of our debt instruments and the debt instruments of our subsidiaries permit additional indebtedness. Additional debt may be
necessary for many reasons, including to adequately respond to competition, to comply with regulatory requirements related to our service
obligations, to fund capital requirements or to finance acquisitions. Incremental borrowings on terms that impose additional financial risks could
exacerbate the other risks described in this report.
We plan to access the public debt markets, and we cannot assure you that these markets will remain free of disruptions.
We have a significant amount of indebtedness that we intend to refinance over the next several years, principally we expect through the
issuance of debt securities of CenturyLink, Qwest Corporation ("QC") or both. Our ability to arrange additional financing will depend on, among
other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. Prevailing
market conditions could be adversely affected by the ongoing sovereign debt crises in Europe, the failure of the United States to reduce its deficit
in amounts deemed to be sufficient, possible further downgrades in the credit ratings of the U.S. debt, contractions or limited growth in the
economy or other similar adverse economic developments in the U.S. or abroad. As a result, we cannot assure you that we will be able to obtain
additional financing on terms acceptable to us or at all. Any such failure to obtain additional financing could jeopardize our ability to repay,
refinance or reduce debt obligations.
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Other Risks
If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies, the accuracy of our
financial statements and related disclosures could be affected.
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires
management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and
accompanying notes. Our critical accounting policies, which are described in Item 7 of this report, describe those significant accounting policies
and methods used in the preparation of our consolidated financial statements that are considered "critical" because they require judgments,
assumptions and estimates that materially impact our consolidated financial statements and related disclosures. As a result, if future events or
assumptions differ significantly from the judgments, assumptions and estimates in our critical accounting policies, these events or assumptions
could have a material impact on our consolidated financial statements and related disclosures.
We face hurricane and other natural disaster risks, which can disrupt our operations and cause us to incur substantial additional capital
costs.
A substantial number of our access lines are located in Florida, Alabama, Louisiana, Texas, North Carolina, and South Carolina, and our
operations there are subject to the risks associated with severe tropical storms, hurricanes and tornadoes, including downed telephone lines,
power outages, damaged or destroyed property and equipment, and work interruptions. Although we maintain property and casualty insurance on
our plant (excluding our outside plant) and may under certain circumstances be able to seek recovery of some additional costs through increased
rates, only a portion of our additional costs directly related to such hurricanes and natural disasters have historically been recoverable. We cannot
predict whether we will continue to be able to obtain insurance for hazard-related damages or, if obtainable and carried, whether this insurance will
be adequate to cover our losses. In addition, we expect any insurance of this nature to be subject to substantial deductibles and to provide for
premium adjustments based on claims. Any future hazard-related costs and work interruptions could adversely affect our operations and our
financial condition.
We are subject to franchising requirements that could impede our expansion opportunities.
We may be required to obtain from municipal authorities operating franchises to install or expand facilities. Some of these franchises may
require us to pay franchise fees. These franchising requirements generally apply to our fiber transport and CLEC operations, and to our emerging
switched digital television. These requirements could delay us in expanding our operations or increase the costs of providing these services.
Tax audits or changes in tax laws could adversely affect us.
Like all large businesses, we are subject to frequent and regular audits by the Internal Revenue Service as well as state and local tax
authorities. These audits could subject us to tax liabilities if adverse positions are taken by these tax authorities.
We believe that we have adequately provided for tax contingencies. However, our tax audits and examinations may result in tax liabilities that
differ materially from those that we have recorded in our consolidated financial statements. Because the ultimate outcomes of all of these matters
are uncertain, we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our financial results.
The current maximum U.S. tax rate of 15% on qualified dividends is scheduled to rise to a maximum rate of 39.6% on January 1, 2013 if
Congress does not otherwise act. An increase in the U.S.
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tax rate on dividends could reduce demand for our stock, which could potentially depress its trading price.
Our agreements and organizational documents and applicable law could limit another party's ability to acquire us.
A number of provisions in our agreements and organizational documents and various provisions of applicable law may delay, defer or prevent
a future takeover of CenturyLink unless the takeover is approved by our Board of Directors. This could deprive our shareholders of any related
takeover premium.
If we fail to extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, or if our
unionized employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.
Over 40% of our employees are members of various bargaining units represented by the Communications Workers of America and the
International Brotherhood of Electrical Workers. From time to time, our labor agreements with these unions lapse, and we typically negotiate the
terms of new agreements. Approximately 15,000 of our union-represented employees are subject to collective bargaining agreements that expire
throughout 2012. We cannot predict the outcome of these negotiations. We may be unable to reach new agreements, and union employees may
engage in strikes, work slowdowns or other labor actions, which could materially disrupt our ability to provide services and result in increased cost
to us. In addition, new labor agreements may impose significant new costs on us, which could impair our financial condition or results of
operations in the future. To the extent they contain benefit provisions, these agreements also limit our flexibility to change benefits in response to
industry or competitive changes. In particular, the post-employment benefits provided under these agreements cause us to incur costs not faced
by many of our competitors, which could ultimately hinder our competitive position.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our property, plant and equipment consists principally of telephone lines, central office equipment, and land and buildings related to our
telephone operations. The components of our gross property, plant and equipment consisted of the following:
December 31,
2011
2010
2%
1%
42%
51%
33%
33%
20%
13%
3%
2%
100%
100%

Land
Fiber, conduit and other outside plant(1)
Central office and other network electronics(2)
Support assets (3)
Construction in progress(4)
Gross property, plant and equipment

(1)

Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.

(2)

Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.

(3)

Support assets consist of buildings, computers and other administrative and support equipment.

(4)

Construction in progress includes property of the foregoing categories that has not been placed in service as it is still under construction.

We own substantially all of our telecommunications equipment required for our business. However, we lease certain facilities and equipment
under various capital lease arrangements when the leasing arrangements are more favorable to us than purchasing the assets.
We also own and lease administrative offices in major metropolitan locations both in the United States and internationally. Substantially all of
our network electronics equipment is located in buildings or land that we own or lease within our local service area. Outside of our local service
area, our assets are generally located on real property pursuant to an agreement with the property owner or another person with rights to the
property. It is possible that we may lose our rights under one or more of these agreements, due to their termination or their expiration.
Several putative class actions have been filed against us disputing our use of certain rights-of-way as described in "Legal Proceedings—
Other Matters" in Item 3 of this report. If we lose any of these rights-of-way or are unable to renew them, we may find it necessary to move or
replace the affected portions of our network. However, we do not expect any material adverse impacts as a result of the loss of any of these rights.
With the acquisitions of Qwest in April 2011 and Savvis in July 2011, we expanded our property to include data center assets, and the related
facilities and communications equipment. The facilities that house Savvis' warehouses, network equipment and data centers are leased.
Some of the properties of our telephone subsidiaries are subject to mortgages securing the debt of such companies. Our net property, plant
and equipment was $19.4 billion and $8.8 billion at December 31, 2011 and 2010, respectively.
ITEM 3. LEGAL PROCEEDINGS
In this section, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter. Until and
unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to
represent.
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We have established accrued liabilities for the matters described below where losses are deemed probable and reasonably estimable.
Litigation Matters Relating to CenturyLink and Embarq
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 $34 million. The lawsuits allege that Sprint
Nextel has breached contracts, violated tariffs, and violated the Federal Communications Act by failing to pay these charges. One lawsuit, filed on
behalf of all legacy Embarq operating entities, was tried in federal court in Virginia in August 2010 and, in March 2011, a ruling was issued in our
favor and against Sprint Nextel. We currently expect Sprint Nextel to file an appeal of this decision. The other lawsuit, filed on behalf of all Legacy
CenturyLink operating entities, is pending in federal court in Louisiana. In that case, in early 2011 the Court dismissed certain of CenturyLink's
claims, referred other claims to the FCC, and stayed the litigation. We have not deferred revenue related to these matters as an adverse outcome is
not probable based upon current circumstances.
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, a group of retirees filed a putative class action lawsuit challenging the decision to make certain modifications in retiree benefits
programs relating to life insurance, medical insurance and prescription drug benefits, generally effective January 1, 2006 and January 1, 2008
(which, at the time of the modifications, was expected to reduce estimated future expenses for the subject benefits by more than $300 million).
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. The Court certified a class on certain of plaintiffs'
claims, but rejected class certification as to other claims. Embarq and other defendants continue to vigorously contest these claims and charges.
On October 14, 2011, the Fulghum lawyers filed a new, related lawsuit, Abbott et al. v. Sprint Nextel et al. CenturyLink/Embarq is not named a
defendant in the lawsuit. In Abbott, approximately 1,800 plaintiffs allege breach of fiduciary duty in connection with the changes in retiree benefits
that also are at issue in the Fulghum case. The Abbott plaintiffs are all members of the class that was certified in Fulghum on claims for allegedly
vested benefits (Counts I and III), and the Abbott claims are similar to the Fulghum breach of fiduciary duty claim (Count II), on which the
Fulghum court denied class certification. We have not accrued a liability for these matters as it is premature to determine whether an accrual is
warranted and, if so, a reasonable estimate of probable liability.
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. We have accrued an amount that we believe is probable for these matters; however, the amount is not material to our financial
statements.
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Litigation Matters Relating to Qwest
The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate Qwest to
indemnify its former directors, officers or employees with respect to certain of the matters described below and Qwest has been advancing legal
fees and costs to certain former directors, officers or employees in connection with certain matters described below.
On September 29, 2010, the trustees in the Dutch bankruptcy proceeding for KPNQwest, N.V. (of which Qwest was a major shareholder) filed a
lawsuit in district court in Haarlem, the Netherlands, alleging tort and mismanagement claims under Dutch law. Qwest and Koninklijke KPN N.V.
("KPN") are defendants in this lawsuit along with a number of former KPNQwest supervisory board members and a former officer of KPNQwest,
some of whom were formerly affiliated with Qwest. Plaintiffs allege, among other things, that defendants' actions were a cause of the bankruptcy of
KPNQwest, and they seek damages for the bankruptcy deficit of KPNQwest, which is claimed to be approximately €4.2 billion (or approximately
$5.4 billion based on the exchange rate on December 31, 2011), plus statutory interest. Two lawsuits asserting similar claims were previously filed
against Qwest and others in federal courts in New Jersey in 2004 and Colorado in 2009; those courts dismissed the lawsuits without prejudice on
the grounds that the claims should not be litigated in the United States.
On September 13, 2006, Cargill Financial Markets, Plc and Citibank, N.A. filed a lawsuit in the District Court of Amsterdam, the Netherlands,
against Qwest, KPN, KPN Telecom B.V., and other former officers, employees or supervisory board members of KPNQwest, some of whom were
formerly affiliated with Qwest. The lawsuit alleges that defendants misrepresented KPNQwest's financial and business condition in connection
with the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of
approximately €219 million (or approximately $284 million based on the exchange rate on December 31, 2011).
We have not accrued a liability for the above matters as it is premature to determine whether an accrual is warranted and, if so, a reasonable
estimate of probable liability. We will continue to defend against the pending KPNQwest litigation matters vigorously.
Several putative class actions relating to the installation of fiber-optic cable in certain rights-of-way were filed against Qwest on behalf of
landowners on various dates and in various courts in Alabama, Arizona, California, Colorado, Delaware, Florida, Georgia, Illinois (where there is a
federal and a state court case), Indiana, Iowa, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada,
New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia, and Washington. For
the most part, the complaints challenge our right to install our fiber-optic cable in railroad rights-of-way. The complaints allege that the railroads
own the right-of-way as an easement that did not include the right to permit us to install our fiber-optic cable in the right-of-way without the
Plaintiffs' consent. Most of the actions purport to be brought on behalf of state-wide classes in the named Plaintiffs' respective states, although
two of the currently pending actions purport to be brought on behalf of multi-state classes. Specifically, the Illinois state court action purports to
be on behalf of landowners in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin, and the Indiana state court action
purports to be on behalf of a national class of landowners. In general, the complaints seek damages on theories of trespass and unjust enrichment,
as well as punitive damages. On July 18, 2008, a federal district court in Massachusetts entered an order preliminarily approving a settlement of all
of the actions described above, except the action pending in Tennessee. On September 10, 2009, the court denied final approval of the settlement
on grounds that it lacked subject matter jurisdiction. On December 9, 2009, the court issued a revised ruling that, among other things, denied a
motion for approval as moot and dismissed the matter for lack of subject matter jurisdiction. The parties are now engaged in negotiating and
finalizing settlements on a state-by-state basis, and have filed and received final approval of settlements in Alabama and Illinois federal court, and
in Tennessee state court. Final approval also has been
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granted in federal court actions in Idaho and North Dakota, to which Qwest is not a party. We have accrued an amount that we believe is probable
for these matters; however, the amount is not material to our financial statements.
Other Matters
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, various tax issues, occasional grievance hearings before labor
regulatory agencies, patent infringement allegations and miscellaneous third party tort actions. The outcome of these other proceedings is not
predictable. However, 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange ("NYSE") and the Berlin Stock Exchange and is traded under the symbol CTL
and CYT, respectively. The following table sets forth the high and low reported sales prices on the NYSE along with the quarterly dividends, for
each of the quarters indicated.

Sales prices
High
Low
2011
First quarter
Second quarter
Third quarter
Fourth quarter
2010
First quarter
Second quarter(1)
Third quarter
Fourth quarter

(1)

Dividend per common share

$

46.78
43.49
41.32
38.01

39.45
38.66
31.75
31.16

.725
.725
.725
.725

$

37.00
36.73
40.00
46.87

32.98
14.16
32.92
39.18

.725
.725
.725
.725

During the widely-publicized temporary market disruption that occurred on the afternoon of May 6, 2010, our common stock momentarily traded as low as $14.16
in markets other than the NYSE. The opening and closing prices of our common stock on May 6, 2010, were $34.48 and $33.52, respectively.

Common stock dividends during 2011 and 2010 were paid each quarter.
As described in greater detail in Item 1A of this Annual Report on Form 10-K, the declaration and payment of dividends is at the discretion of
our Board of Directors, and will depend upon our financial results, cash requirements, future prospects and other factors deemed relevant by our
Board of Directors.
At February 21, 2012, there were approximately 175,000 stockholders of record although there were significantly more beneficial holders of our
common stock. At February 21, 2012, the closing stock price of our common stock was $39.43.
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Issuer Purchases of Equity Securities
The following table contains information about shares of our common stock that we withheld from employees to satisfy tax obligations related
to the vesting of stock-based awards during the fourth quarter of 2011:

Total Number
of Shares
Purchased
Period
October 2011
November 2011
December 2011
Total

13,923
2,225
308
16,456

Average Price
Paid Per
Share
$

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

34.40
37.29
36.68

N/A
N/A
N/A

Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans or
Programs
N/A
N/A
N/A

N/A—not applicable
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected consolidated financial data should be read in conjunction with and are qualified by reference to the
consolidated financial statements and notes thereto in Item 8 of this report and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 of this report.
The table of selected financial data shown below is derived from our audited consolidated financial statements. These historical results are not
necessarily indicative of results that you can expect for any future period.
The results of operations include Savvis for periods after July 15, 2011, Qwest for periods after April 1, 2011 and Embarq for periods after
July 1, 2009.
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Selected financial information from the consolidated statements of operations data is as follows:

Operating revenues
Operating expenses
Operating income
Income before income tax
expense
Net income
Basic earnings per
common share
Diluted earnings per
common share
Dividends declared per
common share
Weighted average basic
common shares
outstanding
Weighted average
diluted common
shares outstanding

(1)

$
$
$

Years Ended December 31,(1)
2011
2010
2009
2008
(Dollars in millions, except per share amounts
and shares in thousands)
15,351
7,042
4,974
2,600
13,326
4,982
3,741
1,878
2,025
2,060
1,233
721

2007

2,656
1,863
793

$
$

948
573

1,531
948

813
647

561
366

620
418

$

1.07

3.13

3.23

3.53

3.79

$

1.07

3.13

3.23

3.52

3.71

$

2.90

2.90

2.80

2.1675

.26

532,780

300,619

198,813

102,268

109,360

534,121

301,297

199,057

102,560

112,787

See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" in Item 7 of this report for a discussion of
unusual items affecting the results as of the years ended December 31, 2011, 2010 and 2009.

Selected financial information from the consolidated balance sheets is as follows:

2011
Net property, plant and
equipment
Goodwill
Total assets
Total long-term debt(1)
Total stockholders'
equity

(1)

2010

December 31,
2009
(Dollars in millions)

2008

2007

$
$
$
$

19,436
21,724
56,139
21,836

8,754
10,261
22,038
7,328

9,097
10,252
22,563
7,754

2,896
4,016
8,254
3,315

3,108
4,011
8,185
3,014

$

20,827

9,647

9,467

3,168

3,416

Total long-term debt is the sum of current maturities of long-term debt and long-term debt on our consolidated balance sheets. For total obligations, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Future Contractual Obligations" in Item 7 of this report.

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Selected financial information from the consolidated statements of cash flows is as follows:
Years Ended December 31,
2010
2009
2008
(Dollars in millions)

2011
Net cash provided by
operating activities
Net cash used in
investing activities
Net cash used in
financing activities
Payments for property,
plant and equipment
and capitalized
software

$

4,201

2,045

1,574

2007

853

1,030

(3,647)

(859)

(679)

(389)

(619)

(577)

(1,175)

(976)

(255)

(402)

(2,411)

(864)

(755)

(287)

(326)

The following table presents certain selected consolidated operating data as of the following dates:

2011 (1)
Broadband subscribers
Access lines

5,554
14,584

December 31,
2009 (2)
2010
(in thousands)
2,349
2,186
6,489
7,025

2008
626
2,025

2007
541
2,152

(1)

In connection with our Qwest acquisition on April 1, 2011, we acquired approximately 9.0 million telephone access lines and approximately 3.0 million broadband
subscribers.

(2)

In connection with our Embarq acquisition on July 1, 2009, we acquired approximately 5.4 million telephone access lines and approximately 1.5 million broadband
subscribers.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to "Notes" in this Item 7 refer to the Notes to Consolidated Financial Statements included in Item 8 of this annual report.
Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" in Item 1
of this report for factors relating to these statements and see "Risk Factors" in Item 1A of this report for a discussion of certain risk factors
applicable to our business, financial condition and results of operations.
Overview
We are an integrated communications company engaged primarily in providing an array of communications services to our residential,
business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line
(including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless and video services. In
certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security
monitoring. 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.
At December 31, 2011, we operated 14.584 million access lines in 37 states, and served 5.554 million broadband subscribers. During 2011, we
updated our methodology for counting access lines and broadband subscribers. Our access line methodology includes only those access lines
that we use to provide services to external customers and excludes lines used solely by us and our affiliates. Our methodology also excludes
unbundled loops and includes stand-alone broadband subscribers. Our methodology for counting access lines may not be comparable to those of
other companies.
Our consolidated financial statements include the accounts of CenturyLink, Inc. ("CenturyLink") and its majority-owned subsidiaries. These
subsidiaries include SAVVIS, Inc. ("Savvis") as of July 15, 2011, Qwest Communications International Inc. ("Qwest") as of April 1, 2011 and
Embarq Corporation ("Embarq") as of July 1, 2009 (See Note 2—Acquisitions). Due to the significant size of these acquisitions, direct comparisons
of our results of operations for the years ended December 31, 2011, 2010 and 2009 are less meaningful than usual. We discuss below, under
"Segment Results", certain trends that we believe are significant, even if they are not necessarily material to the combined company.
In the discussion that follows, we refer to the business that we operated prior to the Qwest acquisition (including Embarq's business) as
"Legacy CenturyLink" and refer to the incremental business activities that we now operate as a result of the Savvis acquisition as "Legacy Savvis"
and the Qwest acquisition as "Legacy Qwest." Due to the magnitude of our recent acquisitions in relation to Legacy CenturyLink operations, in
the combined company variance discussions below we have separately reflected the impacts of both the Legacy Qwest and Legacy Savvis
operations for enhanced visibility, although we actively manage the combined company through our four segments, as discussed further below.
We have incurred operating expenses related to our acquisitions of Savvis in July 2011, Qwest in April 2011 and Embarq in July 2009. These
expenses are reflected in cost of services and products and
45

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selling, general and administrative expenses in our consolidated statements of operations as summarized below.

2011
Cost of services and products:
Integration and other expenses
associated with acquisitions
Severance expenses, accelerated
recognition of share-based awards and
retention compensation associated
with acquisitions

Selling, general and administrative:
Expenses incurred to effect acquisitions
Integration and other expenses associated
with acquisitions
Severance expenses, accelerated
recognition of share-based awards and
retention compensation associated with
acquisitions

Years Ended December 31,
2010
(Dollars in millions)

2009

$

43

37

—

$

24
67

12
49

6
6

$

79

13

65

172

64

86

149
400

19
96

114
265

$

This table does not include costs incurred by Qwest or Savvis prior to being acquired by us. Based on current plans and information, we
estimate that, in relation to our Qwest acquisition, we will incur approximately $800 million to $1 billion of operating expenses associated with
transaction and integration costs (which includes approximately $393 million of the expenses noted above) and approximately $200 million of
capital expenditures associated with integration activities (which includes approximately $24 million of capital expenditures incurred through
December 31, 2011).
Upon the discontinuance of regulatory accounting effective July 1, 2009, we recorded a one-time, non-cash extraordinary gain that aggregated
approximately $217 million before income tax expense ($136 million after-tax). See Note 14—Discontinuance of Regulatory Accounting for more
information.
For several years prior to 2011, we reported our operations as a single segment. In connection with our acquisitions of Savvis on July 15, 2011
and Qwest on April 1, 2011, we have reorganized our business into the following operating segments:
•

Regional markets, which consists primarily of providing products and services to residential consumers, small to medium-sized
businesses and regional enterprise customers;

•

Business markets, which consists primarily of providing products and services to enterprise and government customers;

•

Wholesale markets, which consists primarily of providing products and services to other communications providers; and

•

Savvis operations, which consists primarily of providing hosting and network services primarily to business customers provided by
Legacy Savvis. The business markets segment currently provides some of the same services as our Savvis operations segment, and
we may reclassify in the future the revenues and expenses associated with those services as part of our Savvis operations segment.
We will continue to classify those services as part of the business markets segment until we are able to further integrate Legacy
Savvis.
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Table of Contents
Due to system limitations, it is impracticable to report 2009 segment information using our current segment view. As such, only 2010 financial
data has been revised under our new segment structure described above.
We now report financial information separately for each of these segments; however, our segment information does not include capital
expenditures, total assets, or certain revenues and expenses that we manage on a centralized basis. As we continue to integrate our recent
acquisitions, we may make further changes to the way we assess performance and make decisions about allocating resources, which could change
our segment reporting. Our segment results are not necessarily indicative of the results of operations that our segments would have achieved had
they operated as stand-alone entities during the periods presented. For additional information about our segments, see Note 13—Segment
Information and "Results of Operations—Segment Results" below.
Results of Operations
The following table summarizes the results of our consolidated operations for the years ended December 31, 2011, 2010 and 2009, presented in
a manner that we believe will be useful for understanding the relevant trends affecting our business. Our operating results include operations of
Savvis for periods after July 15, 2011, Qwest for periods after April 1, 2011 and Embarq for periods after July 1, 2009.
Years Ended December 31,
2010
(Dollars in millions except
per share amounts)
15,351
7,042
13,326
4,982
2,025
2,060
(1,077)
(529)
375
583
—
—
573
948

2011

Operating revenues
Operating expenses
Operating income
Other income (expense)
Income tax expense
Extraordinary item, net of income tax expense
Net income

$

$

Employees
BASIC AND DILUTED EARNINGS PER
COMMON SHARE
Before extraordinary item
Extraordinary item
Basic and diluted earnings per common
share

2009

4,974
3,741
1,233
(420)
302
136
647

49,200

20,300

20,200

$

1.07
—

3.13
—

2.55
.68

$

1.07

3.13

3.23

The lower levels of net income in 2011 were primarily attributable to the acquisition of Qwest as of April 1, 2011, which resulted in substantial
acquisition, severance and integration expenses, as presented in the table under the "Overview" section above. Legacy Savvis' and Legacy
Qwest's post-acquisition operations, which included substantial severance and integration expenses and significant acquisition accounting
adjustments to depreciation and amortization expense based on preliminary valuation estimates (see Note 2—Acquisitions and Note 3—Goodwill,
Customer Relationships and Other Intangible Assets), did not contribute significantly to our consolidated net income in 2011. Our current
preliminary valuation estimates of our recently acquired assets and liabilities are subject to change as we finalize our estimates of acquisition date
fair value, including those related to assets under capital leases, which may result in material changes to depreciation
47

Table of Contents
expense. Within our Legacy CenturyLink business, growth in strategic services revenues (which we describe further below) did not fully offset
lower revenues from other services and products, further contributing to the decreases in consolidated net income.
Diluted earnings per common share in 2011 was substantially lower than the amounts for the corresponding periods of 2010 and 2009 due to
decreases in net income, as well as increases in the weighted average number of outstanding common shares. The increase in outstanding shares
during 2011 was primarily attributable to the issuance of 294 million shares in connection with the Qwest acquisition on April 1, 2011 and the
issuance of 14.313 million shares in connection with the Savvis acquisition on July 15, 2011.
The following table summarizes our broadband subscribers and access lines:

2011
Operational metrics:
Broadband subscribers
Access lines

Years Ended December 31,
2010
(in thousands)

5,554
14,584

2009

2,349
6,489

2,186
7,025

During the last several years, we have experienced revenue declines primarily due to declines in access lines, intrastate access rates and
minutes of use. Prior to our acquisition, Qwest had experienced similar declines in its revenues. To mitigate these declines, we remain focused on
efforts to, among other things:
•

promote long-term relationships with our customers through bundling of integrated services;

•

provide new services, such as video, cloud hosting, managed hosting, colocation services and other additional services that may
become available in the future due to advances in technology, wireless spectrum sales by the FCC or improvements in our
infrastructure;

•

provide our broadband and premium services to a higher percentage of our customers;

•

pursue acquisitions of additional communications properties if available at attractive prices;

•

increase usage of our networks; and

•

market our products and services to new customers.

Operating Revenues
During 2011, we revised the way we categorize our products and services. We currently categorize our products, services and revenues
among the following four categories:
•

Strategic services, which include primarily private line (including special access which we market to business customers who
require dedicated equipment to transmit large amounts of data between sites), broadband, hosting (including cloud hosting and
managed hosting), colocation, multi protocol line switching ("MPLS") (which is a data networking technology that can deliver the
quality of service required to support real-time voice and video), video (including DIRECTV), voice over Internet Protocol ("VoIP")
and Verizon Wireless services;

•

Legacy services, which include primarily local, long-distance, switched access, public access, integrated services digital network,
("ISDN") (which uses regular telephone lines to support voice, video and data applications), and traditional wide area network
("WAN") services (which allows a local communications network to link to networks in remote locations);
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•

Data integration, which is telecommunications equipment we sell that is located on customers' premises and related professional
services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic
broadband networks for our government and business customers; and

•

Other revenues, which consists primarily of USF revenue and surcharges.

We have revised our 2010 presentation of our products and services revenues to conform to our current categories for 2011. Due to system
limitations, we have deemed it impracticable to report our 2011 revenue by our previous products and services, which were as follows:
•

Voice, which included our local calling service to residential, business and wholesale customers within our local service areas,
generally for a fixed monthly charge;

•

Data, which included revenues primarily from monthly recurring charges for providing broadband access services, data
transmission services over special circuits and private lines and switched digital television services;

•

Network Access, which included revenues primarily from providing wholesale services to various carriers and customers in
connection with the use of our facilities to originate and terminate their interstate and intrastate voice transmissions as well as
universal support funds and reciprocal compensation from CLECs and wireless service providers; and

•

Other revenues, which included revenues from providing (i) fiber transport, CLEC and security monitoring services; (ii) leasing,
selling, installing and maintaining customer premise equipment and wiring; (iii) providing payphone services; (iv) participating in
the publication of local directories; (v) providing network database services and (vi) providing video services, as well as other new
product and service offerings.

The following table summarizes our operating revenues under our current revenue categorization:
Years Ended
December 31,
2011
2010
Strategic services
Legacy services
Data integration
Other
Total operating
revenues

$

6,254
7,680
537
880

2,049
4,288
158
547

15,351

7,042

Increase (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)
150
3,572
483
(483)
3,875
—
(23)
402
—
(24)
357
—
(380)
49

8,206

483

Total
4,205
3,392
379
333
8,309

Table of Contents
For comparability purposes, we have included the former revenue categorization for 2010 and 2009:
Years Ended December 31,
2010
2009
Voice
$
Data
Network
access
Other
Total
operating
revenues $

3,138
1,909

Increase (Decrease)
CenturyLink
Embarq
(Dollars in millions)
2,168
(77)
1,047
1,202
(28)
735

Total
970
707

1,080
915

928
676

(96)
(33)

248
272

152
239

7,042

4,974

(234)

2,302

2,068

Our operating revenues increased substantially in 2011 as compared to 2010 due to our acquisitions of Savvis and Qwest. Due to our
acquisition of Embarq on July 1, 2009, our 2010 operating revenues reflect a full year of Embarq's results, as opposed to our 2009 operating
revenues, which reflect only six months of Embarq's results.
Total operating revenues increased $8.309 billion in 2011 as compared to 2010 and increased $2.068 billion in 2010 as compared to 2009. Our
2011 increase was largely attributable to the acquisition of Qwest, which contributed total operating revenues (net of intercompany eliminations) of
$8.2 billion. Legacy CenturyLink operating revenues decreased $380 million, or 5.4%, in 2011 and $234 million, or 4.7%, in 2010 as compared to the
prior year period. These decreases were primarily attributable to declines in legacy services revenues, which reflected the continuing loss of access
lines in our markets. At December 31, 2011, we had 14.584 million access lines, of which 8.533 million were in Legacy Qwest's markets. Access lines
in our Legacy CenturyLink markets declined to 6.051 million at December 31, 2011 from 6.489 million at December 31, 2010, a decrease of 6.75%, and
were 7.025 million at December 31, 2009, a decrease of 7.63%. We believe the decline in the number of access lines was primarily due to the
displacement of traditional wireline telephone services by other competitive products and services. We estimate that our access lines loss will be
between 5.9% and 6.6% in 2012. Our legacy services revenues were also negatively impacted in 2011 by the continued migration of customers to
bundled service offerings at lower effective rates. The decreases in our legacy services revenues were partially offset by higher revenues from
strategic services revenues. Broadband and private line services accounted for a majority of the growth in strategic services revenues. In 2010,
total operating revenues decreased $104 million due to the elimination of all intercompany transactions upon the July 1, 2009 discontinuance of
regulatory accounting.
We are aggressively marketing our strategic services (including our data hosting services) and data integration to offset the continuing
declines in our legacy services revenues. We believe our recent acquisitions of Savvis and Qwest will strengthen our ability to achieve this goal.
Further analysis of our operating revenues by segment is provided below in "Segment Results."
Operating Expenses
As discussed in Note 1—Basis of Presentation and Summary of Significant Accounting Policies, during 2011 we changed the definitions we
use to classify expenses as cost of services and products and selling, general and administrative, and have reclassified prior period amounts to
conform to our new definitions. During 2011, our operating expenses increased substantially in comparison to 2010 primarily due to our acquisition
of Qwest and Savvis. In addition, our operating expenses increased substantially in 2010 as compared to 2009 due to our acquisition of Embarq.
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Table of Contents
The following tables summarize our operating expenses:
Years Ended
December 31,
2011
2010
Cost of services and
products (exclusive
of depreciation and
amortization)
Selling, general and
administrative
Depreciation and
amortization
Total operating
expenses

Increase (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

Total

$ 6,325

2,544

(4)

3,523

262

3,781

2,975

1,004

60

1,791

120

1,971

4,026

1,434

72

2,394

126

2,592

$ 13,326

4,982

128

7,708

508

8,344

Years Ended
December 31,
2010
2009
Cost of services and products
(exclusive of depreciation and
amortization)
Selling, general and administrative
Depreciation and amortization
Total operating expenses

$

$

2,544
1,004
1,434
4,982

Increase (Decrease)
CenturyLink
Embarq
(Dollars in millions)

1,801
965
975
3,741

(59)
(87)
(22)
(168)

802
126
481
1,409

Total

743
39
459
1,241

The increases in total operating expenses of $8.344 billion in 2011 was largely attributable to the inclusion of $7.7 billion in post-acquisition
Legacy Qwest operating expenses (net of intercompany eliminations) in our consolidated operating expenses. In addition, the acquisition of Savvis
on July 15, 2011 increased our consolidated operating expenses by $508 million. As discussed in the "overview" section, our operating expenses
for 2011, 2010 and 2009 included substantial severance and integration costs related to the Qwest, Savvis and Embarq acquisitions as well as
significant acquisition accounting adjustments to depreciation and amortization expense (see Note 2—Acquisitions and Note 3—Goodwill,
Customer Relationships and Other Intangible Assets). Excluding the effects of Legacy Qwest and Savvis expenses, total operating expenses in
2011 increased $128 million, or 2.6%, due primarily to integration costs associated with the Qwest acquisition and increased costs of providing our
facilities-based video services to more customers. Total operating expenses in 2010 (excluding $1.409 billion of incremental costs associated with
operating the Embarq properties for a full year in 2010 as compared to a half year in 2009), decreased $168 million primarily due to a $104 million
reduction in operating expenses from the elimination of all intercompany transactions upon the discontinuance of regulatory accounting and a
$32 million reduction in salaries and benefits.
Cost of services and products for Legacy CenturyLink operations was relatively unchanged in 2011. For 2011, higher costs of services and
products associated with providing our facilities-based video service of $55 million were substantially offset by a $28 million decrease in salaries
and benefits and a $20 million decrease in facilities costs associated with the migration of legacy Embarq long-distance traffic to our internal
networks. Costs of services and products in 2010 (excluding $802 million of incremental costs associated with operating the Embarq properties for a
full year in 2010 as compared to a half year in 2009) decreased $59 million primarily due to a reduction in operating expenses from the elimination of
all intercompany transactions upon the discontinuance of regulatory accounting.
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Table of Contents
Legacy CenturyLink selling, general and administrative expenses increased $60 million, or 6.0%, for 2011 as compared to 2010, while selling,
general and administrative expenses decreased $87 million for 2010 as compared to 2009. For all periods presented, our expenses include significant
transaction, severance and integration expenses related to the Savvis, Qwest and Embarq acquisitions (see table in "Overview" above). Changes in
the timing and amount of Qwest and Savvis integration expenses resulted in net increases in Legacy CenturyLink selling, general and
administrative expenses of $164 million in 2011, from the amounts for the comparable periods of 2010. This increase was partially offset by a
decrease of $33 million in 2011 in operating taxes, which were primarily due to favorable property tax and transaction tax settlements. In addition, in
2011 we had a decrease of $20 million in compensation expenses, which were primarily due to workforce reductions and lower pension expense.
Selling, general and administrative expense in 2010 (excluding $126 million of incremental costs associated with operating the Embarq properties for
a full year in 2010 as compared to a half year in 2009) decreased $87 million primarily due to a $32 million reduction in salaries and benefits, a
$17 million decrease in legal costs and a $15 million reduction in expenses from the elimination of all intercompany transactions due to the
discontinuance of regulatory accounting.
Depreciation and amortization for Legacy CenturyLink increased $72 million, or 5.0%, in 2011 primarily due to higher levels of property, plant
and equipment. Depreciation and amortization in 2010 (excluding $481 million of incremental expense associated with operating the Embarq
properties for a full year in 2010 as compared to a half year in 2009) decreased $22 million due to a $19 million decrease resulting from a change in
certain depreciation rates effective July 1, 2009 upon the discontinuance of regulatory accounting and a $25 million decrease of certain assets
becoming fully depreciated. These decreases were partially offset by a $22 million increase due to higher levels of plant in service.
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Table of Contents
Other Consolidated Results
The following tables summarize our total other income (expense) and income tax expense:
Years Ended
December 31,
2011
2010
Interest
expense $
Other
income
(expense)
Total
other
income
(expense)$

(1,072)

Increase (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

(544)

34

486

15

17

6

(529)

51

583

nm

(5)

(1,077)

Income
tax
expense $

375

Total

8

528

(3)

20

492

5

548

nm

nm

Years Ended December 31,
2010
2009
Interest expense
Other income
(expense)
Total other income
(expense)

$

Income tax expense

(544)

Increase (Decrease)
CenturyLink
Embarq
(Dollars in millions)
(367)
13
164

(208)

Total
177

15

(53)

(25)

(43)

(68)

$

(529)

(420)

(12)

121

109

$

583

302

nm

nm

281

nm—Attributing changes in income tax expense to the acquisitions of
Savvis, Qwest and Embarq is considered not meaningful.
Other Income (Expense)
Interest expense increased $528 million in 2011 primarily due to debt assumed in the Qwest acquisition and incurred subsequent to that
acquisition. See Note 4—Long-term Debt and Credit Facilities and "Liquidity and Capital Resources" below for additional information about the
debt assumed in the Qwest acquisition.
Interest expense for Legacy CenturyLink increased $34 million, or 6.3%, in 2011 compared to 2010 and $13 million, or 3.5%, in 2010 compared to
2009. In 2011, the increase was primarily due to interest on our senior notes with $2 billion aggregate principal that were issued in June 2011 to
finance the Savvis acquisition, partially offset by principal repayments made during 2010 and the first quarter of 2011. In 2010, interest expense
increased primarily due to the interest expense attributable to $4.9 billion of Embarq's indebtedness we assumed in mid 2009.
Other income (expense) reflects certain items not directly related to our core operations, including gains and losses from non-operating asset
dispositions and impairments, our share of income from our 49% interest in a cellular partnership, interest income and foreign currency gains and
losses. Other income (expense) for Legacy CenturyLink decreased $17 million in 2011, as compared to 2010. This change was primarily due to
$16 million in transaction expenses incurred in connection with terminating an unused bridge loan financing commitment related to the Savvis
acquisition (see Note 2—Acquisitions). The change from 2009 to 2010 was primarily due to the recognition of a $72 million pre-tax charge for
certain debt extinguishment transactions consummated in October 2009 (of which $27 million was incurred by CenturyLink and $45 million was
incurred by Embarq).
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Table of Contents
Income Tax Expense
Our income tax expense for the years ended December 31, 2011 and 2010 decreased $208 million and increased $281 million, respectively, from
the amounts for the comparable year. Our decrease in 2011 was primarily due to a decrease in income before income tax expense due primarily to the
acquisition of Qwest. Our 2010 increase was due to increased income before income tax expense due in part to the inclusion of a full year of Embarq
operations in 2010. For the years ended December 31, 2011, 2010 and 2009, our effective income tax rate was 39.6%, 38.1% and 37.2%, respectively.
The 2011 increase was due in part to the effects of certain nondeductible expenses incurred in connection with our acquisition of Qwest, which
was substantially offset by the effects of a tax law change in one of the states in which we operate that resulted in recognition of a $14 million tax
benefit in the second quarter of 2011. In addition, due to executive compensation limitations pursuant to the Internal Revenue Code, a portion of
the lump sum distributions related to the termination of an executive retirement plan made in the first quarter of 2009 is reflected as non-deductible
for income tax purposes and thus increased our effective income tax rate. Certain merger-related costs incurred during 2010 and 2009 are also nondeductible for income tax purposes and similarly increased our effective income tax rate. In 2009, such an increase in our effective tax rate was
partially offset by a $7 million reduction to our deferred tax asset valuation allowance associated with state net operating loss carryforwards. In
addition, in 2009 we recognized net after-tax benefits of approximately $16 million primarily related to the recognition of previously unrecognized tax
benefits. See Note 12—Income Taxes and "Income Tax Expense" for additional information.
Extraordinary Item
Upon the discontinuance of regulatory accounting on July 1, 2009, we recorded a one-time extraordinary gain of approximately $136 million
after-tax. See Note 14—Discontinuance of Regulatory Accounting for additional information related to this extraordinary gain.
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Table of Contents
Segment Results
Segment information is summarized below:

Total segment revenues
Total segment expenses
Total segment income

$
$

Total margin percentage
Regional markets:
Revenues
Expenses
Income

$
$

Margin percentage
Business markets:
Revenues
Expenses
Income

$
$

Margin percentage
Wholesale markets:
Revenues
Expenses
Income

$
$

Margin percentage
Savvis operations:
Revenues
Expenses
Income

$
$

Margin percentage

Years Ended December 31,
2011
2010
(Dollars in millions)
14,471
6,495
6,535
2,403
7,936
4,092
55%

63%

7,832
3,398
4,434

4,640
1,783
2,857

57%

62%

2,861
1,736
1,125

266
120
146

39%

55%

3,295
1,021
2,274

1,589
500
1,089

69%

69%

483
380
103

—
—
—

21%

—

The lower levels of margin percentage for regional markets and business markets in 2011 were primarily attributable to the inclusion of Qwest's
results beginning April 1, 2011.
For several years prior to 2011, we reported our operations as a single segment. Due to system limitations we have not reported our 2009
segment information using our current segments as we have deemed it impracticable to do so. As such, the following section only includes data
for the years ended December 31, 2011 and 2010. See consolidated operating results in the "Results of Operations—Overview" section above for
variance discussions related to our 2009 financial information.
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The following table reconciles our total segment revenues and total segment income presented above to operating revenues and operating
income reported in our consolidated statements of operations.
Years Ended December 31,
2011
2010
(Dollars in millions)
14,471
6,495
880
547

Total segment revenues
Other operating revenues
Operating revenues reported in our consolidated statements of
operations

$

$

15,351

7,042

Total segment income
Other operating revenues
Depreciation and amortization
Other unassigned operating expenses
Operating income reported in our consolidated statements of
operations

$

7,936
880
(4,026)
(2,765)

4,092
547
(1,434)
(1,145)

$

2,025

2,060

In connection with the recent reorganization of our segments, we also revised the way we categorize our segment revenues and segment
expenses. Our major categories of products and services are strategic services, legacy services, data integration and other, each of which is
described in more detail in "Operating Revenues" above. We report our segment expenses for regional markets, business markets and wholesale
markets as follows:
•

Direct expenses, which primarily are specific, incremental expenses incurred as a direct result of providing services and products to
segment customers, along with selling, general and administrative expenses that are directly associated with specific segment
customers or activities; and

•

Allocated expenses, which are determined by applying activity-based costing and other methodologies to include network
expenses, facilities expenses and other expenses such as fleet, product management and real estate expenses.

For Savvis operations, segment expenses incorporate the entire operations of our Savvis subsidiaries, including certain centrally managed
costs that are allocated to our other segments and overhead costs that are not allocated to our other operating segments. The integration of certain
of these functions for Savvis are still in the early stages. Consequently, all Savvis operations segment expenses have been categorized as direct
expenses. We intend to refine our expense methodology and begin allocating expenses to Savvis operations as we continue integrating it among
our other segments beginning in 2012.
We do not assign depreciation and amortization expense to our segments, as the related assets and capital expenditures are centrallymanaged. Other unassigned operating expenses consist primarily of expenses for centrally-managed administrative functions (such as finance,
information technology, legal and human resources), severance expenses and restructuring expenses. Interest expense is also excluded from
segment results because we manage our financing on a total company basis and have not allocated assets or debt to specific segments. In
addition, other income (expense) does not relate to our segment operations and is therefore excluded from our segment results. We have recast our
2010 operating results based on our new segment reporting.
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We may make further changes to our segment reporting as we continue to integrate the operations of Legacy Qwest and Legacy Savvis. For
more information on our segment reporting, see Note 13—Segment Information.
Regional Markets
The operations of our regional markets segment have been impacted by several significant trends, including those described below. The
discussion that follows generally applies to both our Legacy CenturyLink markets and our Legacy Qwest markets for periods after the April 1, 2011
acquisition date.
•

Strategic services. We continue to focus on increasing subscribers of our broadband services in our regional markets segment. In
order to remain competitive, we believe continually increasing connection speeds is important. As a result, we continue to invest in
our fiber to the node, or FTTN, deployment, which allows for the delivery of higher speed broadband services. While traditional
ATM-based broadband services are declining, they have been more than offset by growth in fiber-based broadband services. We
also continue to expand our product offerings including facilities-based video services and enhance our marketing efforts as we
compete in a maturing market in which most consumers already have broadband services. We expect these efforts will improve our
ability to compete and increase our broadband revenues.

•

Facilities-based video expenses. As we continue to expand our facilities-based video services we are incurring start-up expenses
in advance of the revenue that this service is expected to generate. Although, over time, we expect that our revenue for facilitiesbased video services will offset the expenses incurred, the timing of this revenue growth is uncertain.

•

Access lines. Our voice revenues have been, and we expect they will continue to be, adversely affected by access line losses.
Intense competition and product substitution continue to drive our access line losses. For example, many consumers are
substituting cable and wireless voice and electronic mail and social networking services for traditional voice telecommunications
services. We expect that these factors will continue to impact our business. Service bundling and other product promotions, as
described below, continue to be some of our responses to offset the loss of revenues as a result of access line losses.

•

Service bundling and product promotions. We offer our customers the ability to bundle multiple products and services. These
customers can bundle local services with other services such as broadband, video, long-distance and wireless. While our video and
wireless services are an important piece of our customer retention strategy, they do not make a large contribution to strategic
services revenues. However, we believe customers value the convenience of, and price discounts associated with, receiving
multiple services through a single company. While bundle price discounts have resulted in lower average revenues for our
individual products, we believe service bundles continue to positively impact our customer retention. In addition to our bundle
discounts, we also offer limited time promotions on our broadband service for prospective customers who want our broadband
product in their bundle which further aids our ability to attract and retain customers and increase usage of our services.

•

Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our workforce in
response to our workload requirements, productivity improvements and changes in industry, competitive, technological and
regulatory conditions.
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The following table summarizes the operating results from Legacy CenturyLink and Legacy Qwest for our regional markets segment:
Years Ended December 31,
2011
2010
Segment revenues:
Strategic
services
Legacy services
Data integration
Total revenues
Segment expenses:
Direct
Allocated
Total expenses
Segment income
Segment margin
percentage

$

$

Increase (Decrease)
CenturyLink
Qwest
(Dollars in millions)

Total

2,532
5,171
129
7,832

1,212
3,289
139
4,640

55
(280)
(14)
(239)

1,265
2,162
4
3,431

1,320
1,882
(10)
3,192

3,252
146
3,398
4,434

1,818
(35)
1,783
2,857

3
(26)
(23)
(216)

1,431
207
1,638
1,793

1,434
181
1,615
1,577

57%

62%

Segment Income
The acquisition of Qwest on April 1, 2011 largely contributed to an increase in our regional markets segment income of $1.577 billion for the
year ended December 31, 2011 as compared to 2010. Our consolidated segment margin percentage declined in 2011 as a result of lower margins in
Legacy Qwest markets. Segment income for our Legacy CenturyLink operations decreased $216 million as compared to 2010 reflecting declines in
revenues while expenses remained relatively flat.
Segment Revenues
Excluding 2011 revenues attributable to the Qwest acquisition, regional markets revenues decreased $239 million, or 5.2%, for the year ended
December 31, 2011 as compared to 2010. Growth in strategic services revenues did not fully offset a decline in legacy services revenues. The higher
amounts of strategic services revenues are due principally to volume increases in our facilities-based video services and increases in the number of
broadband subscribers, partially offset by the effects of rate discounts. Increases in MPLS and Ethernet services volumes also contributed to
higher strategic services revenues. Legacy services revenues decreased primarily due to declines in local services associated with access line
losses resulting from competitive pressures.
Segment Expenses
Regional markets expenses, exclusive of Legacy Qwest expenses, decreased $23 million, or 1.3%, for the year ended December 31, 2011 as
compared to 2010, primarily due to lower marketing and advertising expenses and decreased employee related expense due to workforce
reductions, partially offset by increased costs to provide facilities-based video services.
Business Markets
The operations of our business markets segment have been impacted by several significant trends, including those described below. The
discussion that follows generally applies to both our Legacy CenturyLink markets and our Legacy Qwest markets for periods after the April 1, 2011
acquisition date.
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•

Strategic services. Our mix of total revenues continues to migrate from legacy services to strategic services as our enterprise and
government customers increasingly demand customized and integrated data, Internet and voice services. We offer diverse
combinations of emerging technology products and services such as private line, MPLS, hosting, and VoIP services. We believe
these services afford our customers more flexibility in managing their communications needs and enable us to improve the
effectiveness and efficiency of their operations. Although we are experiencing price compression on our strategic services, we
expect overall revenues from these services to grow.

•

Legacy services. We face intense competition with respect to our legacy services and continue to see customers migrating away
from these services and into strategic services. In addition, our legacy services revenues have been and we expect they will
continue to be adversely affected by access line losses.

•

Data integration. We expect both data integration revenue and the related costs will fluctuate from quarter to quarter as this
revenue stream tends to be more sensitive than other revenue streams to changes in the economy and to changes in spending
trends of our federal government customers.

•

Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our workforce in
response to our productivity improvements while achieving operational efficiencies and improving our processes through
automation. We also expect our business markets segment to benefit indirectly from efficiencies in our company-wide network
operations.

The following table summarizes the operating results from Legacy CenturyLink and Legacy Qwest for our business markets segment:
Years Ended December 31,
2011
2010
Segment revenues:
Strategic
services
Legacy services
Data integration
Total revenues
Segment expenses:
Direct
Allocated
Total expenses
Segment income
Segment margin
percentage

$

$

Increase (Decrease)
CenturyLink
Qwest
(Dollars in millions)

Total

1,341
1,113
407
2,861

57
190
19
266

1
(9)
(9)
(17)

1,283
932
397
2,612

1,284
923
388
2,595

764
972
1,736
1,125

6
114
120
146

8
(11)
(3)
(14)

750
869
1,619
993

758
858
1,616
979

39%

55%

Segment Income
The acquisition of Qwest on April 1, 2011 substantially increased the scale of our business markets segment, resulting in an increase in our
segment income of $979 million, for the year ended December 31, 2011 as compared to 2010. Our consolidated segment margin percentage declined
in 2011 as a result of lower margins in Legacy Qwest markets. Legacy Qwest operations accounted for 91.3% of our 2011 business markets segment
revenues and 88.3% of our segment income.
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Segment Revenues
Legacy CenturyLink business markets revenues decreased $17 million, or 6.4%, for the year ended December 31, 2011 as compared to 2010.
This decrease primarily reflected lower revenues from legacy services driven by access line losses and lower data integration revenues due to
lower sales of data integration equipment.
Segment Expenses
Legacy CenturyLink business markets expenses remained relatively flat for the year ended December 31, 2011 as compared to 2010. However,
direct expenses increased primarily due to increased employee related expenses resulting from a larger sales force and higher customer premise
equipment expenses in 2011, while allocated expenses decreased due to lower network expenses related to cost optimization efforts.
Wholesale Markets
The operations of our wholesale markets segment will likely be impacted by the recently adopted FCC order which will substantially increase
the pace of reductions in the amount of switched access revenues we receive, as discussed in the "Regulation" section in Item 1 of this report, as
well as the significant trends discussed below. The discussion that follows generally applies to both our Legacy CenturyLink markets and our
Legacy Qwest markets for periods after the April 1, 2011 acquisition date.
•

Private line services (including special access). Demand for our private line services continues to increase, despite our customers'
optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue
to impact our wholesale markets segment, we ultimately believe the growth in fiber-based special access provided to wireless
carriers for backhaul will, over time, offset the decline in copper-based special access provided to wireless carriers as they migrate to
Ethernet, and bandwidth consumption grows, although the timing and magnitude of this technological migration is uncertain.

•

Access and local services revenues. Our access and local services revenues have been and we expect will continue to be, adversely
affected by regulation, technological migration, industry consolidation and rate reductions. For example, consumers are substituting
cable, wireless and VoIP services for traditional voice telecommunications services, resulting in continued access revenue loss. We
expect these factors will continue to adversely impact our wholesale markets segment.

•

Long-distance services revenues. Wholesale long-distance revenues continue to decline as a result of customer migration to more
technologically advanced services, price compression, declining demand for traditional voice services and industry consolidation.
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The following table summarizes the operating results from Legacy CenturyLink and Legacy Qwest for our wholesale markets segment:
Years Ended December 31,
2011
2010
Segment revenues:
Strategic
services
Legacy services
Data integration
Total revenues
Segment expenses:
Direct
Allocated
Total expenses
Segment income
Segment margin
percentage

$

$

Increase (Decrease)
CenturyLink
Qwest
(Dollars in millions)

Total

1,898
1,396
1
3,295

780
809
—
1,589

94
(194)
—
(100)

1,024
781
1
1,806

1,118
587
1
1,706

174
847
1,021
2,274

139
361
500
1,089

(6)
61
55
(155)

41
425
466
1,340

35
486
521
1,185

69%

69%

Segment Income
The acquisition of Qwest on April 1, 2011 largely contributed to an increase in our wholesale markets segment income of $1.185 billion for the
year ended December 31, 2011 as compared to 2010. Segment income for our Legacy CenturyLink operations decreased $155 million for the year
ended December 31, 2011 as compared to 2010, primarily reflecting declines in revenues in both periods, as discussed further below.
Segment Revenues
Excluding 2011 revenues attributable to the Qwest acquisition, wholesale markets revenues decreased $100 million, or 6.3%, for the year ended
December 31, 2011 as compared to 2010. This decrease reflects substantially lower revenues from legacy services, partially offset by growth in
revenues from strategic services. The decrease in legacy services revenues reflects ongoing declines in access and local services volumes and
revenues due to the substitution of cable, wireless and VoIP services for traditional voice telecommunications services. Growth in strategic
services revenues, primarily relating to private line and special access services, partially offset the declines in legacy services revenues.
Segment Expenses
Wholesale markets expenses, exclusive of Legacy Qwest expenses, increased $55 million, or 11%, for the year ended December 31, 2011 as
compared to 2010. The increase in Legacy CenturyLink wholesale markets expenses was primarily due to increased allocated expenses reflecting
increased bad debts expense. Direct expenses decreased for the year as a result of reduced access costs.
Savvis Operations
The operations of our Savvis operations segment could be impacted by several significant trends, including those described below.
•

Colocation. Colocation is designed for clients seeking data center space and power for their server and networking equipment
needs. Our data centers provide our clients around the world with a secure, high-powered, purpose-built location for their IT
equipment. We anticipate
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continued pricing pressure for these services as wholesale vendors enter the enterprise colocation market; however, we believe that
our data center expansion strategy can help mitigate these pricing challenges.
•

Managed hosting. Managed hosting services provide a fully managed solution for a customer's IT infrastructure and network
needs, and include dedicated and cloud hosting services, utility and computing storage, consulting and managed security services.
We expect increasing pricing pressure on the managed hosting business from competing cloud computing offerings. However, we
remain focused on growing our managed hosting business, specifically in our cloud service offerings, as we believe this is a key to
growth. We believe that we have continued to strengthen our cloud position in the market by adding differentiating features to our
cloud products.

•

Network services. Network services are comprised of our managed network services, including managed VPN, hosting area
network and bandwidth services. Segment income for these services has been relatively flat due to pricing pressures on VPN and
bandwidth services, offset by increases in network services that support our colocation and managed hosting service offerings.

The following tables summarize the operating results of Savvis operations for 2011 after their acquisition date of July 15, 2011:

Strategic services
Segment expenses
Segment income
Segment margin percentage

$
$

Years Ended December 31,
2011
2010
Increase (Decrease)
(Dollars in millions)
483
—
483
380
—
380
103
—
103
21%

—

Segment Revenues
Segment revenues for our Savvis operations was $483 million, which was derived from colocation services of $183 million, or 37.9%, managed
hosting services of $182 million, or 37.7%, and network services of $118 million, or 24.4%.
Segment Expenses
Segment expenses attributed to Savvis operations was $380 million, which were derived primarily from cost of services and products of
$260 million and selling, general and administrative expenses of $120 million.
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Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The
preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. We have identified certain policies and estimates as critical to our business operations and the understanding of
our past or present results of operations related to (i) business combinations; (ii) goodwill, customer relationships and other intangible assets;
(iii) property, plant and equipment; (iv) pension and post-retirement benefits; (v) loss contingencies and litigation reserves; and (vi) income taxes.
These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our
consolidated financial statements and because they require significant judgments, assumptions or estimates. We believe that the estimates,
judgments and assumptions made when accounting for the items described below are reasonable, based on information available at the time they
are made. However, there can be no assurance that actual results will not differ from those estimates.
Business Combinations
We have accounted for our acquisition of Qwest on April 1, 2011 and Savvis on July 15, 2011 under the acquisition method of accounting,
whereby the tangible and separately identifiable intangible assets acquired and liabilities assumed are recognized at their estimated fair values at
the acquisition date. The portion of the purchase price in excess of the estimated fair value of the net tangible and separately identifiable intangible
assets acquired represents goodwill. The recognition of the fair value of assets acquired and liabilities assumed in business combinations involves
estimates and judgments by our management that may be adjusted during the measurement period, but in no case beyond one year from the
acquisition date. The fair values recorded are made based on management's best estimates and assumptions. In arriving at the fair values of assets
acquired and liabilities assumed, we consider the following generally accepted valuation approaches: the cost approach, income approach and
market approach. Our estimates may also include assumptions about projected growth rates, cost of capital, effective tax rates, tax amortization
periods, technology life cycles, the regulatory and legal environment, and industry and economic trends. Small changes in the underlying
assumptions can impact the estimates of fair value by material amounts, which can in turn materially impact our results of operations.
Goodwill, Customer Relationships and Other Intangible Assets
We amortize customer relationships primarily over an estimated life of 10 years, using either the sum-of-the-years-digits or straight-line
methods, depending on the type of customer. Our capitalized software, which consists primarily of assets obtained from the Qwest acquisition, is
primarily being amortized using the straight-line method over estimated lives up to seven years. Approximately $237 million of our capitalized
software, which represents costs to develop an integrated billing and customer care system, is being amortized over a twenty year period.
Tradenames and patents assets predominantly use the sum-of-the-years digits method over an estimated life of four years. Indefinite life
intangibles are not amortized, but are reviewed annually for potential impairment.
We periodically review the estimated lives and methods used to amortize our other intangible assets. The amount of future amortization
expense may differ materially from current amounts, depending on the results of our periodic reviews and our final determinations of acquisition
date fair value related to Savvis' and Qwest's intangible assets (See Note 2—Acquisitions).
We are subject to testing for impairment of long-lived assets (including goodwill, intangible assets and other long-lived assets) based on
applicable accounting guidelines.
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We are required to review goodwill recorded in business combinations for impairment at least annually, or more frequently if events or a
change in circumstances indicate that an impairment may have occurred. We are required to write-down the value of goodwill only in periods in
which the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is September 30. We
have managed our operations based on four operating segments (regional markets, business markets, wholesale markets and Savvis operations)
and considered these four operating segments to be the appropriate level for testing goodwill impairment.
We have attributed our goodwill balance to our segments at December 31, 2011 as follows:
(Dollars in millions)
11,813
5,021
3,533
1,357
$
21,724

Regional markets
Business markets
Wholesale markets
Savvis operations
Total goodwill

$

With the exception of our Savvis segment, our operating segments do not correspond to our legal entity organization structure, which
required us to apply significant judgment based on numerous assumptions to attribute our goodwill and certain other assets and liabilities to the
operating segments in order to make our annual impairment assessment. For this assessment, we compare each segment's estimated fair value to
the carrying value of the assets that we attribute to the segment. If the estimated fair value of the reporting unit is greater than the carrying value,
we conclude that no impairment exists. If the fair value of the segment is less than the carrying value, a second calculation is required in which the
implied fair value of goodwill is compared to the carrying value of goodwill that we attribute to the segment. Estimating the implied fair value of
goodwill requires further assumptions and the application of judgment to assess the current fair values of the assets and liabilities attributable to
the segment. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value. Small
changes in the assumptions underlying either the valuation methods or the attribution methods can drive material changes in the implied fair value
of goodwill.
At September 30, 2011, we estimated the fair value of our regional, business and wholesale markets reporting units using an equal weighting
based on a market approach and a discounted cash flow method. The market approach includes the use of comparable multiples of publicly traded
companies whose services are comparable to ours to corroborate discounted cash flow results. The discounted cash flow method is based on the
present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting unit beyond the
cash flows from the discrete five-year projection period. The estimated cash flows are discounted using a rate that represents our weighted
average cost of capital, which we determined to be 6.50% as of the measurement date (which was comprised of a pre-tax cost of debt of 7.0% and a
cost of equity of 8.7%). We also reconciled the estimated fair values of the reporting units to our market capitalization as of September 30, 2011 and
concluded that the indicated implied control premium of 16% was reasonable based on recent transactions in the market place.
For our Savvis operations, we determined the preliminary fair value of the assets acquired and liabilities assumed using various methods,
including an overall discounted cash flow analysis performed for all of Savvis' operations. As of September 30, 2011, the fair value assignments
were preliminary and could change significantly upon finalization of the fair value assignments. Due to the recentness of the acquisition and the
related preliminary valuation results and the lack of any significant adverse events that have occurred to Savvis' operating results or our
expectations of forecasted operating results
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utilized in the preliminary valuation since the July 15, 2011 acquisition date, we concluded that the goodwill related to the Savvis operations was
not impaired as of September 30, 2011.
As of September 30, 2011, based on our analysis performed with respect to these segments as described above, we concluded that our
goodwill was not impaired as of that date. However, as of that date, the estimated fair value of the regional markets and wholesale markets
exceeded their carrying value by less than 5%. A 25 basis point increase in the discount rate used in our analysis would have caused the estimated
fair values of the regional markets and wholesale markets goodwill to be less than their carrying values and thus would have required us to perform
the second step of goodwill impairment testing.
On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order (the "CAF order"). This order will
reduce the amount of switched access revenue we recognize in our wholesale markets segment in the future. Although other elements of this order
are currently expected to result in positive impacts to our overall business, it will likely have a material negative impact to our wholesale markets
segment. Because we expect the order to have a material negative impact on our wholesale markets segment, we conducted another assessment of
the goodwill attributed to the wholesale markets segment at December 31, 2011. In the process of re-estimating the fair value of the wholesale
markets segment as a result of the CAF order, we updated our estimates of projected future cash flows and we revised our market multiple
assumption. In our most recent estimate, we revised our revenue projections to stabilize by 2016 rather than our previous assumption that
revenues would decline in perpetuity, and thus increasing our terminal value. After updating our fair value estimate of the wholesale markets
segment to reflect revised estimates of revenues, the effects of our market multiple assumption due to changes in our stock price between
September 30, 2011 and December 31, 2011, the increase in terminal value and the adverse effects of the CAF order, the estimated fair value of the
wholesale markets segment exceeded its attributed carrying value by greater than 5%. We also evaluated and concluded that the goodwill
attributed to our other reporting units was not impaired as of December 31, 2011 due to (i) an increase in our market capitalization since
September 30, 2011, (ii) a reduction in our carrying value of equity since September 30, 2011 and (iii) the lack of significant adverse changes in the
operating forecasts of our other segments.
We cannot assure that other adverse conditions will not trigger future goodwill impairment testing or an impairment charge. A number of
factors, many of which we have no ability to control, could affect our financial condition, operating results and business prospects and could
cause our actual results to differ from the estimates and assumptions we employed in our goodwill impairment testing. These factors include, but
are not limited to, (i) further weakening in the overall economy; (ii) a significant decline in our stock price and resulting market capitalization;
(iii) changes in the discount rate; (iv) successful efforts by our competitors to gain market share in our markets; (v) adverse changes as a result of
regulatory actions; (vi) a significant adverse change in legal factors or in the overall business climate; (vii) recognition of a goodwill impairment
loss in the financial statements of a subsidiary that is a component of our reporting units and (viii) additional information relative to the impact of
the CAF order. We will continue to monitor certain events that impact our operations to determine if an interim assessment of goodwill impairment
should be performed prior to the next required testing date of September 30, 2012.
Property, Plant and Equipment
Property, plant and equipment acquired in connection with our acquisitions was recorded based on its fair value as of its acquisition date.
Substantially all other property, plant and equipment is stated at original cost less depreciation. Renewals and betterments of plant and equipment
are capitalized while repairs, as well as renewals of minor items, are charged to operating expense. Depreciation of property, plant and equipment is
provided on the straight line method using class or overall group rates; such average annual rates range from 2% to 29%.
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Normal retirements of property, plant and equipment are charged against accumulated depreciation, with no gain or loss recognized. Other
types of property, plant and equipment is stated at cost and, when sold or retired, a gain or loss is recognized. We depreciate such property on the
straight line method over estimated service lives ranging from two to 35 years.
We perform annual internal reviews to evaluate the reasonableness of depreciable lives for our property, plant and equipment. Our reviews
utilize models that take into account actual usage, replacement history and assumptions about technology evolution to estimate the remaining life
of our asset base. The changes in our estimates incorporated as a result of our most recent review did not have a material impact on the level of our
depreciation expense.
Pension and Post-Retirement Benefits
We sponsor several noncontributory defined benefit pension plans (referred to as our pension plans) for substantially all employees. In
addition to these tax qualified pension plans, we also maintain several non-qualified pension plans for certain eligible highly compensated
employees. We maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees.
Pension and post-retirement health care and life insurance benefits attributed to eligible employees' service during the year, as well as interest
on benefit obligations, are accrued currently. Pension and post-retirement benefit expenses are recognized over the period in which the employee
renders service and becomes eligible to receive benefits as determined using the projected unit credit method. Pension prior service costs and
actuarial gains and losses are recognized as components of net periodic expense over the average remaining service period of participating
employees expected to receive benefits. Post-retirement healthcare prior service costs are recognized as components of net periodic expense over
the average expected years to full benefit eligibility for active employees. Post-retirement actuarial gains or losses are amortized on a straight-line
basis over the average expected future working lifetime of active employees.
In computing the pension and post-retirement health care and life insurance benefits expenses and obligations, the most significant
assumptions we make include discount rate, expected rate of return on plan assets, health care trend rates and our evaluation of the legal basis for
plan amendments. The plan benefits covered by collective bargaining agreements as negotiated with our employees' unions can also significantly
impact the amount of expense, benefit obligations and pension assets that we record.
The discount rate is the rate at which we believe we could effectively settle the benefit obligations as of the end of the year. We selected the
discount based on a cash flow matching analysis using hypothetical yield curves developed by an actuary firm from U.S. corporate bonds rated
high quality and projections of the future benefit payments that constitute the projected benefit obligation for the plans. This process establishes
the uniform discount rate that produces the same present value of the estimated future benefit payments, as is generated by discounting each
year's benefit payments by a spot rate applicable to that year. The spot rates used in this process are derived from a yield curve created from yields
on the 60th to 90th percentile of U.S. high quality bonds.
The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans' assets. The rate of return is determined
by the strategic allocation of plan assets and the long-term risk and return forecast for each asset class. The forecasts for each asset class are
generated primarily from an analysis of the long-term expectations of various third party investment management organizations. The expected rate
of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy.
To compute the expected return on pension and post-retirement benefit plan assets, we apply an expected rate of return to the fair value of the
pension plan assets and to the fair value of the
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post-retirement benefit plan assets adjusted for contribution timing and for projected benefit payments to be made from the plan assets. Annual
market volatility for these assets is reflected in the subsequent year's net periodic combined benefits expense.
Changes in any of the above factors could impact operating expenses in the consolidated statements of operations as well as the value of the
liability and accumulated other comprehensive income of stockholders' equity on our consolidated balance sheets. The expected rate of return on
plan assets is reflected as a reduction to our pension and post-retirement benefit expense. If our assumed expected rates of return for 2011 were 100
basis points lower, our qualified pension and post-retirement benefit expenses would have increased by $98 million. If our assumed discount rates
for 2011 were 100 basis points lower, our qualified pension and post-retirement benefit expenses would have decreased by $29 million and our
projected benefit obligation would have increased by approximately $1.8 billion. An increase of 100 basis points in the initial healthcare cost trend
rate would have increased our post-retirement benefit expense by $2 million and increased our projected post-retirement benefit obligation by
$70 million.
The trusts for the pension and post-retirement benefits plans hold investments in equities, fixed income, real estate and other assets such as
private equity assets. The assets held by these trusts are reflected at estimated fair value as of December 31, 2011. For additional information on
our trust investments, see Note 8—Employee Benefits to our consolidated financial statements in Item 8 of this report.
Loss Contingencies and Litigation Reserves
We are involved in several material legal proceedings, as described in more detail in "Legal Proceedings" in Item 3 of this report. We assess
potential losses in relation to these and other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is
considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates
are more or less than the actual liability resulting from the resolution of these matters, our earnings will be increased or decreased accordingly. If
the differences are material, our consolidated financial statements could be materially impacted. If a loss is considered reasonably possible, we
disclose any determinable estimate of the loss if material but we do not recognize any expense for the potential loss.
Income Taxes
Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and
liabilities reflecting future tax consequences attributable to tax NOLs, tax credit carryforwards and differences between the financial statement
carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates
expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities
of a change in tax rate is recognized in earnings in the period that includes the enactment date.
The measurement of deferred taxes often involves an exercise of judgment related to the realization of tax basis. Our deferred tax assets and
liabilities reflect our assessment that tax positions taken and the resulting tax basis, are more likely than not to be sustained if they are audited by
taxing authorities. Also, assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to
affect taxable income requires judgment about the future apportionment of our income among the states in which we operate. These and other
matters involve the exercise of significant judgment. Any changes in our practices or judgments involved in the measurement of deferred tax assets
and liabilities could materially impact our financial condition or results of operations.
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We record deferred income tax assets and liabilities as described above. Valuation allowances are established when necessary to reduce
deferred income tax assets to amounts that we believe are more likely than not to be recovered. We evaluate our deferred tax assets quarterly to
determine whether adjustments to our valuation allowance are appropriate. In making this evaluation, we rely on our recent history of pre-tax
earnings, estimated timing of future deductions and benefits represented by the deferred tax assets and our forecasts of future earnings, the latter
two of which involve the exercise of significant judgment. At December 31, 2011, we concluded that it was more likely than not that we would
realize the majority of our deferred tax assets. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits
change in the future, we may determine that a valuation allowance for certain deferred tax assets is appropriate, which could materially impact our
financial condition or results of operations. See Note 12—Income Taxes for additional information.
Recently Issued Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08,
Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update simplifies the goodwill impairment assessment by
allowing a company to first review qualitative factors to determine the likelihood of whether the fair value of a reporting unit is less than its
carrying amount before applying the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of a
reporting unit is greater than its carrying amount, the company would not be required to perform the two-step goodwill impairment test for that
reporting unit. This update is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15,
2011 with early adoption permitted. This ASU, which we adopted during the third quarter of 2011, did not have any impact on our consolidated
financial statements.
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This
update requires the use of the relative selling price method when allocating revenue in these types of arrangements. This method requires 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 was effective for us on January 1, 2011 and we have adopted it prospectively for revenue
arrangements entered into or materially modified after January 1, 2011. This standard update has not had and is not expected to have a material
impact on our consolidated financial statements since the allocation of revenue has historically been based upon the relative fair value of the
elements as determined by reference to vendor specific objective evidence of fair value when the elements have been sold on a stand-alone basis.
Liquidity and Capital Resources
Overview
At December 31, 2011, we held cash and cash equivalents of $128 million and had $1.423 billion available under our $1.7 billion revolving credit
facility (referred to as our "Credit Facility", which is described further below). Excluding cash used for acquisitions, we have generally relied on
cash provided by operations and our Credit Facility to fund our operating and capital expenditures, make our dividend payments and repay a
portion of our maturing debt. Our operations have historically provided a stable source of cash flow that has helped us meet the needs of the
business.
Our acquisition of Qwest on April 1, 2011 and, to a lesser extent, Savvis on July 15, 2011, resulted in significant changes in our consolidated
financial position and our future cash requirements. At December 31, 2011, our cash and cash equivalents totaled $128 million, compared to
$173 million at December 31, 2010.
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At December 31, 2011, we had a working capital deficit of $496 million, reflecting current liabilities of $4.019 billion and current assets of
$3.523 billion, compared to positive working capital of $132 million at December 31, 2010. The unfavorable change in our working capital position is
primarily due to our consolidation of Qwest's working capital accounts as well as $480 million in current maturities of long-term debt at
December 31, 2011. We anticipate that our existing cash balances and net cash provided by operating activities, which were significantly enhanced
by our acquisition of Qwest, will enable us to meet our other current obligations, fund capital expenditures and pay dividends to our shareholders.
We also may draw on our Credit Facility as a source of liquidity if and when necessary.
We currently expect to continue our current annual dividend of $2.90 per common share, subject to our board's discretion.
Debt and Other Financing Arrangements
We have available a four-year $1.7 billion revolving Credit Facility, which expires in January 2015. Up to $400 million of the Credit Facility can
be used for letters of credit, which reduces the amount available for other extensions of credit. Available borrowings under the Credit Facility are
also effectively reduced by any outstanding borrowings under our commercial paper program. Our commercial paper program borrowings are
effectively limited to the lesser of $1.5 billion or the total amount available under the Credit Facility. At December 31, 2011, we had $277 million in
borrowings and no amounts of letters of credit outstanding under the Credit Facility, and no amounts outstanding under our commercial paper
program.
The Credit Facility has 21 lenders, with commitments ranging from $2.5 million to $135 million. Under the Credit Facility, we, and our indirect
subsidiary, Qwest Corporation, ("QC"), must maintain a debt to EBITDA (earnings before interest, taxes, depreciation and amortization, as defined
in our Credit Facility) ratio of not more than 4:1 and 2.85:1, respectively, as of the last day of each fiscal quarter for the four quarters then ended.
The Credit Facility also contains a negative pledge covenant, which generally provides restrictions if we pledge assets or permit liens on our
property, and requires that any advances under the Credit Facility must also be secured equally and ratably. The Credit Facility also has a cross
payment default provision, and the Credit Facility and certain of our debt securities also have cross acceleration provisions. When present, these
provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. To the
extent that our EBITDA (as defined in our Credit Facility), is reduced by cash settlements or judgments, including in respect of any of the matters
discussed in Note 16—Commitments and Contingencies, our debt to EBITDA ratios under certain debt agreements will be adversely affected. This
could reduce our financing flexibility due to potential restrictions on incurring additional debt under certain provisions of our debt agreements or,
in certain circumstances, could result in a default under certain provisions of such agreements.
At December 31, 2011, our long-term debt (including current maturities) totaled $21.836 billion, compared to $7.328 billion outstanding at
December 31, 2010. Substantially all of the $14.508 billion increase in our debt is attributable to the acquisition of Qwest on April 1, 2011 and our
recent debt issuances to fund the acquisition of Savvis and the retirement of its credit facility in July 2011.
Approximately $318 million of our CenturyLink, Inc. Series L 7.875% notes will mature on August 15, 2012 and on January 27, 2012, we called
$800 million of Qwest Communications International Inc. 7.500% notes due February 15, 2014, committing to retire them on March 1, 2012. Subject
to market conditions, we expect to continue to issue debt securities from time to time in the future to refinance a substantial portion of our maturing
debt. This includes issuing debt securities of CenturyLink or through our QC subsidiary to refinance its maturing debt. The availability, interest
rate and other terms of any new borrowings will depend on the ratings assigned to us and QC by the three
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major credit rating agencies, among other factors. Following our announcement in April 2011 of our agreement to purchase Savvis, one of these
agencies revised its previous outlook on its rating of us from stable to negative. We believe this negative outlook could result in a ratings
downgrade if we are unable to reduce our "debt leverage ratio," while maintaining "free cash flow" (each as defined by the ratings agency) over
the 12 to 18 months following the negative outlook announcement.
Between the date of this report and the end of 2012, we currently expect to reduce our consolidated debt levels by $800 million to
$1.300 billion, based on current circumstances and market conditions.
In April 2011, we entered into a $160 million uncommitted revolving letter of credit facility. At December 31, 2011, our outstanding letters of
credit totaled $129 million under this facility.
Future Contractual Obligations
The following table summarizes our estimated future contractual obligations at December 31, 2011:

2012
Long-term
debt,
including
current
maturities
and capital
lease
obligations $
Interest on
long-term
debt and
capital
leases(1)
Operating
leases
Purchase
commitments
(2)

Postretirement
benefit
obligation
Non-qualified
pension
obligations
Unrecognized
tax benefits
(3)

Other
Total future
contractual
obligations
(4)

$

2013

2014

2017 and
thereafter

2015
2016
(Dollars in millions)

Total

480

1,717

2,057

1,659

2,856

12,798

21,567

1,478

1,409

1,313

1,185

1,003

11,715

18,103

280

244

208

178

147

928

1,985

268

114

77

52

47

148

706

71

71

70

69

120

1,195

1,596

3

2

2

2

2

22

33

—
4

—
12

—
7

—
5

—
5

86
112

86
145

2,584

3,569

3,734

3,150

4,180

27,004

44,221

(1)

Interest paid in all years may differ due to future refinancing of debt. Interest on our floating rate debt was calculated for all years using the rates effective at December 31, 2011.

(2)

We have various long-term, non-cancelable purchase commitments for advertising and promotion services, including advertising and marketing at sports arenas and other venues and
events. We also have service related commitments with various vendors for data processing, technical and software support services. Future payments under certain service contracts will
vary depending on our actual usage. In the table above we estimated payments for these service contracts based on the level of services we expect to receive.

(3)

Represents the amount of tax and interest we would pay for our unrecognized tax benefits. Of our total balance of unrecognized tax benefits of $111 million and related estimated interest
and penalties of $33 million, only $86 million would result in future cash payments if our tax positions were not upheld. The remaining $58 million is an unrecognized tax benefit in
the form of a refund claim that, if not granted, would not result in a cash payment and therefore is not included in the table above. See Note 12—Income Taxes for additional
information. The timing of any payments for our unrecognized tax benefits cannot be predicted with certainty; therefore, such amount is reflected in the "2017 and thereafter" column in
the above table.

(4)

The table does not include:

•

our open purchase orders as of December 31, 2011. These purchase orders are generally at fair value, and are generally cancelable without penalty;

•

other long-term liabilities, such as accruals for legal matters and other taxes that are not contractual obligations by nature. We cannot determine with any degree of reliability
the years in which these liabilities might ultimately settle;

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•

cash funding requirements for pension benefits payable to certain eligible current and future retirees. Benefits paid by our qualified pension plans are paid through trusts. Cash
funding requirements for the trusts are not included in this table as we are not able to reliably estimate required contributions to the trust. Our funding projections are
discussed further below;

•

certain post-retirement benefits payable to certain eligible current and future retirees. Not all of our post-retirement benefit obligation amount is a contractual obligation and
only the portion that we believe is a contractual obligation is reported in the table. See additional information on our benefits plans in Note 8—Employee Benefits to our
consolidated financial statements in Item 8 of this report;

•

contract termination fees. These fees are non-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business and to optimize our
cost structure, we enter into contracts with terms greater than one year to use the network facilities of other carriers and to purchase other goods and services. Our contracts to
use other carriers' network facilities generally have no minimum volume requirements and are based on an interrelationship of volumes and discounted rates. Assuming we
exited these contracts in 2012, the contract termination fees would be approximately $819 million. Under the same assumption, termination fees for these contracts to purchase
goods and services would be $185 million. In the normal course of business, we believe the payment of these fees is likely to be remote; and

•

potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business. The nature and terms of these arrangements vary.
Historically, we have not incurred significant costs related to performance under these types of arrangements.

Capital Expenditures
We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and
expand our service offerings. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as
forecasted revenue growth or productivity, expense and service impacts) and our expected return on investment. The amount of capital investment
is influenced by, among other things, demand for our services and products, cash generated by operating activities and regulatory considerations.
We estimate our total 2012 capital expenditures to be approximately $2.7 billion to $2.9 billion.
Our capital expenditures continue to be focused on our strategic services such as video, broadband and managed hosting services. In 2012,
we anticipate that our fiber investment, which includes fiber to the tower, or FTTT, will be similar to that spent in 2011. FTTT is a type of
telecommunications network consisting of fiber-optic cables that run from a telecommunication provider's broadband interconnection points to
cellular towers. FTTT allows for the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be
available through a more traditional telecommunications network.
Pension and Post-retirement Benefit Obligations
We are subject to material obligations under our existing defined benefit pension plans and other post-retirement benefit plans. The
accounting unfunded status as of December 31, 2011 of our defined pension plans and other post-retirement benefit obligations was $1.7 billion
and $3.2 billion, respectively. See Note 8—Employee Benefits to our consolidated financial statements in Item 8 of this report for additional
information about our pension and other post-retirement benefit arrangements.
Benefits paid by our pension plans are paid through a trust. We contributed $587 million during the year ended December 31, 2011 to our
pension plans and expect to make a contribution of less than $50 million in 2012. We currently expect that required and voluntary contributions for
2013 will be approximately $500 million, based on current laws and circumstances. The actual amount of contributions to our plans in 2013 and
beyond will depend on earnings on investments, discount rates, demographic experience, changes in plans benefits and funding laws and
regulations.
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Certain of our post-retirement health care and life insurance benefits plans are unfunded. Several trusts hold assets that are used to help cover
the health care costs of certain retirees. As of December 31, 2011, the fair value of these trust assets was $693 million; however, a portion of these
assets is comprised of investments with restricted liquidity. We estimate that the more liquid assets in the trust will be adequate to provide
continuing reimbursements for covered post-retirement health care costs for approximately four years. Thereafter, covered benefits will be paid
either directly by us or from the trusts as the remaining assets become liquid. This projected four year period could be substantially shorter or
longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits.
Historical Information
The following table summarizes our consolidated cash flow activities (which include cash flows from Savvis, Qwest and Embarq after their
respective acquisition dates):

Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities

Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities

$

$

Years Ended December 31,
2011
2010
(Dollars in millions)
4,201
2,045
(3,647)
(859)
(577)
(1,175)

Increase
(Decrease)

Years Ended December 31,
2010
2009
(Dollars in millions)
2,045
1,574
(859)
(679)
(1,175)
(976)

Increase
(Decrease)

2,156
2,788
(598)

471
180
199

The increase in our net cash provided by operating activities in 2011 is largely attributable to the acquisitions of Qwest and Savvis, which
contributed net cash provided by operating activities of approximately $2.1 billion and $90 million, respectively. Net cash provided by operating
activities in 2010 as compared to 2009 increased primarily due to 2010 including a full year of operations of Embarq as compared to only a half year
in 2009. Our consolidated financial statements in Item 8 in this report provide information about the components of net income and differences
between net income and net cash provided by operating activities. For additional information about our operating results, see "Results of
Operations" above.
Net cash used in investing activities included payments for property, plant and equipment and capitalized software of $2.411 billion in 2011,
including $1.329 billion for Qwest and Savvis' post-acquisition capital expenditures, compared to $864 million in 2010. In addition, we paid
$1.671 billion, net of $61 million cash received, for the acquisition of Savvis on July 15, 2011. Cash used in investing activities in 2011 was partially
offset by cash acquired through the April 1, 2011 acquisition of Qwest of $419 million, net of $5 million cash paid.
Net cash used in financing activities decreased in 2011 primarily due to us receiving net debt proceeds in excess of payments of approximately
$1.1 billion in 2011 and a debt payment of $500 million in 2010. In addition, our cash dividends paid increased $677 million in 2011 as compared to
2010 primarily as a result of the issuance of 308 million common shares in connection with our acquisitions of Qwest and Savvis in 2011. Net cash
used in financing activities in 2010 as compared to 2009 increased due to a $319 million increase in cash dividends paid, primarily due to the
issuance of
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196 million shares issued on July 1, 2011 for the acquisition of Embarq, partially offset with $73 million in increased proceeds from the issuance of
common stock under our equity incentive plans.
On October 4, 2011, our indirect wholly owned subsidiary, Qwest Corporation ("QC"), issued $950 million aggregate principal amount of its
6.75% Notes due 2021 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $927 million. The notes are senior
unsecured obligations of QC and may be redeemed, in whole or in part, at a redemption price equal to the greater of their principal amount or the
present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rate specified in the indenture agreement plus
50 basis points.
On September 21, 2011, QC issued $575 million aggregate principal amount of its 7.50% Notes due 2051 in exchange for net proceeds, after
deducting underwriting discounts and expenses, of $557 million. The notes are senior unsecured obligations of QC and may be redeemed, in whole
or in part, on or after September 15, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to
the redemption date. In October 2011, QC used the net proceeds from this offering, together with the $927 million of net proceeds received on
October 4, 2011, from the debt issuance described above and available cash, to redeem the $1.500 billion aggregate principal amount of its 8.875%
Notes due 2012 and to pay all related fees and expenses, which resulted in an immaterial loss.
On June 16, 2011, we issued unsecured senior notes with an aggregate principal amount of $2.0 billion ("Senior Notes"), consisting of
(i) $400 million of 7.60% Senior Notes, Series P, due 2039, (ii) $350 million of 5.15% Senior Notes, Series R, due 2017 and (iii) $1.250 billion of 6.45%
Senior Notes, Series S, due 2021. After deducting underwriting discounts and expenses, we received aggregate net proceeds of $1.959 billion in
exchange for the Senior Notes. We may redeem the Senior Notes, in whole or in part, at any time at a redemption price equal to the greater of their
principal amount or the present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rates plus 50 basis
points. We used the net proceeds to fund a portion of our acquisition of Savvis and repay certain of Savvis' debt (see Note 2—Acquisitions). In
April 2011, we received commitment letters from two banks to provide up to $2.0 billion in bridge financing for the Savvis acquisition. This
arrangement was terminated in June 2011 in connection with the issuance of the Senior Notes, resulting in $16 million in transaction expenses
recognized in other income (expense), net.
On June 8, 2011, QC issued approximately $661 million aggregate principal amount of its 7.375% Notes due 2051 in exchange for net proceeds,
after deducting underwriting discounts and expenses, of $642 million. The notes are unsecured obligations of QC and may be redeemed, in whole
or in part, on or after June 1, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the
redemption date. QC used the net proceeds, together with available cash, to redeem $825 million aggregate principal amount of its 7.875% Notes
due 2011 and to pay related fees and expenses.
Certain Matters Related to Acquisitions
Qwest's pre-existing debt obligations consisted primarily of debt securities issued by Qwest and two of its subsidiaries while Savvis'
remaining debt obligations consist primarily of capital leases, all of which are now included in our consolidated debt balances. The indentures
governing Qwest's debt securities contain customary covenants that restrict the ability of Qwest or its subsidiaries from making certain payments
and investments, granting liens and selling or transferring assets. Based on current circumstances, we do not anticipate that these covenants will
significantly restrict our ability to manage cash balances or transfer cash between entities within our consolidated group of companies as needed.
In accounting for the Qwest acquisition, we recorded Qwest's debt securities at their estimated fair values, which totaled $12.292 billion as of
April 1, 2011. Our acquisition date fair value estimates were
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based primarily on quoted market prices in active markets and other observable inputs where quoted market prices were not available. The fair
value of Qwest's debt securities exceeded their stated principal balances on the acquisition date by $693 million, which is being recognized as a
reduction to interest expense over the remaining terms of the debt, of which $150 million was recognized in 2011.
Other Matters
We have cash management arrangements with certain of our principal subsidiaries, in which substantial portions of the subsidiaries' cash is
regularly transferred to us in exchange for matching receivables. In accordance with generally accepted accounting principles, these receivables
are eliminated as intercompany transactions. Although we periodically repay these receivables to fund the subsidiaries' cash requirements
throughout the year, at any given point in time we may owe a substantial sum to our subsidiaries under these receivables, which is not recorded on
our consolidated balance sheets.
We also are involved in various legal proceedings that could have a material effect on our financial position. See Note 16—Commitment and
Contingencies for the current status of such legal proceedings, including matters involving Qwest.
Market Risk
We are exposed to market risk from changes in interest rates on our variable rate long-term debt obligations. We seek to maintain a favorable
mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates. From time to time over
the past several years, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for fixed
interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates; however, at December 31, 2011 we had no such
instruments outstanding. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. We do not hold or issue derivative financial instruments for trading or speculative purposes. Management
periodically reviews our exposure to interest rate fluctuations and implements strategies to manage the exposure.
At December 31, 2011, we have approximately $21.1 billion (excluding capital lease and other obligations with a carrying amount of
$712 million) of long-term debt outstanding, 95% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We had
$1.049 billion floating rate debt exposed to changes in the London InterBank Offered Rate (LIBOR). A hypothetical increase of 100 basis points in
LIBOR relative to this debt would decrease our annual pre-tax earnings by $10 million.
With our acquisition of Savvis in July 2011, we have become exposed to the risk of fluctuations in the foreign currencies in which its
international operations are denominated, primarily the euro, the British Pound, the Canadian Dollar, the Japanese Yen and the Singapore Dollar.
As a consolidated entity, the percentage of revenues generated and costs incurred that are denominated in these currencies is immaterial. We use
a sensitivity analysis to estimate our exposure to this foreign currency risk, measuring the change in financial position arising from hypothetical
10% change in the exchange rates of these currencies, relative to the U.S. Dollar with all other variables held constant. The aggregate potential
change in the fair value of assets resulting from a hypothetical 10% change in these exchange rates was $15 million at December 31, 2011.
Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may
differ materially from those presented above if market conditions vary from the assumptions used in the analyses performed. These analyses only
incorporate the risk exposures that existed at December 31, 2011.
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Off-Balance Sheet Arrangements
We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and
we do not engage in leasing, hedging, or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of
the consolidated financial statements or in the Future Contractual Obligations table above or (ii) discussed under the heading "Market Risk"
above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk" in Item 7 of this
report is incorporated herein by reference.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
The Shareholders
CenturyLink, Inc.:
Management has prepared and is responsible for the integrity and objectivity of our consolidated financial statements. The consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and
necessarily include amounts determined using our best judgments and estimates.
Our consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, who have
expressed their opinion with respect to the fairness of the consolidated financial statements. Their audit was conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States).
Management is responsible for establishing and maintaining adequate internal control over financial reporting, a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Under the supervision and with the participation of management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). Based on our evaluation under the framework of COSO, management concluded that our internal control over financial reporting was
effective at December 31, 2011. The effectiveness of our internal control over financial reporting at December 31, 2011 has been audited by
KPMG LLP, as stated in their report which is included herein.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
The Audit Committee of the Board of Directors is composed of independent directors who are not officers or employees. The Committee meets
periodically with the external auditors, internal auditors and management. The Committee considers the independence of the external auditors and
the audit scope and discusses internal control, financial and reporting matters. Both the external and internal auditors have free access to the
Committee.
/s/ R. Stewart Ewing, Jr.

R. Stewart Ewing, Jr.
Executive Vice President, Chief Financial Officer and Assistant Secretary
February 27, 2012
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CenturyLink, Inc.:
We have audited the accompanying consolidated balance sheets of CenturyLink, Inc. and subsidiaries (the Company) as of December 31, 2011
and 2010, and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders' equity for each of the years
in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's
internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2012 expressed an unqualified
opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
KPMG LLP
Shreveport, Louisiana
February 27, 2012
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CenturyLink, Inc.:
We have audited CenturyLink, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2011, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control—Integrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of December 31, 2011 and 2010, and the related consolidated statements of operations,
comprehensive income, cash flows, and stockholders' equity for each of the years in the three-year period ended December 31, 2011, and our report
dated February 27, 2012 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
Shreveport, Louisiana
February 27, 2012
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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

OPERATING REVENUES
OPERATING EXPENSES
Cost of services and products (exclusive of
depreciation and amortization)
Selling, general and administrative
Depreciation and amortization
Total operating expenses
OPERATING INCOME
OTHER INCOME (EXPENSE)
Interest expense
Other income (expense)
Total other income (expense)
INCOME BEFORE INCOME TAX EXPENSE
Income tax expense
NET INCOME BEFORE EXTRAORDINARY
ITEM
Extraordinary item, net of $81 tax (Note 14)
NET INCOME
BASIC AND DILUTED EARNINGS PER
COMMON SHARE
Before extraordinary item
Extraordinary item
Basic and diluted earnings per common
share
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC
DILUTED

$

Years Ended December 31,
2011
2010
2009
(Dollars in millions, except per share
amounts and shares in thousands)
15,351
7,042
4,974

6,325
2,975
4,026
13,326
2,025

2,544
1,004
1,434
4,982
2,060

(1,072)
(5)
(1,077)
948
375

(544)
15
(529)
1,531
583

(367)
(53)
(420)
813
302

573
—
573

948
—
948

511
136
647

$

1.07
—

3.13
—

2.55
.68

$

1.07

3.13

3.23

532,780
534,121

300,619
301,297

198,813
199,057

$

See accompanying notes to consolidated financial statements.
79

1,801
965
975
3,741
1,233

Table of Contents

CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

2011
NET INCOME
OTHER COMPREHENSIVE (LOSS) INCOME:
Items related to employee benefit plans:
Change in net actuarial loss, net of $508,
$32 and $(36) tax
Change in net prior service credit, net of
$23, $2 and $7 tax
Auction rate securities marked to market,
net of $2, $— and $— tax
Foreign currency translation adjustment and
other, net of $2, $— and $— tax
Other comprehensive (loss) income
COMPREHENSIVE (LOSS) INCOME

$

Years Ended December 31,
2010
(Dollars in millions)
573
948

See accompanying notes to consolidated financial statements.
80

647

(812)

(53)

49

(37)

(3)

(11)

(4)

—

—

—
(56)
892

—
38
685

(18)
(871)
(298)

$

2009

Table of Contents

CENTURYLINK, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2011
2010
(Dollars in millions
and shares in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, less allowance of $145 and $60
Income tax receivable
Deferred income taxes, net
Other
Total current assets
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment
Accumulated depreciation
Net property, plant and equipment
GOODWILL AND OTHER ASSETS
Goodwill
Customer relationships, net
Other intangible assets, net
Other
Total goodwill and other assets
TOTAL ASSETS

$

$

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt
Accounts payable
Accrued expenses and other liabilities
Salaries and benefits
Income and other taxes
Interest
Other
Advance billings and customer deposits
Total current liabilities
LONG-TERM DEBT
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net
Benefit plan obligations, net
Other
Total deferred credits and other liabilities
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY
Preferred stock—non-redeemable, $25.00 par value, authorized
2,000 shares, issued and outstanding 9 and 9 shares
Common stock, $1.00 par value, authorized 800,000 shares,
issued and outstanding 618,514 and 304,948 shares
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
81

$

$

128
1,952
27
1,026
390
3,523

173
713
102
81
74
1,143

29,577
(10,141)
19,436

16,329
(7,575)
8,754

21,724
8,361
2,239
856
33,180
56,139

10,261
930
622
328
12,141
22,038

480
1,399

12
300

634
383
293
250
580
4,019
21,356

159
124
104
122
190
1,011
7,316

3,823
4,855
1,259
9,937

2,369
1,306
389
4,064

—

—

619
18,901
(1,012)
2,319
20,827
56,139

305
6,181
(141)
3,302
9,647
22,038

Table of Contents

CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

2011
OPERATING ACTIVITIES
Net income
$
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
Extraordinary item, net of income tax
expense
Deferred income taxes
Provision for uncollectible accounts
Long-term debt (premium) discount
amortization
Changes in current assets and current
liabilities:
Accounts receivable
Accounts payable
Accrued income and other taxes
Other current assets and other current
liabilities, net
Retirement benefits
Changes in other noncurrent assets and
liabilities
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Payments for property, plant and equipment
and capitalized software
Cash paid for Savvis acquisition, net of $61
cash acquired
Cash acquired in Qwest acquisition, net of $5
cash paid
Cash acquired in Embarq acquisition
Other, net
Net cash used in investing activities
FINANCING ACTIVITIES
Net proceeds from issuance of long-term
debt
Payments of long-term debt
Net (payments) borrowings on credit facility
Debt issuance and retirement costs
Dividends paid
Net proceeds from issuance of common
stock
Repurchase of common stock
Other, net
Net cash used in financing activities
Effect of exchange rate changes on cash and
cash equivalents
Net (decrease) increase in cash and cash
equivalents
Cash and cash equivalents at beginning of
period
Cash and cash equivalents at end of period
$
Supplemental cash flow information:
Income taxes refunded (paid), net
Interest (paid) (net of capitalized interest of
$25, $13 and $3)

$
$

Years Ended December 31,
2010
(Dollars in millions)

2009

573

948

647

4,026

1,434

975

—
395
153

—
132
91

(148)

1

(136)
154
57
11

(102)
(58)
31

(118)
(96)
38

(80)
(32)
(150)

(76)
(688)

(127)
(271)

121
(82)

(6)
101
4,201

(13)
26
2,045

(2,411)

(864)

(755)

(1,671)

—

—

419
—
16
(3,647)

—
—
5
(859)

—
77
(1)
(679)

4,102
(2,984)
(88)
(114)
(1,556)

—
(500)
74
—
(879)

644
(825)
(272)
(7)
(560)

103
(31)
(9)
(577)

130
(17)
17
(1,175)

57
(16)
3
(976)

40
49
1,574

(22)

—

—

(45)

11

(81)

173
128

162
173

243
162

118

(424)

(257)

(548)

(392)

(1,225)

See accompanying notes to consolidated financial statements.
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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

2011
COMMON STOCK (represents dollars and
shares)
Balance at beginning of period
Issuance of common stock to acquire Qwest,
including shares issued in connection with
share-based compensation awards
Issuance of common stock to acquire Savvis,
including shares issued in connection with
share-based compensation awards
Issuance of common stock to acquire
Embarq, including shares issued in
connection with share-based
compensation awards
Issuance of common stock through dividend
reinvestment, incentive and benefit plans
Shares withheld to satisfy tax withholdings
Balance at end of period
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period
Issuance of common stock to acquire Qwest,
including assumption of share-based
compensation awards
Issuance of common stock to acquire Savvis,
including assumption of share-based
compensation awards
Issuance of common stock to acquire
Embarq, including assumption of sharebased compensation awards
Issuance of common stock through dividend
reinvestment, incentive and benefit plans
Shares withheld to satisfy tax withholdings
Share-based compensation and other, net
Balance at end of period
ACCUMULATED OTHER COMPREHENSIVE
(LOSS) INCOME
Balance at beginning of period
Other comprehensive (loss) income
Balance at end of period
RETAINED EARNINGS
Balance at beginning of period
Net income
Dividends declared
Balance at end of period
TOTAL STOCKHOLDERS' EQUITY

$

$

See accompanying notes to consolidated financial statements.
83

Years Ended December 31,
2010
(Dollars in millions)

2009

305

299

100

294

—

—

14

—

—

—

—

196

6
—
619

6
—
305

4
(1)
299

6,181

6,020

45

11,974

—

—

601

—

—

—

—

5,874

97
(30)
78
18,901

124
(16)
53
6,181

53
(15)
63
6,020

(141)
(871)
(1,012)

(85)
(56)
(141)

(123)
38
(85)

3,302
573
(1,556)
2,319
20,827

3,233
948
(879)
3,302
9,647

3,146
647
(560)
3,233
9,467

Table of Contents

CENTURYLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its
consolidated subsidiaries, including SAVVIS, Inc. and its consolidated subsidiaries (referred to as "Savvis") for periods on or after July 15,
2011, Qwest Communications International Inc. and its consolidated subsidiaries (referred to as "Qwest") for periods on or after April 1, 2011,
and Embarq Corporation and its consolidated subsidiaries (referred to as "Embarq") for periods on or after July 1, 2009.
(1) Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
We are an integrated communications company engaged primarily in providing an array of communications services to our residential,
business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line
(including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless and video services. In
certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security
monitoring.
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries over which we exercise
control. These subsidiaries include our acquisition of SAVVIS, Inc. ("Savvis") on July 15, 2011, Qwest Communications International Inc.
("Qwest") on April 1, 2011 and Embarq Corporation ("Embarq") on July 1, 2009 (See Note 2—Acquisitions). All intercompany amounts and
transactions with our consolidated subsidiaries have been eliminated.
Through June 30, 2009, CenturyLink accounted for its regulated telephone operations (except for the properties acquired from Verizon in 2002)
in accordance with the provisions of regulatory accounting under which certain of our assets and liabilities were required to be recorded and,
accordingly, reflected in the balance sheets of our regulated entities. 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. In the third quarter of 2009,
upon the discontinuance of regulatory accounting, we recorded a non-cash extraordinary gain in our consolidated statements of operations of
$136 million after-tax. See Note 14—Discontinuance of Regulatory Accounting for additional information.
Subsequent to the July 1, 2009 discontinuance of regulatory accounting, all intercompany transactions with affiliates have been eliminated
from the consolidated financial statements. Prior to July 1, 2009, intercompany transactions with regulated affiliates subject to regulatory
accounting were not eliminated in connection with preparing the consolidated financial statements, as allowed by the provisions of regulatory
accounting. The amount of intercompany revenues and costs that were not eliminated related to the first half of 2009 approximated $114 million.
Our consolidated financial statements reflect changes in the way we present the effects of noncontrolling interests in certain of our
subsidiaries. To simplify the overall presentation of our financial statements, we no longer display immaterial amounts attributable to
noncontrolling interests as separate items. In our revised presentation we report: (i) income attributable to noncontrolling interests in other income
(expense), (ii) equity attributable to noncontrolling interests in additional paid-in capital and (iii) cash flows attributable to noncontrolling interests
in other financing activities. As a result of this change, the amounts we now report as net income correspond to amounts that we previously
reported as net income attributable to CenturyLink, Inc. This presentation change had no effect on earnings per common share, total equity or the
classification of our cash flows.
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During 2011, we changed the definitions we use to classify expenses as cost of services and products and selling, general and administrative,
and as a result, we reclassified previously reported amounts to conform to the current period presentation. These revisions resulted in the
reclassification of $134 million and $49 million from selling, general and administrative to cost of services and products for years ended
December 31, 2010 and 2009, respectively. Our current definitions are as follows:
•

Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and
services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining
our network (such as salaries, wages, benefits and professional fees); facilities expenses (which are third-party telecommunications
expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment
sales expenses (such as data integration and modem expenses); costs for universal service funds ("USF") (which are federal and
state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and
affordable rates, among other things, and to which we are often required to contribute); and other expenses directly related to our
network and hosting operations.

•

Selling, general and administrative expenses are expenses incurred in selling products and services to our customers, corporate
overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal
commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for
administrative functions; marketing and advertising; taxes (such as property and other taxes) and fees; external commissions; bad
debt expense; and other selling, general and administrative expenses.

These expense classifications may not be comparable to those of other companies.
We also have reclassified certain other prior period amounts to conform to the current period presentation, including the categorization of our
revenues and our segment reporting (see Note 13—Segment Information). These changes had no impact on total revenues, total operating
expenses or net income for any period.
We have reclassified certain prior year balance sheet amounts presented in our Annual Report on Form 10-K for the year ended December 31,
2010. We primarily reclassified $312 million from other assets to other intangible assets, net.
Summary of Significant Accounting Policies
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting
principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we made
when accounting for items and matters such as, but not limited to, investments, long-term contracts, customer retention patterns, allowance for
doubtful accounts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets (including deferred tax
assets), impairment assessments, pension, post-retirement and other post-employment benefits, taxes, certain liabilities and other provisions and
contingencies are reasonable, based on information available at the time they were made. These estimates, judgments and assumptions can affect
the reported amounts of assets, liabilities and components of stockholders' equity as of the dates of the consolidated balance sheets, as well as the
reported amounts of revenue, expenses and components of cash flows during the periods presented in our consolidated statements of operations,
our consolidated statements of comprehensive (loss) income and our consolidated statements of cash flows. We also make estimates in our
assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 12—Income Taxes and Note 16—Commitments
and Contingencies for additional information.
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For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense
for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of
recoverability and reduce the estimated loss if recovery is also deemed probable.
For matters related to income taxes, if the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant
taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax
position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized
benefit from uncertain tax positions.
For all of these and other matters, actual results could differ from our estimates.
Revenue Recognition
We recognize revenue for services when the related services are provided. Recognition of certain payments received in advance of services
being provided is deferred until the service is provided. These advance payments include activation and installation charges, which we recognize
as revenue over the expected customer relationship period, which ranges from eighteen months to over ten years depending on the service. We
also defer costs for customer acquisitions. The deferral of customer acquisition costs is limited to the amount of revenue deferred on advance
payments. Costs in excess of advance payments are recorded as expense in the period such costs are incurred. Expected customer relationship
periods are estimated using historical experience. Termination fees or other fees on existing contracts that are negotiated in conjunction with new
contracts are deferred and recognized over the new contract term.
We offer bundle discounts to our customers who receive certain groupings of services. These bundle discounts are recognized concurrently
with the associated revenues and are allocated to the various services in the bundled offering based on the estimated selling price of services
included in each bundled combination. Revenues from installation activities are deferred and recognized as revenue over the estimated life of the
customer relationship. The costs associated with such installation activities, up to the related amount of deferred revenue, are deferred and
recognized as an operating expense over the same period.
Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable. If the
elements are deemed separable and separate earnings processes exist, the revenue associated with each element is allocated to each element based
on the relative estimated selling price of the separate elements. We have estimated the selling prices of each element by reference to vendorspecific objective evidence of selling prices when the elements are sold separately. The revenue associated with each element is then recognized
as earned. For example, if we receive an advance payment when we sell equipment and continuing service together, we immediately recognize as
revenue the amount allocated to the equipment as long as all the conditions for revenue recognition have been satisfied. The portion of the
advance payment allocated to the service based upon its relative selling price is recognized ratably over the longer of the contractual period or the
expected customer relationship period.
We have periodically transferred optical capacity assets on our network to other telecommunications service carriers. These transactions are
structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber
for a specified term, typically 20 years. We account for the cash consideration received on transfers of optical capacity assets and on all of the
other elements deliverable under an IRU, as revenue ratably over the term of the agreement. We have not recognized revenue on any
contemporaneous exchanges of our optical capacity assets for other optical capacity assets.
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We offer some products and services that are provided by third-party vendors. We review the relationship between us, the vendor and the
end customer to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross
or net basis, we consider whether we act as a principal in the transaction, take title to the products, have risk and rewards of ownership and act as
an agent or broker. Based on our agreements with DIRECTV and Verizon Wireless, we offer these services through sales agency relationships
which are reported on a net basis.
For our Savvis operations, we have service level commitments pursuant to individual client contracts with certain of our clients. To the extent
that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or
conditions, we will estimate the amount of credits to be issued and record a reduction to revenue, with a corresponding increase in the allowance
for doubtful accounts. In the event we provide credits or payments to clients related to service level claims, we may recover such costs through
third party insurance agreements. Insurance proceeds received under these agreements are recorded as an offset to previously recorded revenue
reductions.
USF, Gross Receipts Taxes and Other Surcharges
In determining whether to include in our revenue and expenses the taxes and surcharges collected from customers and remitted to
governmental authorities, including USF charges, sales, use, value added and some excise taxes, we assess, among other things, whether we are
the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. In jurisdictions where we determine that
we are the principal taxpayer, we record the taxes on a gross basis and include them in our revenue and costs of services and products.
In jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and
do not include them in our revenue and costs of services and products.
Advertising Costs
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated
statements of operations. For the years ended December 31, 2011, 2010 and 2009, our advertising expense was $275 million, $49 million and
$25 million, respectively.
Legal Costs
In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other
matters. We expense these costs as the related services are received.
Income Taxes
We file a consolidated federal income tax return with our eligible subsidiaries. The provision for income taxes consists of an amount for taxes
currently payable, an amount for tax consequences deferred to future periods, adjustments to our liabilities for uncertain tax positions and
amortization of investment tax credits. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax net
operating loss carryforwards (NOLs), tax credit carryforwards and differences between the financial statement carrying value of assets and
liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in
which the differences are expected to affect taxable income. The effect on deferred income
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tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
We use the deferral method of accounting for federal investment tax credits earned prior to the repeal of such credits in 1986. We also defer
certain transitional investment tax credits earned after the repeal, as well as investment tax credits earned in certain states. We amortize these
credits ratably over the estimated service lives of the related assets as a credit to our income tax expense in our consolidated statements of
operations.
We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than
not to be recovered. A significant portion of our net deferred tax assets relate to tax benefits attributable to NOLs. Each quarter we evaluate the
need to retain all or a portion of the valuation allowance on our deferred tax assets. At December 31, 2011, we concluded that it was more likely
than not that we would realize the majority of our deferred tax assets. See Note 12—Income Taxes for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from
fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements
approximates their fair value. In evaluating investments for classification as cash equivalents, we require that individual securities have original
maturities of three months or less and that individual investment funds have dollar-weighted average maturities of ninety days or less. To preserve
capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition and in high quality and relatively
risk-free investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among
certain products and includes criteria related to credit worthiness of any particular financial institution.
Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for
payment. Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. Until the issued
checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheet. This activity is
included in the operating activities section in our consolidated statements of cash flows.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts Receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other
receivables less an allowance for doubtful accounts. The allowance for doubtful accounts receivable reflects our best estimate of probable losses
inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other
currently available evidence. We generally consider our accounts past due if they are outstanding over 30 days. Our collection process varies by
the customer segment, amount of the receivable, and our evaluation of the customer's credit risk. Our past due accounts are written off against our
allowance for doubtful accounts when collection is considered to be not probable. Any recoveries of accounts previously written off are generally
recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable net of the allowance for doubtful
accounts approximates fair value.
Property, Plant and Equipment
Property, plant and equipment acquired in connection with our acquisitions was recorded based on its estimated fair value as of its acquisition
date plus the estimated value of any associated legally or
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contractually required retirement obligations. Substantially all other property, plant and equipment is stated at original cost plus the estimated
value of any associated legally or contractually required retirement obligations. Property, plant and equipment is depreciated primarily using the
straight-line group method. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the
majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are categorized in the year
acquired on the basis of equal life groups for purposes of depreciation and tracking. Generally, under the straight-line group method, when an
asset is sold or retired, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a
gain or loss. A gain or loss is recognized in our consolidated statements of operations only if a disposal is abnormal or unusual. Leasehold
improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs
are expensed as incurred. Interest is capitalized during the construction phase of network and other internal-use capital projects. Employee-related
costs for construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment
supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews
utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in
certain instances, actuarially determined probabilities to estimate the remaining life of our asset base. The changes in our estimates incorporated as
a result of our most recent reviews did not have a material impact on the level of our depreciation expense.
We have asset retirement obligations associated with the legally or contractually required removal of a limited group of property, plant and
equipment assets from leased properties and the disposal of certain hazardous materials present in our owned properties. When an asset retirement
obligation is identified, usually in association with the acquisition of the asset, we record the fair value of the obligation as a liability. The fair value
of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated
asset. Where the removal obligation is not legally binding, the net cost to remove assets is expensed in the period in which the costs are actually
incurred.
We review long-lived assets, other than goodwill and other intangible assets with indefinite lives, for impairment whenever facts and
circumstances indicate that the carrying amounts of the assets may not be recoverable. For measurement purposes, long-lived assets are grouped
with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and
liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not
recoverable and exceeds its fair value. Recoverability of the asset group to be held and used is measured by comparing the carrying amount of the
asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is
not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. We
determine fair values by using a combination of comparable market values and discounted cash flows, as appropriate.
Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships, trademarks and tradenames, are initially
recorded at fair value. We amortize customer relationships primarily over an estimated life of 10 years, using either the sum-of-the-years-digits or
straight-line methods, depending on the type of customer. We amortize capitalized software using the straight-line method over estimated lives
ranging up to seven years and amortize our other intangible assets
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predominantly using the sum-of-the-years digits method over an estimated life of four years. Other intangible assets not arising from business
combinations are initially recorded at cost. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful
life of an intangible asset, we classify the intangible asset as indefinite-lived and such intangible assets are not amortized.
Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line group method over its
estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoting time to the projects and
external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at
which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized
only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training
costs are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually.
Capitalized software is included in other intangible assets, net, in our consolidated balance sheets.
Our long-lived intangible assets with indefinite lives are reviewed for impairment annually or whenever an event occurs or circumstances
change that would indicate an impairment may have occurred. These assets are carried at historical cost if their estimated fair value is greater than
their carrying amounts. However, if their estimated fair value is less than the carrying amount, other indefinite-lived intangible assets are reduced
to their estimated fair value through an impairment charge to our consolidated statements of operations. In the fourth quarter of 2011, we
completed our annual review and determined that the fair value of our indefinite-lived intangible assets exceeded their carrying amounts;
accordingly, no impairment charge was recorded in 2011.
We are required to review goodwill for impairment at least annually, or more frequently if events or a change in circumstances indicate that an
impairment may have occurred. We are required to write-down the value of goodwill only in periods in which the recorded amount of goodwill
exceeds the fair value. Our annual measurement date for testing goodwill impairment is September 30. Subsequent to our acquisitions of Qwest on
April 1, 2011 and Savvis on July 15, 2011, we managed our operations based on four operating segments (regional markets, business markets,
wholesale markets and Savvis operations) and have considered these four operating segments to be the appropriate level for testing goodwill
impairment as of September 30, 2011. Prior to our acquisition of Qwest, our reporting units were generally aligned to our five geographic operating
regions, under which we managed the substantial portion of our operations. See Note 3—Goodwill, Customer Relationships and Other Intangible
Assets for additional information.
We periodically review the estimated lives and methods used to amortize our other intangible assets. The actual amounts of amortization
expense may differ materially from our estimates, depending on the results of our periodic reviews and our final determinations of acquisition date
fair value related to Savvis' and Qwest's intangible assets. For more information, see Note 2—Acquisitions.
Pension and Post-Retirement Benefits
We recognize the overfunded or underfunded status of our defined benefit and post-retirement plans as an asset or a liability on our balance
sheet. Accumulated actuarial gains and losses are a component of our other comprehensive (loss) income, which is then included in our
accumulated other comprehensive (loss) income. Pension and post-retirement benefit expenses are recognized over the period in which the
employee renders service and becomes eligible to receive benefits. We make significant assumptions (including the discount rate, expected rate of
return on plan assets and health care trend rates) in computing the pension and post-retirement benefits expense and obligations. See Note 8—
Employee Benefits.
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Foreign Currency
Our results of operations include foreign subsidiaries, which are translated from the applicable functional currency to the United States dollar
using the average exchange rates during the reporting period, while assets and liabilities are translated at the reporting date. Resulting gains or
losses from translating foreign currency are included in accumulated other comprehensive (loss) income.
Common Stock
At December 31, 2011, we had unissued shares of CenturyLink common stock reserved of 43.6 million shares for incentive compensation,
4.1 million shares for acquisitions, 3.4 million shares for our employee stock purchase plan ("ESPP") and 400,000 shares for our dividend
reinvestment plan.
Preferred stock
Holders of outstanding CenturyLink preferred stock are entitled to receive cumulative dividends, receive preferential distributions equal to $25
per share plus unpaid dividends upon CenturyLink's liquidation and vote as a single class with the holders of common stock.
Recently Issued Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08,
Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update simplifies the goodwill impairment assessment by
allowing a company to first review qualitative factors to determine the likelihood of whether the fair value of a reporting unit is less than its
carrying amount before applying the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of a
reporting unit is greater than its carrying amount, a company would not be required to perform the two-step goodwill impairment test for that
reporting unit. This update is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15,
2011 with early adoption permitted. This ASU, which we adopted during the third quarter of 2011, did not have any impact on our consolidated
financial statements.
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This
update requires the use of the relative selling price method when allocating revenue in these types of arrangements. This method requires 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 was effective for us on January 1, 2011 and we have adopted it prospectively for revenue
arrangements entered into or materially modified after January 1, 2011. This standard update has not had and is not expected to have a material
impact on our consolidated financial statements since the allocation of revenue has historically been based upon the relative fair value of the
elements as determined by reference to vendor specific objective evidence of fair value when the elements have been sold on a stand-alone basis.
(2) Acquisitions
Acquisition of Savvis
On July 15, 2011, we acquired all of the outstanding common stock of Savvis, a provider of cloud hosting, managed hosting, colocation and
network services in domestic and foreign markets. We believe this acquisition enhances our ability to be an information technology partner with
our existing business customers and strengthens our opportunities to attract new business customers in the future. Each share of Savvis common
stock outstanding immediately prior to the acquisition converted into the right
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to receive $30 per share in cash and 0.2479 shares of CenturyLink common stock. The aggregate consideration of $2.382 billion consisted of:
•

cash payments of $1.732 billion;

•

the 14.313 million shares of CenturyLink common stock issued to consummate the acquisition,

•

the closing stock price of CenturyLink common stock at July 14, 2011 of $38.54; and

•

the estimated net value of the pre-combination portion of certain share-based compensation awards assumed by CenturyLink of
$98 million, of which $33 million was paid in cash.

Upon completing the acquisition, we also paid $547 million to retire certain pre-existing Savvis debt and accrued interest, and paid related
transaction expenses totaling $15 million. The cash payments required on or about the closing date were funded using existing cash balances,
which included the net proceeds from the June 2011 issuance of senior notes with an aggregate principal amount of $2.0 billion. See Note 4—Longterm Debt and Credit Facilities, for additional information about our senior notes.
We have recognized the assets and liabilities of Savvis 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. As such, we have not completed our valuation analysis and calculations
in sufficient detail necessary to arrive at the final estimates of the fair value of Savvis' assets acquired and liabilities assumed, along with the
related allocations to goodwill and intangible assets. The fair values of certain tangible assets, intangible assets, certain contingent liabilities and
residual goodwill are the most significant areas not yet finalized and therefore are subject to change. We expect to complete our final fair value
determinations no later than the second quarter of 2012. Our final fair value determinations may be significantly different than those reflected in our
consolidated financial statements at December 31, 2011.
Based on our preliminary estimate, the aggregate consideration exceeds the aggregate estimated fair value of the acquired assets and assumed
liabilities by $1.357 billion, which has been recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced financial
and operational scale and product and market diversification that we expect 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:

Cash, accounts receivable and other current assets
Property, plant and equipment
Identifiable intangible assets
Customer relationships
Other
Other noncurrent assets
Current liabilities, excluding current maturities of long-term debt
Current maturities of long-term debt
Long-term debt
Deferred credits and other liabilities
Goodwill
Aggregate consideration
92

July 15, 2011
(Dollars in millions)
$
213
1,335

$

794
51
27
(129)
(38)
(840)
(388)
1,357
2,382

Table of Contents
Acquisition of Qwest
On April 1, 2011, we acquired all of the outstanding common stock of Qwest, a provider of data, Internet, video and voice services nationwide
and globally. We entered into this acquisition, among other things, to realize certain strategic benefits, including enhanced financial and
operational scale, market diversification and leveraged combined networks. As of the acquisition date, Qwest served approximately 9.0 million
access lines and approximately 3.0 million broadband subscribers across 14 states. Each share of Qwest 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 was $12.273 billion 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

•

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

We assumed approximately $12.7 billion of long-term debt in connection with our acquisition of Qwest.
We have recognized the assets and liabilities of Qwest 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. As such, we have not completed our valuation analysis and calculations
in sufficient detail necessary to arrive at the final estimates of the fair value of Qwest's assets acquired and liabilities assumed, along with the
related allocations to goodwill and intangible assets. The fair values of certain tangible assets, intangible assets, certain contingent liabilities and
residual goodwill are the most significant areas not yet finalized and therefore are subject to change. We expect to complete our final fair value
determinations no later than the first quarter of 2012. Our final fair value determinations may be significantly different than those reflected in our
consolidated financial statements at December 31, 2011.
Based on our preliminary estimate, the aggregate consideration exceeds the aggregate estimated fair value of the acquired assets and assumed
liabilities by $10.106 billion, which amount 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 to realize. None of the goodwill associated
with this acquisition is deductible for income tax purposes.
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The following is our preliminary assignment of the aggregate consideration:

Cash, accounts receivable and other current assets
Property, plant and equipment
Identifiable intangible assets
Customer relationships
Capitalized software
Other
Other noncurrent assets
Current liabilities, excluding current maturities of long-term debt
Current maturities of long-term debt
Long-term debt
Deferred credits and other liabilities
Goodwill
Aggregate consideration

April 1, 2011
(Dollars in millions)
$
2,128
9,554

$

7,625
1,702
189
373
(2,428)
(2,422)
(10,253)
(4,301)
10,106
12,273

Acquisition of Embarq
On July 1, 2009, we acquired all of the outstanding common stock of Embarq Corporation ("Embarq"), a provider of data, Internet, video and
voice services. We entered into this acquisition, among other things, to realize certain strategic benefits, including enhanced financial and
operational scale, market diversification and leveraged combined networks. As of the acquisition date, Embarq served approximately 5.4 million
access lines and approximately 1.5 million broadband subscribers across 18 states. Each share of Embarq common stock outstanding immediately
prior to the acquisition converted into the right to receive 1.37 shares of CenturyLink common stock, with cash paid in lieu of fractional shares. The
aggregate consideration of $6.070 billion was based on:
•

the 196 million shares of CenturyLink common stock issued to consummate the acquisition;

•

the closing stock price of CenturyLink common stock at June 30, 2009 of $30.70; and

•

the estimated net value of the pre-combination portion of share-based compensation awards assumed by CenturyLink of
approximately $50 million (excluding the value of restricted stock included in the number of issued shares specified above).

We assumed approximately $4.9 billion of long-term debt in connection with our acquisition of Embarq.
In connection the Embarq acquisition, we amended our charter to eliminate our time-phase voting structure, which previously entitled persons
who beneficially owned shares of our common stock continuously since May 30, 1987 to ten votes per share.
We have recognized the assets and liabilities of Embarq based on their acquisition date fair values. Based on our final determination of fair
value in June 2010, the aggregate consideration exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities by
$6.245 billion, which amount 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 to realize. None of the goodwill associated with this
acquisition is deductible for income tax purposes.
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The following is our assignment of the aggregate consideration:

Cash, accounts receivable and other current assets
Property, plant and equipment
Identifiable intangible assets
Customer relationships
Right of way
Other
Other noncurrent assets
Current liabilities, excluding current maturities of long-term debt
Current maturities of long-term debt
Long-term debt
Deferred credits and other liabilities
Goodwill
Aggregate consideration

July 1, 2009
(Dollars in millions)
$
676
6,078

$

1,098
268
27
24
(837)
(2)
(4,885)
(2,622)
6,245
6,070

In connection with consummating the Embarq acquisition, we amended our charter to (i) eliminate our time-phase voting structure, which
previously entitled persons who beneficially owned shares of our common stock continuously since May 30, 1987 to ten votes per share, and
(ii) increase the authorized number of shares of our common stock from 350 million to 800 million. As so amended and restated, our charter provides
that each share of our common stock is entitled to one vote per share with respect to each matter properly submitted to shareholders for their vote,
consent, waiver, release or other action.
References to Acquired Businesses
In the discussion that follows, we refer to the business that we operated prior to the Qwest acquisition (including Embarq's business) as
"Legacy CenturyLink" and refer to the incremental business activities that we now operate as a result of the Savvis acquisition and the Qwest
acquisition as "Legacy Savvis" and "Legacy Qwest", respectively.
Combined Pro Forma Operating Results (Unaudited)
For the year ended December 31, 2011, CenturyLink's results of operations included operating revenues (net of intercompany eliminations)
attributable to Qwest and Savvis of $8.2 billion and $483 million, respectively. The addition of Qwest and Savvis post-acquisition operations did
not contribute significantly to our consolidated net income.
The following unaudited pro forma financial information presents the combined results of CenturyLink as if the Qwest and Savvis acquisitions
had been consummated as of January 1, 2010.

Operating revenues
Net income
Basic earnings per common share
Diluted earnings per common share

$

95

Years Ended December 31,
2011
2010
(Dollars in millions)
18,692
19,431
601
293
.97
.48
.97
.48

Table of Contents
This pro forma information reflects certain adjustments to previously reported operating results, consisting of primarily:
•

decreased operating revenues and expenses due to the elimination of deferred revenues and deferred expenses associated with
installation activities and capacity leases that were assigned no value at the acquisition date and the elimination of transactions
among CenturyLink, Qwest and Savvis that are now subject to intercompany elimination;

•

increased amortization expense related to identifiable intangible assets, net of decreased depreciation expense to reflect the fair
value of property, plant and equipment;

•

decreased recognition of retiree benefit expenses for Qwest due to the elimination of unrecognized actuarial losses;

•

decreased interest expense primarily due to the amortization of an adjustment to reflect the increased fair value of long-term debt of
Qwest recognized on the acquisition date; and

•

the related income tax effects.

The pro forma information does not necessarily reflect the actual results of operations had the Qwest and Savvis acquisitions been
consummated at January 1, 2010, nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any
potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisitions (other than those realized in
our historical financial statements after the respective acquisition dates).
At December 31, 2011, we had incurred cumulative acquisition related expenses, consisting primarily of integration and severance related
expenses, of $41 million for Savvis, $393 million for Qwest, and $459 million for Embarq. The total amount of these expenses recognized in our costs
of services and products and selling, general and administrative expenses for years ended December 31, 2011, 2010 and 2009 was $467 million,
$145 million and $271 million, respectively. An additional $16 million consists of transaction expenses incurred in connection with terminating an
unused loan financing commitment related to our Savvis acquisition. This amount was not considered an operating activity and therefore not
included as an operating expense.
Qwest incurred cumulative pre-acquisition related expenses of $71 million, including $36 million in periods prior to being acquired and
$35 million on the date of acquisition. Savvis incurred cumulative pre-acquisition related expenses of $22 million, including $3 million in periods
prior to being acquired and $19 million on the date of acquisition. These amounts are not included in our results of operations.
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(3) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
December 31,
December 31,
2011
2010
(Dollars in millions)
$
21,724
10,261

Goodwill
Customer relationships, less accumulated amortization of
$1,337 and $349
Indefinite-life intangible assets
Other intangible assets subject to amortization
Capitalized software, less accumulated amortization of
$441 and $79
Tradenames and patents, less accumulated
amortization of $73 and $3
Total other intangible assets, net

$

8,361

930

418

418

1,622

164

199
2,239

40
622

Our goodwill was derived from numerous acquisitions whereby the purchase price exceeded the fair value of the net assets acquired (See
Note 2—Acquisitions). At December 31, 2011, the net carrying amounts of goodwill, customer relationships and other intangible assets included
preliminary estimates of $20.710 billion as a result of our acquisitions of Qwest and Savvis. We expect to complete the final determination of these
estimates and related estimated lives for amortizable intangible assets no later than the second quarter of 2012 for Savvis and the first quarter of
2012 for Qwest.
Total amortization expense for intangible assets for years ended December 31, 2011, 2010 and 2009 was $1.425 billion, $206 million and
$136 million, respectively. The 2011 total included $42 million related to the Savvis acquisition and $1.185 billion for the Qwest acquisition for the
year ended December 31, 2011.
We estimate that total amortization expense for intangible assets for the years ending December 31, 2012 through 2016 will be as follows:

2012
2013
2014
2015
2016

$

(Dollars in millions)
1,656
1,524
1,389
1,234
1,090

Our annual measurement date for testing goodwill impairment is September 30. As of December 31, 2011, we attributed our goodwill balances
to our segments as follows:
December 31, 2011
(Dollars in millions)
$
11,813
5,021
3,533
1,357
$
21,724

Regional markets
Business markets
Wholesale markets
Savvis operations
Total goodwill
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For each segment, we compare its estimated fair value to the carrying value of the assets that we attribute to the segment. If the estimated fair
value of the segment is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the segment is less
than the attributed carrying value, a second calculation is required in which the implied fair value of goodwill is compared to the carrying value
goodwill that we attribute to the segment. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its
implied fair value.
At September 30, 2011, we estimated the fair value of our regional, business and wholesale markets segments using an equal weighting based
on a market approach and a discounted cash flow method. The market approach includes the use of comparable multiples of publicly traded
companies whose services are comparable to ours to corroborate discounted cash flow results. The discounted cash flow method is based on the
present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the segment beyond the cash
flows from the discrete projection five-year period. The estimated cash flows were discounted for each segment using a rate that represents our
weighted average cost of capital, which we determined to be 6.50% as of the measurement date (which was comprised of a pre-tax cost of debt of
7.0% and a cost of equity of 8.7%). We also reconciled the estimated fair values of the segments to our market capitalization as of September 30,
2011 and concluded that the indicated implied control premium of 16% was reasonable based on recent transactions in the market place. At
September 30, 2011, based on our analysis performed with respect to these segments as described above, we concluded that our goodwill was not
impaired as of that date.
For our Savvis operations, we determined the preliminary fair value of the assets acquired and liabilities assumed using various methods,
including an overall discounted cash flow analysis performed for all of Savvis' operations. The fair value assignments are still preliminary and
could change significantly upon finalization of the fair value assignments. Due to the recentness of the acquisition and the related preliminary
valuation results and the lack of any significant adverse events that have occurred to Savvis' operating results or our expectations of forecasted
operating results utilized in the preliminary valuation since the July 15, 2011 acquisition date, we have concluded that the goodwill related to the
Savvis operations is not impaired.
On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order. This order will reduce the amount of
switched access revenues we recognize in our wholesale markets segment in the future. This CAF order was considered to be an event or change
in circumstance that may indicate that an impairment may have occurred. At December 31, 2011, we performed the first step of the goodwill
impairment test to identify a potential impairment by comparing the estimated fair value of the wholesale markets segment with its attributed
carrying amount, including goodwill. We concluded the goodwill of this segment is not impaired and no further testing was necessary.
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(4) Long-Term Debt and Credit Facilities
Long-term debt, including unamortized discounts and premiums, at December 31, 2011 and 2010 consisted of borrowings by CenturyLink, Inc.
and certain of its subsidiaries, as follows:

Interest Rates
CenturyLink, Inc.
Senior notes
Credit facility
Subsidiaries
Qwest
Senior notes
Debentures
Other notes
Embarq Corporation
Senior notes
First mortgage bonds
Other
First mortgage notes
Capital lease and other
obligations
Unamortized premiums
(discounts) and other,
net
Total long-term debt
Less current maturities
Long-term debt, excluding
current maturities

(*)

Years Ended December 31,
2011
2010
(Dollars in millions)

Maturities

5.000% - 7.875% 2012 - 2039
2.550% - 4.500%(*)
2015

$

4,518
277

2,518
365

7.125% - 8.000%
6.875% - 7.750%
6.500% - 8.375%

2014 - 2018
2014 - 2043
2013 - 2051

2,650
3,182
5,628

—
—
—

6.738% - 7.995%
6.875% - 8.770%
6.750% - 9.000%
2.00% - 10.00%

2013 - 2036
2013 - 2025
2013 - 2019
2012 - 2018

4,013
322
200
65

4,013
322
200
83

712

—

Various

Various

$

269
21,836
(480)

(173)
7,328
(12)

21,356

7,316

This range includes the weighted average interest on our credit facility of 2.74% as of December 31, 2011.

Long-Term Debt Acquired
As a result of the acquisition of Qwest on April 1, 2011, Qwest's pre-existing debt obligations, which consisted primarily of debt securities
issued by Qwest Communications International Inc. and two of its subsidiaries, are now included in our consolidated debt balances. On the
acquisition date, Qwest's debt securities had stated principal balances totaling $11.598 billion, predominantly fixed contractual interest rates
ranging from 6.5% to 8.875% (weighted average of 7.63%) and maturities ranging from 2012 to 2051. In accounting for the Qwest acquisition, we
recorded Qwest's debt securities at their estimated fair values, which totaled $12.675 billion as of April 1, 2011 (which included $383 million of
capital leases and certain other obligations). Our acquisition date fair value estimates were based primarily on quoted market prices in active
markets and other observable inputs where quoted market prices were not available. The amount by which the fair value of Qwest debt securities
exceeded their stated principal balances on the acquisition date of $693 million is being recognized as a reduction to interest expense over the
remaining terms of the debt.
Upon completing the acquisition of Savvis on July 15, 2011, we paid $547 million to retire certain pre-existing Savvis debt and accrued interest,
and paid related transaction expenses totaling $15 million. The cash payments required on or about the closing date were funded using existing
cash balances,
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which included the net proceeds from the June 16, 2011 issuance of senior notes with an aggregate principal amount of $2.0 billion, as discussed
below.
New Issuances
On October 4, 2011, our indirect wholly owned subsidiary, Qwest Corporation ("QC") issued $950 million aggregate principal amount of its
6.75% Notes due 2021 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $927 million. The notes are senior
unsecured obligations of QC and may be redeemed, in whole or in part, at a redemption price equal to the greater of their principal amount or the
present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rate specified in the indenture agreement plus
50 basis points. In October 2011, QC used the net proceeds from this offering, together with the $557 million of net proceeds received on
September 21, 2011 from the debt issuance described below and available cash, to redeem the $1.500 billion aggregate principal amount of its
8.875% Notes due 2012 and to pay all related fees and expenses, which resulted in an immaterial loss.
On September 21, 2011, QC issued $575 million aggregate principal amount of its 7.50% Notes due 2051 in exchange for net proceeds, after
deducting underwriting discounts and expenses, of $557 million. The notes are senior unsecured obligations of QC and may be redeemed, in whole
or in part, on or after September 15, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to
the redemption date.
On June 16, 2011, we issued unsecured senior notes with an aggregate principal amount of $2.0 billion ("Senior Notes"), consisting of
(i) $400 million of 7.60% Senior Notes, Series P, due 2039, (ii) $350 million of 5.15% Senior Notes, Series R, due 2017 and (iii) $1.250 billion of 6.45%
Senior Notes, Series S, due 2021. After deducting underwriting discounts and expenses, we received aggregate net proceeds of $1.959 billion in
exchange for the Senior Notes. We may redeem the Senior Notes, in whole or in part, at any time at a redemption price equal to the greater of their
principal amount or the present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rates plus 50 basis
points. We used the net proceeds to fund a portion of our acquisition of Savvis and repay certain of Savvis' debt (see Note 2—Acquisitions). In
April 2011, we received commitment letters from two banks to provide up to $2.0 billion in bridge financing for the Savvis acquisition. This
arrangement was terminated in June 2011 in connection with the issuance of the Senior Notes resulting in $16 million in transaction expenses
recognized in other income (expense), net.
On June 8, 2011, QC issued $661 million aggregate principal amount of its 7.375% Notes due 2051 in exchange for net proceeds, after deducting
underwriting discounts and expenses, of $642 million. The notes are unsecured obligations of QC and may be redeemed, in whole or in part, on or
after June 1, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
In April 2011, we entered into a $160 million uncommitted revolving letter of credit facility, which enables us to provide letters of credit under
terms that may be more favorable than those under the Credit Facility. At December 31, 2011, our outstanding letters of credit totaled $129 million.
In January 2011, we entered into a new four-year revolving credit facility with various lenders (the "Credit Facility"). The Credit Facility initially
allowed us to borrow up to $1 billion. Upon consummation of the Qwest acquisition, our borrowing capacity under the Credit Facility increased to
$1.7 billion, for the general corporate purposes of us and our subsidiaries. Up to $400 million of the Credit Facility can be used for letters of credit,
which reduce the amount available for other extensions of credit. Interest is assessed on borrowings using the London Interbank Offered Rate
("LIBOR") plus an applicable margin between 0.5% and 2.5% per annum depending on the type of loan and CenturyLink's then-current senior
unsecured long-term debt rating. At December 31, 2011, we had
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$277 million in borrowings and an immaterial amount of letters of credit outstanding under the Credit Facility.
Repayments
In October 2011, QC used the net proceeds of $927 million from the October 4, 2011 issuance, together with the $557 million of net proceeds
received from the September 21, 2011 debt issuance described above and available cash, to redeem the $1.5 billion aggregate principal amount of its
8.875% Notes due 2012 and to pay all related fees and expenses, which resulted in an immaterial loss.
In June 2011, QC used the net proceeds of $642 million from the June 8, 2011 debt issuance, together with available cash, to redeem
$825 million aggregate principal amount of its 7.875% Notes due 2011 and to pay related fees and expenses, which resulted in an immaterial loss.
Aggregate maturities of our long-term debt (excluding unamortized premiums, discounts, and other):
(Dollars in millions)
480
1,717
2,057
1,659
2,856
12,798
$
21,567

2012
2013
2014
2015
2016
2017 and thereafter
Total notes and debentures

$

Interest Expense
Interest expense includes interest on long-term debt. The following table presents the amount of gross interest expense, net of capitalized
interest:

2011
Interest expense on long-term debt:
Gross interest expense
Capitalized interest
Total interest expense on long-term
debt

Years Ended December 31,
2010
(Dollars in millions)

2009

$

1,097
(25)

557
(13)

370
(3)

$

1,072

544

367

Long-Term Debt Covenants
Certain of our loan agreements contain various restrictions, among which are limitations regarding issuance or guarantee of additional debt or
issuance of preferred stock, payment of cash dividends, reacquisition or sale of capital stock and other matters. In addition, the transfer of funds
from certain consolidated subsidiaries to CenturyLink is restricted by various loan agreements. Subsidiaries that have loans from government
agencies and cooperative lending associations, or have issued first mortgage bonds, generally may not loan or advance any funds to CenturyLink,
but may pay dividends if certain financial ratios are met. At December 31, 2011, all of our consolidated retained earnings reflected on the balance
sheet were available under our loan agreements for the declaration of dividends.
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The senior notes of CenturyLink were issued under an indenture dated March 31, 1994. This indenture does not contain any financial
covenants, but does include restrictions that limit our ability to (i) incur, issue or create liens upon our property and (ii) consolidate with or merge
into, or transfer or lease all or substantially all of its assets to, any other party. The indenture does not contain any provisions that are impacted by
our credit ratings, or that restrict the issuance of new securities in the event of a material adverse change to us.
The indentures governing Qwest's debt securities contain customary covenants that restrict the ability of Qwest or its subsidiaries from
incurring additional debt, making certain payments and investments, granting liens, and selling or transferring assets. We do not anticipate that
these covenants will significantly restrict our ability to manage cash balances or transfer cash between entities within our consolidated group of
companies as needed.
Since the Qwest parent company has achieved investment grade ratings from one of the rating agencies, most of the covenants listed above
have been suspended. Under the indenture governing these notes, we must repurchase the notes upon certain changes of control, which were not
triggered upon the acquisition on April 1, 2011. This indenture also contains provisions for cross acceleration relating to any of our other debt
obligations and the debt obligations of our restricted subsidiaries in an aggregate amount in excess of $100 million.
Embarq's senior notes were issued pursuant to an indenture dated as of May 17, 2006. While Embarq is generally prohibited from creating liens
on its property unless its senior notes are secured equally and ratably, Embarq can create liens on its property without equally and ratably
securing its senior notes so long as the sum of all indebtedness so secured does not exceed 15% of Embarq's consolidated net tangible assets. The
indenture contains customary events of default, none of which are impacted by Embarq's credit rating. The indenture does not contain any
financial covenants or restrictions on the ability to issue new securities in accordance with the terms of the indenture.
Several of our other subsidiaries have outstanding first mortgage bonds or notes. Each issue of these first mortgage bonds or notes are
secured by substantially all of the property, plant and equipment of the issuing subsidiary. Approximately 23% of our property, plant and
equipment is pledged to secure the long-term debt of subsidiaries.
Under the Credit Facility, we, and our indirect subsidiary, Qwest Corporation, ("QC"), must maintain a debt to EBITDA (earnings before
interest, taxes, depreciation and amortization, as defined in our Credit Facility) ratio of not more than 4:1 and 2.85:1, respectively, as of the last day
of each fiscal quarter for the four quarters then ended. The Credit Facility also contains a negative pledge covenant, which generally provides
restrictions if we pledge assets or permit liens on our property, and requires that any advances under the Credit Facility must also be secured
equally and ratably. The Credit Facility also has a cross payment default provision, and the Credit Facility and certain of our debt securities also
have cross acceleration provisions. At December 31, 2011, we were in compliance with all of the provisions and covenants contained in our Credit
Facility and other debt agreements.
Subsequent Event
On January 27, 2012 we called $800 million of Qwest 7.5% notes due February 15, 2014. The principal amount plus all accrued interest will be
redeemed on March 1, 2012 at a redemption price of 100%.
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(5) Accounts Receivable
The following table presents details of our accounts receivable balances:

Trade receivables
Earned and unbilled receivables
Purchased and other receivables
Total accounts receivable
Less: allowance for doubtful accounts
Accounts receivable, less allowance

$

$

December 31,
2011
2010
(Dollars in millions)
1,609
718
349
51
139
4
2,097
773
(145)
(60)
1,952
713

We are exposed to concentrations of credit risk from residential and business customers within our local service area, business customers
outside of our local service area and from other telecommunications service providers. We generally do not require collateral to secure our
receivable balances. We have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for
services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other
telecommunications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not
experienced any significant loss associated with these purchased receivables.
The following table presents details of our allowance for doubtful accounts:
Beginning
Balance
2011
2010
2009

$
$
$

60
48
16

Additions

Deductions
(Dollars in millions)
153
(68)
91
(79)
57
(25)
103

Other

Ending Balance
—
—
—

145
60
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(6) Property, Plant and Equipment
Net property, plant and equipment is composed of the following:

Depreciable
Lives
Land
Fiber, conduit and other outside
plant(1)
Central office and other network
electronics(2)
Support assets (3)
Construction in progress(4)
Gross property, plant and equipment
Accumulated depreciation
Net property, plant and equipment

N/A

$

December 31,
2011
2010
(Dollars in millions)
590
206

8-45 years

12,423

8,382

3-10 years
5-35 years
N/A

9,730
6,090
744
29,577
(10,141)
19,436

5,412
2,057
272
16,329
(7,575)
8,754

$

(1)

Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.

(2)

Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to
customers.

(3)

Support assets consist of buildings, computers and other administrative and support equipment.

(4)

Construction in progress includes property of the foregoing categories that has not been placed in service as it is still under construction.

We recorded depreciation expense of $2.601 billion, $1.228 billion and $839 million for the years ended December 31, 2011, 2010 and 2009,
respectively.
Asset Retirement Obligations
At December 31, 2011, our asset retirement obligations balance was primarily related to estimated future costs of removing equipment from
leased properties and estimated future costs of properly disposing of asbestos and other hazardous materials upon remodeling or demolishing
buildings. Asset retirement obligations are included in other long-term liabilities on our consolidated balance sheets.
As of the Qwest and Savvis acquisition dates, we recorded liabilities to reflect our preliminary estimates of fair values of Qwest and Savvis
asset retirement obligations. Our fair value estimates were determined using discounted cash flow methods.
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The following table provides asset retirement obligation activity:

2011
Balance at beginning of year
Accretion expense
Liabilities incurred
Liabilities assumed in Qwest and
Savvis acquisitions
Liabilities settled and other
Change in estimate
Balance at end of year

$

$

Years Ended December 31,
2010
(Dollars in millions)
41
39
9
2
—
—
124
(3)
(62)
109

—
—
—
41

2009
—
1
38
—
—
—
39

During 2011, we revised our estimates for the cost of removal of network equipment, asbestos remediation, and other obligations by
$62 million. These revisions resulted in a reduction of the asset retirement obligation and offsetting reduction to gross property, plant and
equipment.
(7) Severance and Leased Real Estate
Periodically, we have reductions in our workforce and have accrued liabilities for related severance costs. These workforce reductions resulted
primarily from the progression or completion of our integration plans, increased competitive pressures and reduced workload demands due to the
loss of access lines.
We report severance liabilities within accrued expenses and other liabilities-salaries and benefits in our consolidated balance sheets and report
severance expenses in cost of services and products and selling, general and administrative expenses in our consolidated statements of
operations. We have not allocated any severance expense to our regional, business and wholesale markets segments.
In periods prior to our acquisition of Qwest, Qwest had ceased using certain real estate that it was leasing under long-term operating leases.
As of the April 1, 2011 acquisition date, we recorded liabilities to reflect our preliminary estimates of the fair values of the existing lease obligations
for real estate for which we had ceased using, net of estimated sublease rentals. Our fair value estimates were determined using discounted cash
flow methods. We recognize expense to reflect accretion of the discounted liabilities and periodically, we adjust the expense when our actual
experience differs from our initial estimates. We report the current portion of liabilities for ceased-use real estate leases in accrued expenses and
other liabilities and report the noncurrent portion in deferred credits and other liabilities in our consolidated balance sheets. We report the related
expenses in selling, general and administrative expenses in our consolidated statements of operations. At December 31, 2011, the current and
noncurrent portions of our leased real estate accrual were $27 million and $126 million, respectively. The remaining lease terms range from 0.1 to
14.0 years, with a weighted average of 9.1 years.
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Changes in our accrued liabilities for severance expenses and leased real estate were as follows:
Severance
Real Estate
(Dollars in millions)
$
69
—
27
—
(78)
—
18
—
132
6
20
168
(133)
(21)
$
37
153

Balance at January 1, 2010
Accrued to expense
Payments, net
Balance at December 31, 2010
Accrued to expense
Liabilities assumed in Qwest acquisition
Payments, net
Balance at December 31, 2011

Our severance expenses for the year ended December 31, 2011 also included $12 million of share-based compensation associated with the
accelerated vesting of stock awards that occurred in connection with workforce reductions relating to the acquisition of Qwest.
(8) Employee Benefits
Pension, Post-Retirement and Other Post-Employment Benefits
We sponsor several defined benefit pension plans, which in the aggregate cover a substantial portion of our employees including separate
plans for Legacy CenturyLink, Legacy Qwest and Embarq employees. Until such time as we elect to integrate the Qwest and Embarq benefit plans
with ours, we plan to continue to operate these plans independently. Pension benefits for participants of these plans who are represented by a
collective bargaining agreement are based on negotiated schedules. All other participants' pension benefits are based on each individual
participant's years of service and compensation. We use a December 31 measurement date for all our plans. In addition to these tax qualified
pension plans, we also maintain non-qualified pension plans for certain former highly compensated employees. We maintain post-retirement
benefit plans that provide health care and life insurance benefits for certain eligible retirees. We also provide other post-employment benefits for
eligible former employees.
Pension
In connection with the acquisition of Qwest on April 1, 2011, we assumed defined benefit pension plans sponsored by Qwest for its
employees. Based on a valuation analysis, we recognized a $490 million net liability at April 1, 2011 for the unfunded status of the Qwest pension
plans, reflecting projected benefit obligations of $8.3 billion in excess of the $7.8 billion fair value of plan assets.
Current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year
amortization of the shortfall. Our funding policy for the pension plan is to make contributions with the objective of accumulating sufficient assets
to pay all qualified pension benefits when due under the terms of the plan. The accounting unfunded status of our qualified pension plans was
$1.7 billion as of December 31, 2011. We expect to make a contribution of less than $50 million in 2012, based on current laws and circumstances.
In 2010, to align our benefit structure closer to those offered by our competitors, we froze our Legacy CenturyLink and Embarq pension benefit
accruals for our non-represented employees at December 31, 2010. Such action resulted in a reduction of our benefit obligation of approximately
$110 million and resulted in the recognition of a curtailment gain of approximately $21 million in 2010.
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Prior to their acquisition on April 1, 2011, Qwest had frozen its pension benefit accruals for non-represented employees.
Other Post-Retirement Benefits
Our post-retirement health care plans provide post-retirement benefits to qualified retirees. The post-retirement health care plans we assumed
as part of our acquisitions of Qwest and Embarq provide post-retirement benefits to qualified retirees and allows (i) eligible employees retiring
before certain dates to receive benefits at no or reduced cost and (ii) eligible employees retiring after certain dates to receive benefits on a shared
cost basis. The post-retirement health care plans are generally funded by us and we expect to continue funding these post-retirement obligations
as benefits are paid. Our plan uses a December 31 measurement date.
In connection with the acquisition of Qwest on April 1, 2011, we assumed post-retirement benefit plans sponsored by Qwest for certain of its
employees. At April 1, 2011, we recognized a $2.5 billion liability for the unfunded status of Qwest's post-retirement benefit plans, reflecting
estimated accumulated post-retirement benefit obligations of $3.3 billion in excess of the $768 million fair value of the plan assets.
No contributions were made to the post-retirement trusts in 2011 or 2010 and we do not expect to make a contribution in 2012.
A change of 100 basis points in the assumed initial health care cost trend rate would have had the following effects in 2011:
100 Basis Points Change
Increase
(Decrease)
(Dollars in millions)
Effect on the aggregate of the service and interest cost
components of net periodic post-retirement benefit expense
(statements of operations)
Effect on benefit obligation (balance sheets)

$

2
70

(2)
(65)

We expect our health care cost trend rate to decrease by 0.5% per year from 7.5% in 2012 to an ultimate rate of 5.0% in 2018. Our postretirement health care expense, for certain eligible Legacy Qwest retirees and certain eligible Legacy CenturyLink retirees, is capped at a set dollar
amount. Therefore, those health care benefit obligations are not subject to increasing health care trends after the effective date of the caps.
Expected Cash Flows
The pension, non-qualified pension and post-retirement health care benefit payments and premiums and life insurance premium payments are
paid by us or distributed from plan assets. The
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estimated benefit payments provided below are based on actuarial assumptions using the demographics of the employee and retiree populations
and have been reduced by estimated participant contributions.
Post-Retirement
Benefit Plans
(Dollars in millions)

Pension Plans
Estimated future benefit
payments:
2012
2013
2014
2015
2016
2017—2021

$

1,029
996
985
974
966
4,623

Medicare Part D
Subsidy Receipts

391
386
378
369
359
1,604

(24)
(26)
(28)
(30)
(32)
(183)

Net Periodic Benefit Expense
The measurement date used to determine pension, non-qualified pension and post-retirement health care and life insurance benefits is
December 31. The actuarial assumptions used to compute the net periodic benefit expense for our pension, non-qualified pension and postretirement benefit plans are based upon information available as of the beginning of the year, as presented in the following table.
Pension Plans
2011(1)
Actuarial
assumptions
at
beginning
of year:
Discount rate
Rate of
compensation
increase
Expected
long-term
rate of
return on
plan assets
Initial health
care cost
trend rate
Ultimate
health care
cost trend
rate
Year ultimate
trend rate
is reached

2010

Post-Retirement Benefit Plans
2011(2)

2009

2010

2009

5.00%-5.50%

5.50%-6.00%

6.60%-6.90%

5.30%

5.70%-5.80%

6.40%-6.90%

3.25%

3.50%-4.00%

4.00%

N/A

N/A

N/A

7.50%-8.00%

8.25%-8.50%

8.25%-8.50%

7.25%

7.25%

8.25%-8.50%

N/A

N/A

N/A

8.50%

8.00%

7.00%

N/A

N/A

N/A

5.00%

5.00%

5.00%

N/A

N/A

N/A

2018

2014

2011

N/A—Not applicable
(1)

This column does not consider Qwest's actuarial assumptions for its pension plan as of the beginning of the year due to the acquisition date of April 1, 2011. Qwest
had the following actuarial assumptions as of April 1, 2011: discount rate of 5.40%; expected long-term rate of return on plan assets 7.50%; and a rate of
compensation increase of 3.50%.

(2)

This column does not consider Qwest's actuarial assumptions for its post-retirement benefit plan as of the beginning of the year due to the acquisition date of April 1,
2011. Qwest had the following actuarial assumptions as of April 1, 2011: discount rate of 5.30%; expected long-term rate of return on plan assets of 7.50%; initial
health care cost trend rate of 7.50% and ultimate health care trend rate of 5.00% to be reached in 2016.

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Net periodic pension expense, which includes the effects of the Qwest acquisition subsequent to April 1, 2011 and the Embarq acquisition
subsequent to July 1, 2009, included the following components:

Service cost
Interest cost
Expected return on plan assets
Curtailment gain
Settlements
Contractual retirement benefits
Amortization of unrecognized prior
service cost
Amortization of unrecognized
actuarial loss
Net periodic pension (income)
expense(1)(2)

$

$

Pension Plans
Years Ended December 31,
2011
2010
(Dollars in millions)
70
61
560
246
(709)
(283)
—
(21)
1
—
—
—

2009
36
135
(128)
—
18
15

2

2

—

13

17

16

(63)

22

92

(1)

Includes $58 million of income related to the Qwest plans subsequent to the April 1, 2011 acquisition date.

(2)

The Legacy Embarq pension plan contains a provision that grants early retirement benefits for certain participants affected by workforce reductions. During 2009,
we recognized approximately $15 million of additional pension expense related to these contractual benefits.

Net periodic post-retirement benefit expense, which includes the effects of the Qwest acquisition subsequent to April 1, 2011 and the Embarq
acquisition subsequent to July 1, 2009, included the following components:

Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized prior
service cost
Amortization of unrecognized
actuarial loss
Net periodic post-retirement benefit
expense(1)

(1)

$

$

Post-Retirement Plans
Years Ended December 31,
2011
2010
(Dollars in millions)
18
15
152
32
(41)
(4)

2009
9
27
(2)

(2)

(3)

(4)

—

1

—

127

41

30

Includes $92 million related to the Qwest plans subsequent to the April 1, 2011 acquisition date.

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Benefit Obligations
The actuarial assumptions used to compute the funded status for the plans are based upon information available as of December 31, 2011 and
December 31, 2010 and are as follows:
Pension Plans
December 31,
2011
Actuarial
assumptions
at end of year:
Discount rate
Rate of
compensation
increase
Initial health
care cost
trend rate
Ultimate
health care
cost trend
rate
Year ultimate
trend rate
is reached

Post-Retirement Benefit Plans
December 31,
2011
2010

2010

4.25%-5.10%

5.00%-5.50%

4.60%-4.80%

5.30%

3.25%

3.25%-4.00%

N/A

N/A

N/A

N/A

7.25%-8.00%

8.50%

N/A

N/A

5.00%

5.00%

N/A

N/A

2018

2018

N/A—Not applicable

The following table summarizes the change in the benefit obligations for the pension and post-retirement benefit plans:

2011
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan amendments
Acquisitions
Actuarial loss
Contractual retirement benefits
Curtailment gain
Settlements
Benefits paid by company
Benefits paid from plan assets
Benefit obligation at end of year

$

$

Pension Plans
Years Ended December 31,
2010
(Dollars in millions)

4,534
70
560
12
8,267
930
—
—
—
(16)
(761)
13,596
110

4,182
61
246
4
—
427
—
(110)
—
(5)
(271)
4,534

2009

463
36
135
16
3,467
232
15
—
8
(57)
(133)
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Post-Retirement Benefit Plans
Years Ended December 31,
2011
2010
2009
(Dollars in millions)
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Participant contributions
Plan amendments
Acquisitions
Direct subsidy receipts
Actuarial loss (gain)
Benefits paid
Benefit obligation at end of year

$

558
18
152
64
31
3,284
22
153
(352)
3,930

$

582
15
32
14
—
—
1
(32)
(54)
558

293
9
27
3
—
228
—
58
(36)
582

Our aggregate accumulated benefit obligation as of December 31, 2011, 2010 and 2009 was $17.499 billion, $4.509 billion and $4.042 billion,
respectively.
Plan Assets
We maintain plan assets for our pension plans and certain post-retirement benefit plans. The pension plan assets are used for the payment of
pension benefits and certain eligible plan expenses. The post-retirement benefit plan assets are used to pay health care benefits and premiums on
behalf of eligible retirees who are former union-represented plan participants and to pay certain eligible plan expenses. The expected rate of return
on plan assets is the long-term rate of return we expect to earn on the plans' assets. The rate of return is determined by the strategic allocation of
plan assets and the long-term risk and return forecast for each asset class. The forecasts for each asset class are generated primarily from an
analysis of the long-term expectations of various third party investment management organizations. The expected rate of return on plan assets is
reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy. The following table
summarizes the change in the fair value of plan assets for the pension and post-retirement benefit plans:

2011
Change in plan assets
Fair value of plan assets at beginning of
year
Return on plan assets
Acquisitions
Employer contributions
Settlements
Benefits paid
Fair value of plan assets at end of year

$

$

Pension Plans
Years Ended December 31,
2010
(Dollars in millions)

3,732
479
7,777
587
—
(761)
11,814
111

3,220
483
—
300
—
(271)
3,732

2009

353
474
2,407
119
—
(133)
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Table of Contents
Post-Retirement Benefit Plans
Years Ended December 31,
2011
2010
2009
(Dollars in millions)
Change in plan assets
Fair value of plan assets at beginning of
year
Return on plan assets
Acquisitions
Employer contributions
Participant contributions
Benefits paid
Fair value of plan assets at end of year

$

54
4
768
155
64
(352)
693

$

57
6
—
31
14
(54)
54

17
6
33
34
3
(36)
57

Pension Plans: Our investment objective for the pension plan assets is to achieve an attractive risk-adjusted return over time that will
provide for the payment of benefits and minimize the risk of large losses. Our pension plan investment strategy is designed to meet this objective
by broadly diversifying plan assets across numerous strategies with differing expected returns, volatilities and correlations. The pension plan
assets have target allocations of 53% to interest rate sensitive investments and 47% to investments designed to provide higher expected returns
than the interest rate sensitive investments. Interest rate sensitive investments include 32% of plan assets targeted primarily to long-duration
investment grade bonds, 10% to high yield and emerging market bonds, 5% to convertible bonds and 6% targeted to diversified strategies, which
primarily have exposures to global government, corporate and inflation-linked bonds, as well as some exposures to global stocks and commodities.
Assets expected to provide higher returns than the interest rate sensitive assets include broadly diversified equity investments with approximately
15% targeted to U.S. stocks, 12% to developed market non-U.S. stocks and 3% to emerging market stocks. Approximately 12% is allocated to other
private markets investments including funds primarily invested in private equity, debt and hedge funds. Real estate investments are targeted at 5%
of plan assets. At the beginning of 2012, our expected annual long-term rate of return on pension assets is assumed to be 7.5%.
Post-Retirement Benefit Plans: Our investment objective for the post-retirement benefit plan assets is to achieve an attractive risk-adjusted
return and minimize the risk of large losses over the expected life of the assets. Investment risk is managed by broadly diversifying assets across
numerous strategies with differing expected returns, volatilities and correlations. Our investment strategy is designed to be consistent with the
investment objective, with particular focus on providing liquidity for the reimbursement of our union-represented employees post-retirement health
care costs. The post-retirement benefit plan assets have target allocations of 35% to equities and 65% to non-equity investments. Specific target
allocations within these broad categories are allowed to vary to provide liquidity in order to meet reimbursement requirements. Equity investments
are broadly diversified with exposure to publicly traded U.S., non-U.S. and emerging market stocks and private equity. While no new private equity
investments have been made in recent years, the percent allocation to existing private equity investments is expected to increase in the near term
as liquid, publicly traded stocks are drawn down for the reimbursement of health care costs. The 65% non-equity allocation includes investment
grade bonds, high yield bonds, convertible bonds, emerging market debt, real estate, hedge funds, private debt and diversified strategies. At the
beginning of 2012, our expected annual long-term rate of return on post-retirement benefit plan assets is assumed to be 7.5%.
Permitted investments: Plan assets are managed consistent with the restrictions set forth by the Employee Retirement Income Security Act
of 1974, as amended, which requires diversification of assets and also generally prohibits defined benefit and welfare plans from investing more
than 10% of their
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assets in securities issued by the sponsor company. At December 31, 2011, the pension and post-retirement benefit plans did not directly own any
shares of our common stock or any of our debt, which is consistent with December 31, 2010.
Derivative instruments: Derivative instruments are used to reduce risk as well as provide return. The pension and post-retirement benefit
plans use exchange traded futures to gain exposure to equity and Treasury markets consistent with target asset allocations. Interest rate swaps are
used in the pension plan to reduce risk relative to measurement of the benefit obligation, which is sensitive to interest rate changes. Foreign
exchange forward contracts and total return swaps are used primarily to manage currency exposures. Credit default swaps are used to manage
credit risk exposures in a cost effective and targeted manner relative to transacting with physical corporate fixed income securities. Options are
currently used to manage interest rate exposure taking into account the implied volatility and current pricing of the specific underlying market
instrument. Some derivative instruments subject the plans to counterparty risk. We closely monitor counterparty exposure and mitigate this risk by
diversifying the exposure among multiple high credit quality counterparties, requiring collateral and limiting exposure by periodically settling
contracts.
The gross notional exposure of the derivative instruments directly held by the plans is shown below. The notional amount of the derivatives
corresponds to market exposure but does not represent an actual cash investment.
Gross notional exposure
Post-Retirement
Pension Plan
Benefit Plans
Year Ended December 31, 2011
(Dollars in millions)

Derivative instrument:

Exchange-traded U.S. equity futures

$

535

12

4

—

1,512

19

Interest rate swaps

635

—

Total return swaps

110

51

Credit default swaps

201

—

Foreign exchange forwards

635

23

Options

917

—

Exchange-traded non-U.S. equity futures
Exchange-traded Treasury futures

Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date.
We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value
and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. For
additional information on the fair value hierarchy, see Note 11—Fair Value Disclosure.
At December 31, 2011, we used the following valuation techniques to measure fair value for assets. There were no changes to these
methodologies during 2011:
•

Level 1—Assets were valued using the closing price reported in the active market in which the individual security was traded.
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•

Level 2—Assets were valued using quoted prices in markets that are not active, broker dealer quotations, net asset value of shares
held by the plans and other methods by which all significant input were observable at the measurement date.

•

Level 3—Assets were valued using unobservable inputs in which little or no market data exists as reported by the respective
institutions at the measurement date.

The tables below presents the fair value of plan assets by category and the input levels used to determine those fair values at December 31,
2011. It is important to note that the asset allocations do not include market exposures that are gained with derivatives.

Investment grade bonds (a)
High yield bonds (b)
Emerging market bonds (c)
Convertible bonds (d)
Diversified strategies (e)
U.S. stocks (f)
Non-U.S. stocks (g)
Emerging market stocks (h)
Private equity (i)
Private debt (j)
Market neutral hedge funds
(k)
Directional hedge funds (k)
Real estate (l)
Derivatives (m)
Cash equivalents and shortterm investments (n)
Total investments

$

Fair value of pension plan assets at December 31, 2011
Level 1
Level 2
Level 3
Total
(Dollars in millions)
694
2,206
—
2,900
—
541
79
620
—
295
—
295
—
337
—
337
—
489
—
489
401
944
—
1,345
994
459
—
1,453
102
136
—
238
—
—
791
791
—
—
461
461
—
—
—
12

$

620
268
48
(5)

13
2,216

1,183
7,521

Dividends and interest
receivable
Pending trades receivable
Accrued expenses
Pending trades payable
Total pension plan assets

188
183
535
—

808
451
583
7

—
2,237

1,196
11,974

$
114

32
436
(8)
(620)
11,814

Table of Contents

Investment grade bonds (a)
High yield bonds (b)
Emerging market bonds (c)
Convertible bonds (d)
Diversified strategies (e)
U.S. stocks (f)
Non-U.S. stocks (g)
Emerging market stocks (h)
Private equity (i)
Private debt (j)
Market neutral hedge funds
(k)
Directional hedge funds (k)
Real estate (l)
Cash equivalents and shortterm investments (n)
Total investments

$

$

Fair value of post-retirement plan assets at December 31, 2011
Level 1
Level 2
Level 3
Total
(Dollars in millions)
45
100
— $
—
61
—
—
33
—
—
30
—
—
62
—
64
4
—
62
2
—
—
17
—
—
—
60
—
—
8

145
61
33
30
62
68
64
17
60
8

—
—
—

67
20
19

—
—
26

67
20
45

5
176

20
435

—
94

25
705

Dividends and interest
receivable
Pending trades receivable
Accrued expenses
Pending trades payable
Total post-retirement plan
assets

3
23
(15)
(23)
$

693

The tables below presents the fair value of plan assets by category and the input levels used to determine those fair values at December 31,
2010. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include
dividend and interest receivable, pending trades, trades payable and accrued expenses.

Investment grade bonds (a)
High yield bonds (b)
U.S. stocks (f)
Non-U.S. stocks (g)
Private equity (i)
Private debt (j)
Directional hedge funds (k)
Real estate (l)
Cash equivalents and shortterm investments (n)
Other (o)
Total pension plan assets

$

$

Fair value of pension plan assets at December 31, 2010
Level 1
Level 2
Level 3
Total
(Dollars in millions)
—
331
—
331
—
913
—
913
1,168
277
—
1,445
508
—
—
508
—
—
1
1
—
—
3
3
—
—
161
161
—
—
182
182
26
13
1,715

—
146
1,667
115

—
3
350

26
162
3,732

Table of Contents

Fixed income (a)(d)
U.S. stocks (f)
Cash equivalents and shortterm investments (n)
Total post-retirement plan
assets

$

$

Fair value of post-retirement plan assets at December 31, 2010
Level 1
Level 2
Level 3
Total
(Dollars in millions)
35
5
—
40
5
5
—
10
4

—

—

4

44

10

—

54

The plans' assets are invested in various asset categories utilizing multiple strategies and investment managers. For several of the investments
in the tables above and discussed below, the plans own units in commingled funds and limited partnerships that invest in various types of assets.
Interests in commingled funds are valued using the net asset value (NAV) per unit of each fund. The NAV reported by the fund manager is based
on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding.
Commingled funds held by the plans that can be redeemed at NAV within a year of the financial statement date are generally classified as Level 2.
Investments in limited partnerships represent long-term commitments with a fixed maturity date, typically ten years. Valuation inputs for these
limited partnership interests are generally based on assumptions and other information not observable in the market and are classified as Level 3
investments. The assumptions and valuation methodologies of the pricing vendors, account managers, fund managers and partnerships are
monitored and evaluated for reasonableness. Below is an overview of the asset categories, the underlying strategies and valuation inputs used to
value the assets in the preceding tables:
(a) Investment grade bonds represent investments in fixed income securities as well as commingled bond funds with characteristics
similar to the Barclays Capital U.S. Aggregate Bond Index. This index is comprised of U.S. Treasury securities, agencies, corporate bonds,
mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. Treasury securities are valued at the bid
price reported in the active market in which the security is traded and are classified as Level 1. The valuation inputs of other investment
grade bonds primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields
available on comparable securities of issuers with similar credit ratings. The primary observable inputs include references to the new issue
market for similar securities, the secondary trading markets and dealer quotes. Option adjusted spread models are utilized to evaluate
securities such as asset backed securities that have early redemption features. These securities are classified as Level 2. The commingled
funds are valued at NAV based on the market value of the underlying fixed income securities using the same valuation inputs described
above. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.
(b) High yield bonds represent investments in below investment grade fixed income securities as well as commingled high yield bond
funds. The valuation inputs for the securities primarily utilize observable market information and are based on a spread to U.S. Treasury
securities and consider yields available on comparable securities of issuers with similar credit ratings. These securities are classified as
Level 2. The commingled funds are valued at NAV based on the market value of the underlying high yield instruments using the same
valuation inputs described above. Commingled funds that can be redeemed at NAV within a year of the financial statement date are
classified as Level 2. Commingled funds that cannot be redeemed at NAV or that cannot be redeemed at NAV within a year of the financial
statement date are classified as Level 3.
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(c) Emerging market bonds represent investments in securities issued by governments and other entities located in developing
countries as well as commingled emerging market bond funds. The valuation inputs for the securities utilize observable market information
and are primarily based on dealer quotes or a spread relative to the local government bonds. These securities are classified as Level 2. The
commingled funds are valued at NAV based on the market value of the underlying emerging market bonds using the same valuation inputs
described above. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.
(d) Convertible bonds primarily represent investments in corporate debt securities that have features that allow the debt to be
converted into equity securities under certain circumstances. The valuation inputs for the individual convertible bonds primarily utilize
observable market information including a spread to U.S. Treasuries and the value and volatility of the underlying equity security.
Convertible bonds are classified as Level 2.
(e) Diversified strategies represent an investment in a commingled fund that primarily has exposures to global government, corporate
and inflation linked bonds, global stocks and commodities. The commingled fund is valued at NAV based on the market value of the
underlying investments. The valuation inputs utilize observable market information including published prices for exchange traded
securities, bid prices for government bonds, and spreads and yields available for comparable fixed income securities with similar credit
ratings. This fund can be redeemed at NAV within a year of the financial statement date and is classified as Level 2.
(f) U.S. stocks represent investments in stocks of U.S. based companies as well as commingled U.S. stock funds. The valuation
inputs for U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are
classified as Level 1. The commingled funds are valued at NAV based on the market value of the underlying investments using the same
valuation inputs described above. These commingled funds can be redeemed at NAV within a year of the financial statement date and are
classified as Level 2.
(g) Non-U.S. stocks represent investments in stocks of companies based in developed countries outside the U.S. as well as
commingled funds. The valuation inputs for non-U.S. stocks are based on the last published price reported on the major stock market on
which the securities are traded and are classified as Level 1. The commingled funds are valued at NAV based on the market value of the
underlying investments using the same valuation inputs described above. These commingled funds can be redeemed at NAV within a year
of the financial statement date and are classified as Level 2.
(h) Emerging market stocks represent investments in a registered mutual fund and commingled funds comprised of stocks of
companies located in developing markets. Registered mutual funds are valued at the last published price reported on the major market on
which the mutual funds are traded and are classified as Level 1. The commingled funds are valued at NAV based on the market value of the
underlying investments using the same valuation inputs described previously for individual stocks. These commingled funds can be
redeemed at NAV within a year of the financial statement date and are classified as Level 2.
(i) Private equity represents non-public investments in domestic and foreign buy out and venture capital funds. Private equity funds
are structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting
and other regulatory guidelines. The partnerships use valuation methodologies that give consideration to a range of factors, including but
not limited to the price at which investments were acquired, the nature of the investments, market conditions, trading values on comparable
public securities, current and projected operating performance, and financing transactions subsequent to the
117

Table of Contents
acquisition of the investments. These valuation methodologies involve a significant degree of judgment. Private equity investments are
classified as Level 3.
(j) Private debt represents non-public investments in distressed or mezzanine debt funds. Mezzanine debt instruments are debt
instruments that are subordinated to other debt issues and may include embedded equity instruments such as warrants. Private debt funds
are structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting
and other regulatory guidelines. The valuation of underlying fund investments are based on factors including the issuer's current and
projected credit worthiness, the security's terms, reference to the securities of comparable companies, and other market factors. These
valuation methodologies involve a significant degree of judgment. Private debt investments are classified as Level 3.
(k) Market neutral hedge funds hold investments in a diversified mix of instruments that are intended in combination to exhibit low
correlations to market fluctuations. These investments are typically combined with futures to achieve uncorrelated excess returns over
various markets. Directional hedge funds—This asset category represents investments that may exhibit somewhat higher correlations to
market fluctuations than the market neutral hedge funds. Investments in hedge funds include both direct investments and investments in
diversified funds of funds. Hedge Funds are valued at NAV based on the market value of the underlying investments which include
publicly traded equity and fixed income securities and privately negotiated debt securities. The hedge funds are valued by third party
administrators using the same valuation inputs previously described. Hedge funds that can be redeemed at NAV within a year of the
financial statement date are classified as Level 2. Hedge fund investments that cannot be redeemed at NAV or that cannot be redeemed at
NAV within a year of the financial statement date are classified as Level 3.
(l) Real estate represents investments in commingled funds and limited partnerships that invest in a diversified portfolio of real estate
properties. These investments are valued at NAV according to the valuation policy of each fund or partnership, subject to prevailing
accounting and other regulatory guidelines. The valuation inputs of the underlying properties are generally based on third-party appraisals
that use comparable sales or a projection of future cash flows to determine fair value. Real estate investments that can be redeemed at NAV
within a year of the financial statement date are classified as Level 2. Real estate investments that cannot be redeemed at NAV or that
cannot be redeemed at NAV within a year of the financial statement date are classified as Level 3.
(m) Derivatives include the market value of exchange traded futures contracts which are classified as Level 1, as well as privately
negotiated over-the-counter swaps that are valued based on the change in interest rates or a specific market index and classified as Level 2.
The market values represent gains or losses that occur due to fluctuations in interest rates, foreign currency exchange rates, security
prices, or other factors.
(n) Cash equivalents and short-term investments represent investments that are used in conjunction with derivatives positions or are
used to provide liquidity for the payment of benefits or other purposes. U.S. Treasury Bills are valued at the bid price reported in the active
market in which the security is traded and are classified as Level 1. The valuation inputs of other securities are based on a spread to U.S.
Treasury Bills, the Federal Funds Rate, or London Interbank Offered Rate and consider yields available on comparable securities of issuers
with similar credit ratings and are classified as Level 2. The commingled funds are valued at NAV based on the market value of the
underlying investments using the same valuation inputs described above. These commingled funds can be redeemed at NAV within a year
of the financial statement date and are classified as Level 2.
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Table of Contents
(o) Other represents investment in private debt, high yield bonds and net payables and receivables associated with the securities.
The valuation of underlying fund investments are based on factors including the issuer's current and projected credit worthiness, the
security's terms, reference to the securities of comparable companies, and other market factors. These valuation methodologies involve a
significant degree of judgment. These investments are classified as Level 3.
Concentrations of Risk: Investments, in general, are exposed to various risks, such as significant world events, interest rate, credit, foreign
currency and overall market volatility risk. These risks are managed by broadly diversifying assets across numerous asset classes and strategies
with differing expected returns, volatilities and correlations. Risk is also broadly diversified across numerous market sectors and individual
companies. Financial instruments that potentially subject the plans to concentrations of counterparty risk consist principally of investment
contracts with high quality financial institutions. These investment contracts are typically collateralized obligations and/or are actively managed,
limiting the amount of counterparty exposure to any one financial institution. Although the investments are well diversified, the value of plan
assets could change materially depending upon the overall market volatility, which could affect the funded status of the plans.
The table below presents a rollforward of the pension plan assets valued using Level 3 inputs:

High
Yield
Bonds
Balance at
December 31, 2009 $
Net acquisitions
(dispositions)
Actual return on
plan assets:
(Losses) gains
relating to
assets sold
during the year
Gains (losses)
relating to
assets still held
at year-end
Balance at
December 31, 2010
Net acquisitions
(dispositions)
Actual return on
plan assets:
(Losses) gains
relating to
assets sold
during the year
(Losses) gains
relating to
assets still held
at year-end
Balance at
December 31, 2011$

Pension Plan Assets Valued Using Level 3 Inputs
Market
Neutral Directional
Private Private
Hedge
Hedge
Real
Equity
Debt
Fund
Funds
Estate
Other
(Dollars in millions)

—

—

—

—

—

1

3

—

—

—

—

—

—

—

162

—

322

(9)

2

3

—

—

2

(2)

—

—

—

—

8

20

—

28

1

3

—

161

182

3

350

96

795

453

185

30

318

(3)

(12)

197

13

3

(1)

9

—

209

(5)

(202)

(8)

—

(7)

26

—

(196)

79

791

535

—

461

188
119

160

Total

183

1,874

2,237

Table of Contents
The table below presents a rollforward of the post-retirement plan assets valued using Level 3 inputs:
Post-Retirement Plan Assets Valued Using Level 3 Inputs
Private
Private
Real
Equity
Debt
Estate
Total
(Dollars in millions)
Balance at
December 31, 2010 $
Net acquisitions
Actual return on
plan assets:
Gains relating to
assets sold
during the year
(Losses) gains
relating to
assets still held
at year-end
Balance at
December 31, 2011$

—
55

—
8

—
24

—
87

33

1

—

34

(28)

(1)

2

(27)

60

8

26

94

Certain gains and losses are allocated between assets sold during the year and assets still held at year-end based on transactions and
changes in valuations that occurred during the year. These allocations also impact our calculation of net acquisitions and dispositions.
At December 31, 2011, the investment program produced actual gains on pension and post-retirement plan assets of $483 million as compared
to the expected returns of $750 million for a difference of $267 million. As of December 31, 2010, the investment program produced actual gains on
pension and post-retirement plan assets of $489 million as compared to the expected returns of $287 million for a difference of $202 million. The
short-term annual returns on plan assets will almost always be different from the expected long-term returns and the plans could experience net
gains or losses, due primarily to the volatility occurring in the financial markets during any given year.
Unfunded Status
The following table presents the unfunded status of the pensions and post-retirement benefit plans:

Benefit obligation
Fair value of plan
assets
Unfunded status
Current portion of
unfunded status
Non-current
portion of
unfunded status

$

$

$

$

Pension Plans
Post-Retirement Benefit Plans
Years Ended December 31,
Years Ended December 31,
2011
2010
2011
2010
(Dollars in millions)
(13,596)
(4,534)
(3,930)
(558)
11,814
(1,782)

—

(1,782)

3,732
(802)

—

(802)
120

693
(3,237)

(164)

(3,073)

54
(504)

—

(504)

Table of Contents
The current portion of our post-retirement benefit obligations is recorded on our consolidated balance sheets in accrued expenses and other
current liabilities—other.
Accumulated Other Comprehensive (Loss) Income—Recognition and Deferrals
The following tables present cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2010, items
recognized as a component of net periodic benefits expense, additional items deferred during 2011 and cumulative items not recognized as a
component of net periodic benefits expense as of December 31, 2011. The items not recognized as a component of net periodic benefits expense
have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:
As of and for the Years Ended December 31,
Recognition
of Net
Periodic
Net
Benefits
Change in
Expense
Deferrals
AOCI
(Dollars in millions)

2010

2011

Accumulated other
comprehensive (loss)
income:
Pension plans:
Net actuarial (loss)
gain
Prior service (cost)
benefit
Deferred income
tax benefit
(expense)
Total pension plans
Post-retirement benefit
plans:
Net actuarial (loss)
gain
Prior service
benefit (cost)
Deferred income
tax benefit
(expense)
Total post-retirement
benefit plans
Total accumulated other
comprehensive (loss)
income

$

$

(188)

13

(1,160)

(1,147)

(1,335)

(19)

2

(12)

(10)

(29)

80
(127)

(5)
10

451
(721)

446
(711)

526
(838)

(31)

—

(190)

(190)

(221)

12

(2)

(31)

(33)

(21)

7

—

85

85

92

(12)

(2)

(136)

(138)

(150)

(139)

8

(857)

(849)

(988)

The following table presents estimated items to be recognized in 2012 as a component of net periodic benefit expense of the pension, nonqualified pension and post-retirement benefit plans:
Pension
Post-Retirement
Plans
Plans
(Dollars in millions)
Estimated recognition of net periodic benefit expense in 2012:
Net actuarial (loss)
Prior service (cost)
Deferred income tax benefit
Estimated net periodic benefit expense to be recorded in 2012
as a component of other comprehensive income (loss)
121

$

(30)
(3)
12

—
—
—

$

(21)

—

Table of Contents
Medicare Prescription Drug, Improvement and Modernization Act of 2003
We sponsor post-retirement health care plans with several benefit options that provide prescription drug benefits that we deem actuarially
equivalent to or exceeding Medicare Part D. We recognize the impact of the federal subsidy received under the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 in the calculation of our post-retirement benefit obligation and net periodic post-retirement benefit
expense.
Other Benefit Plans
Health Care and Life Insurance
We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the
health care plan. Our health care benefit expenses for current employees were $377 million, $190 million and $67 million for the years ended
December 31, 2011, 2010 and 2009, respectively. Union-represented employee benefits are based on negotiated collective bargaining agreements.
Employees are required to partially fund the health care benefits provided by us, in addition to paying their own out-of-pocket costs. Participating
non-represented employees contributed $62 million, $30 million and $9 million December 31, 2011, 2010 and 2009, respectively. Participating unionrepresented employees contributed $28 million, $17 million and $4 million for the years ended December 31, 2011, 2010 and 2009, respectively. Our
group life insurance plans are fully insured and the premiums are paid by us.
401(k) Plan
We sponsor a qualified defined contribution benefit plan covering substantially all of our employees. Under this plan, employees may
contribute a percentage of their annual compensation to the plan up to certain maximums, as defined by the plan and by the Internal Revenue
Service ("IRS"). Currently, we match a percentage of employee contributions in cash. At December 31, 2011 and December 31, 2010, the assets of
the plan included approximately 9 million and 4 million shares of our common stock, respectively, as a result of the combination of previous
employer match and participant directed contributions. We recognized expenses related to this plan of $70 million, $17 million and $14 million for
the years ended December 31, 2011, 2010 and 2009, respectively.
Deferred Compensation Plans
We sponsored non-qualified unfunded deferred compensation plans for various groups that included certain of our current and former highly
compensated employees. Participants in these plans could, at their discretion, invest their deferred compensation in various investment choices
including our common stock. The value of assets and liabilities related to these plans was not significant.
(9) Share-based Compensation
We maintain programs that allow our Board of Directors (through its Compensation Committee or our Chief Executive Officer as its delegate)
to grant incentives to certain employees and our outside directors in any one or a combination of several forms, including incentive and nonqualified stock options; stock appreciation rights; restricted stock awards; restricted stock units and market and performance shares. Stock options
generally expire ten years from the date of grant. We also offer an ESPP which allows eligible employees to purchase our common stock at a 15%
discount based on the lower of the beginning or ending stock price during recurring six month offering periods.
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Table of Contents
Acquisitions
Upon the July 15, 2011, closing of our acquisition of Savvis, and pursuant to the terms of the acquisition agreement, we assumed certain
obligations under Savvis' share-based compensation arrangements. Specifically:
•

all Savvis stock options outstanding immediately prior to the acquisition were vested in full and were converted into 2,420,532 fully
vested CenturyLink stock options, and

•

all non-vested Savvis restricted stock units outstanding immediately prior to the acquisition converted into an aggregate 1,080,070
non-vested CenturyLink awards.

We estimate the aggregate fair value of the assumed Savvis share-based compensation arrangements was $123 million, of which $98 million
was attributable to services performed prior to the acquisition date and was included in the cost of the acquisition. The fair value of CenturyLink
shares was determined based on the $38.54 closing price of our common stock on July 14, 2011. The remaining $25 million of the aggregate fair
value of the assumed Savvis awards was attributable to post-acquisition services and is being recognized as compensation expense, net of
estimated forfeitures, over the remaining 1.5 year vesting period.
Upon the April 1, 2011, closing of our acquisition of Qwest, pursuant to the terms of the acquisition agreement, we assumed certain
obligations under Qwest's pre-existing share-based compensation arrangements. Specifically:
•

all Qwest non-qualified stock options outstanding immediately prior to the acquisition converted into an aggregate of 7,198,331
CenturyLink non-qualified stock options (including 5,562,198 fully vested options),

•

all non-vested shares of Qwest restricted stock outstanding immediately prior to the acquisition converted into an aggregate of
780,455 non-vested shares of CenturyLink restricted stock, and

•

all Qwest market-based awards outstanding immediately prior to the acquisition vested in full and were paid out by us through the
issuance of an aggregate of 563,269 shares of CenturyLink common stock in April 2011.

The aggregate fair value of the assumed Qwest awards was $114 million, of which $85 million was attributable to services performed prior to
the acquisition date and was included in the cost of the acquisition. The fair value of CenturyLink shares was determined based on the $41.55
closing price of our common stock on March 31, 2011. We determined the fair value of Qwest's non-qualified stock options, using the BlackScholes option-pricing model, reflecting a risk-free interest rate ranging from 0% to 2.13% (depending on the expected life of the option), an
expected dividend yield of 6.98%, an expected term ranging from 0.1 to 4.8 years (depending on the option's remaining contractual term and
exercise price and on historical experience), and expected volatility ranging from 11.1% to 35.3% (based on the expected term and historical
experience). The remaining $29 million of the aggregate fair value of the assumed Qwest awards was attributable to post-acquisition period and was
included in the cost of the acquisition, which is being recognized as compensation expense, net of estimated forfeitures, over the remaining vesting
periods from 0.1 years to 3.0 years.
Upon the July 1, 2009, closing of our acquisition of Embarq, pursuant to the terms of the acquisition agreement, we assumed certain
obligations under Embarq pre-existing share-based compensation arrangements. Specifically:
•

all Embarq stock options outstanding immediately prior to the acquisition were vested in full and were converted into 7.2 million
fully vested CenturyLink stock options, and

•

all non-vested Embarq restricted stock units outstanding immediately prior to the acquisition converted into an aggregate 2.4 million
non-vested CenturyLink awards.
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Table of Contents
The aggregate fair value of the assumed Embarq awards was $99 million, of which $50 million was attributable to services performed prior to
the acquisition date and was included in the cost of the acquisition. The fair value of CenturyLink shares was determined based on the $30.70
closing price of our common stock on June 30, 2009. We determined the fair value of Embarq's non-qualified stock options, using the Black-Scholes
option-pricing model, reflecting a risk-free interest rate ranging from 0.5% to 2.6% (depending on the expected life of the option), an expected
dividend yield of 9.12%, an expected term ranging from 0.3 to 6.0 years (depending on the option's remaining contractual term and exercise price
and on historical experience), and expected volatility ranging from 27% to 50% (based on the expected term and historical experience). The
remaining $49 million of the aggregate fair value of the assumed Embarq awards was attributable to post-acquisition period and was included in the
cost of the acquisition, which is being recognized as compensation expense, net of estimated forfeitures, over the remaining vesting periods.
Stock Options
The following table summarizes activity involving stock option awards for the year ended December 31, 2011:

Number of
Options
(in thousands)
5,040
2,421
7,198
(3,072)
(1,198)
10,389

Outstanding at December 31, 2010
Assumed in Savvis acquisition
Assumed in Qwest acquisition
Exercised
Forfeited/Expired
Outstanding at December 31, 2011
Exercisable at December 31, 2011

9,321

WeightedAverage
Exercise
Price
$
$
$
$
$
$

39.06
14.29
34.50
23.59
68.43
31.05

$

29.56

The aggregate intrinsic value of our options outstanding and exercisable at December 31, 2011 was $87 million and $77 million, respectively.
The weighted average remaining contractual term for such options was 4.9 years and 4.5 years, respectively.
During 2011, we received net cash proceeds of $72 million in connection with our option exercises. The tax benefit realized from these exercises
was $19 million. The total intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 was $47 million, $28 million and
$6 million, respectively.
Restricted Stock
For awards that contain only service conditions for vesting, we calculate its fair value based on the closing stock price on the date of grant.
For restricted stock units that contain market and performance conditions, the award fair value is calculated through Monte-Carlo simulations.
During the second and third quarter of 2011, we granted approximately 624,000 shares of restricted stock to certain executive-level employees
as part of our long-term incentive program, of which approximately 474,000 contained only service conditions and will vest on a straight-line basis
on May 31, 2012, 2013 and 2014. The remaining awards contain market conditions and will vest on May 31, 2014. These shares represent only the
target for the award as each recipient has the
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opportunity to ultimately receive between 0% and 200% of the target restricted stock award depending on our total shareholder return for 2011,
2012 and 2013 in relation to that of the S&P 500 Index.
In addition to these awards, during 2011 we granted approximately 689,000 shares of restricted stock awards to certain other key employees
and our outside directors as part of our equity compensation and retention programs. These awards require only service conditions for vesting.
During the first quarter of 2010, we granted approximately 397,000 shares of restricted stock to certain executive-level employees as part of our
long-term incentive program, of which approximately 198,000 contained only service conditions and will vest on a straight-line basis in March 15,
2011, 2012 and 2013. The remaining awards contain service and market conditions. One half of these awards will vest on March 15, 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. The other half will vest on March 15, 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. These shares represent only the target for the award as 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.
In addition to these awards, during 2010 we granted approximately 600,000 shares of restricted stock awards to certain other key employees
and our outside directors as part of our equity compensation and retention programs. These awards require only service conditions for vesting.
In anticipation of our acquisition of Qwest, during the third quarter of 2010, we granted 407,000 shares of restricted stock to certain executive
officers and other key employees as part of a retention program. The shares of restricted stock contain only service conditions and will vest in
equal installments on the first, second and third anniversaries of the April 1, 2011 closing date of the acquisition. As this retention program was
contingent upon the consummation of the Qwest acquisition, we did not begin expensing these awards until the closing of the acquisition on
April 1, 2011.
The following table summarizes activity involving restricted stock and restricted stock unit awards for the year ended December 31, 2011:

Number of
Shares
(in thousands)
2,892
1,313
1,080
780
(1,780)
(77)
4,208

Non-vested at December 31, 2010
Granted
Assumed in Savvis acquisition
Assumed in Qwest acquisition
Vested
Forfeited
Non-vested at December 31, 2011

WeightedAverage
Grant Date
Fair Value
$
$
$
$
$
$
$

33.69
36.15
38.54
41.55
34.58
33.99
36.78

During 2010, we granted 1.4 million shares of restricted stock at a weighted-average price of $36.56. During 2009, we granted 820,000 shares of
restricted stock at a weighted-average price of $27.34, excluding the 2.4 million shares issued in connection with our acquisition of Embarq. The
total fair value of restricted stock that vested during 2011, 2010 and 2009 was $72 million, $48 million and $45 million, respectively.
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Compensation Expense and Tax Benefit
We recognize compensation expense related to our share-based awards with graded vesting that only have a service condition on a straightline basis over the requisite service period for the entire award. Total compensation expense for all share-based payment arrangements for the
years ended December 31, 2011, 2010 and 2009 was $65 million, $38 million and $55 million, respectively. These amounts included $12 million in
compensation expense recognized in 2011 and $21 million in 2009 for the acceleration of certain awards resulting from the consummation of the
Qwest and Embarq acquisitions. Our tax benefit recognized in the income statements for our share-based payment arrangements for the years
ended December 31, 2011, 2010 and 2009 was $25 million, $14 million and $21 million, respectively. At December 31, 2011, there was $96 million of
total unrecognized compensation expense related to our share-based payment arrangements, which we expect to recognize over a weightedaverage period of 1.79 years.
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(10) Earnings Per Common Share
Basic and diluted earnings per common share for the years ended December 31, 2011, 2010 and 2009 were calculated as follows:
Years Ended December 31,
2011
2010
2009
(Dollars in millions, except per share amounts,
shares in thousands)
Income (Numerator):
Net income before extraordinary item
Extraordinary item, net of income tax expense
Net income
Earnings applicable to non-vested restricted
stock
Net income applicable to common stock for
computing basic earnings per common
share
Net income as adjusted for purposes of
computing diluted earnings per common
share

$

(2)

$

Shares (Denominator):
Weighted average number of shares:
Outstanding during period
Non-vested restricted stock
Non-vested restricted stock units
Weighted average shares outstanding for
computing basic earnings per common
share
Incremental common shares attributable to
dilutive securities:
Shares issuable under convertible securities
Shares issuable under incentive
compensation plans
Number of shares as adjusted for purposes of
computing diluted earnings per common
share
Basic earnings per common share:
Before extraordinary item
Extraordinary item
Basic earnings per common share
Diluted earnings per common share:
Before extraordinary item
Extraordinary item
Diluted earnings per common share

573
—
573

948
—
948
(6)

511
136
647
(4)

571

942

643

571

942

643

534,320
(2,209)
669

301,428
(1,756)
947

199,177
(1,387)
1,023

532,780

300,619

198,813

13

13

13

1,328

665

231

534,121

301,297

199,057

1.07
—
1.07

3.13
—
3.13

2.55
.68
3.23

1.07
—
1.07

3.13
—
3.13

2.55
.68
3.23

$
$

$
$

Our calculations of diluted earnings per common share exclude shares of common stock that are issuable upon exercise of stock options when
the exercise price is greater than the average market price of our common stock during the period. Such potentially issuable shares totaled
2.4 million, 2.9 million and 4.1 million for 2011, 2010 and 2009, respectively.
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(11) Fair Value Disclosure
Our financial instruments consist of cash and cash equivalents, accounts receivable, investments, accounts payable and long-term debt,
excluding capital lease obligations. The carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable
approximate their fair values.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation
techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank
the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB.
We determined the fair values of our long-term notes, including the current portion, based on quoted market prices where available or, if not
available, based on discounted future cash flows using current market interest rates
The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:
Input Level
Level 1
Level 2
Level 3

Description of Input
Observable inputs such as quoted market prices in active markets.
Inputs other than quoted prices in active markets that are either directly or indirectly
observable.
Unobservable inputs in which little or no market data exists.

The following table presents the carrying amounts and estimated fair values of our investment securities, which are reported in noncurrent
other assets, and long-term debt, excluding capital lease obligations, as well as the input levels used to determine the fair values:
December 31, 2011
December 31, 2010
Carrying
Carrying
Amount
Fair Value
Amount
Fair Value
(Dollars in millions)

Input
Level
Assets—Investments
securities
Liabilities—Long-term
debt excluding capital
lease obligations

3

$

73

73

—

—

2

$

21,124

22,052

7,328

8,007

In connection with the acquisition of Qwest on April 1, 2011, we acquired auction rate securities maturing in 2033 to 2036 that are not actively
traded in liquid markets. We have designated these securities as available for sale and, accordingly, we report them on our balance sheet under our
"goodwill and other assets—other" line item at fair value on a recurring basis. We estimated the fair value of these securities at December 31, 2011
using a probability-weighted cash flow model that considers the coupon rate for the securities, probabilities of default and liquidation prior to
maturity, and a discount rate commensurate with the creditworthiness of the issuer. These securities have a cost basis of $79 million.
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(12) Income Taxes

2011
Income tax expense was as follows:
Federal
Current
Deferred
State
Current
Deferred
Foreign
Current
Deferred
Total income tax expense

$

$

$

129

2009

(49)
401

384
145

158
210

25
(6)

67
(13)

3
12

—
—
583

—
—
383

4
—
375

2011
Income tax expense was allocated as follows:
Income tax expense in the consolidated
statements of income:
Attributable to income before extraordinary
item
Attributable to extraordinary item
Stockholders' equity:
Compensation expense for tax purposes in
excess of amounts recognized for
financial reporting purposes
Tax effect of the change in accumulated
other comprehensive loss

Years Ended December 31,
2010
(Dollars in millions)

Years Ended December 31,
2010
(Dollars in millions)

2009

375
—

583
—

302
81

(13)

(12)

(4)

(535)

(34)

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The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:
Years Ended December 31,
2010
2009
(Percentage of pre-tax income)
35.0%
35.0%
35.0%

2011
Statutory federal income tax rate
State income taxes, net of federal income tax
benefit
Change in tax treatment of Medicare subsidy
Nondeductible acquisition related costs
Nondeductible compensation pursuant to
executive compensation limitations
Recognition of previously unrecognized tax
benefits
Foreign income taxes
Foreign valuation allowance
Other, net
Effective income tax rate

1.3%
—
0.9%

1.9%
0.3%
0.2%

2.0%
—
0.7%

0.4%

0.2%

0.9%

—
0.4%
0.8%
0.8%
39.6%

—
—
—
0.5%
38.1%

(1.5)%
—
—
0.1%
37.2%

Included in income tax expense for the years ended December 31, 2011, 2010 and 2009 is $24 million, $4 million and $7 million, respectively,
which related to a portion of our transaction costs associated with our recent acquisitions. The 2011 and 2010 transaction costs were primarily
related to the acquisition of Qwest. The 2009 transaction costs were related to the acquisition of Embarq. These costs are considered nondeductible for income tax purposes.
In 2011, our effective tax rate decreased due to a $16 million reduction to our net deferred tax asset valuation allowance associated with state
operating loss carryforwards. We also recorded an additional valuation allowance of $8 million on deferred tax assets that require future income of
a special character to realize the benefits. Because we are not currently forecasting income of an appropriate character for these benefits to be
realized, we will continue to maintain a valuation allowance equal to the amount we do not believe is more likely than not to be realized.
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The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2011 and 2010 were as follows:
Years Ended December 31,
2011
2010
(Dollars in millions)
Deferred tax assets
Post-retirement and pension benefit costs
Net operating loss carryforwards
Other employee benefits
Other
Gross deferred tax assets
Less valuation allowance
Net deferred tax assets

$

Deferred tax liabilities
Property, plant and equipment, primarily due to depreciation
differences
Goodwill and other intangible assets
Other
Gross deferred tax liabilities
Net deferred tax liability

$

2,052
2,492
118
836
5,498
(276)
5,222

510
75
45
116
746
(43)
703

(3,641)
(4,215)
(163)
(8,019)
(2,797)

(1,762)
(1,159)
(70)
(2,991)
(2,288)

Of the $2.797 billion and $2.288 billion net deferred tax liability at December 31, 2011 and 2010, respectively, $3.823 billion and $2.369 billion is
reflected as a long-term liability and $1.026 billion and $81 million is reflected as a net current deferred tax asset.
In connection with our acquisitions of Savvis on July 15, 2011 and Qwest on April 1, 2011, we recognized net noncurrent deferred tax liabilities
of approximately $320 million and $595 million, respectively, which reflects the expected future tax effects of certain differences between the
financial reporting carrying amounts and tax bases of Savvis' and Qwest's assets and liabilities. In addition, due to the Qwest acquisition, we
recognized a net current deferred tax asset of $271 million, which relates primarily to certain accrued liabilities that are expected to result in future
tax deductions. These primary differences involve Qwest's pension and other post-retirement benefit obligations as well as tax effects for acquired
intangible assets, property, plant and equipment and long-term debt, including the effects of acquisition date valuation adjustments, for both
entities. The net deferred tax liability is partially offset by a deferred tax asset for expected future tax deductions relating to Savvis' and Qwest's net
operating loss carryforwards.
At December 31, 2011, we had NOLs of $6.2 billion. If unused, the NOLs will expire between 2015 and 2031; however, no significant amounts
expire until 2020. At December 31, 2011, we had $72 million ($47 million net of federal income tax) of state investment tax credit carryforwards that
will expire between 2012 and 2024 if not utilized. In addition, at December 31, 2011 we had $30 million of alternative minimum tax, or AMT, credits.
Our acquisitions of Qwest and Savvis caused "ownership changes" within the meaning of Section 382 of the Internal Revenue Code. As a result,
our ability to use these NOLs is subject to annual limits imposed by Section 382. Despite this, we expect to use substantially all of these NOLs as
an offset against our future taxable income, although the timing of that use will depend upon our future earnings and future tax circumstances.
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We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. At December 31, 2011, a
valuation allowance of $276 million was established as it is more likely than not that this amount of net operating loss carryforwards will not be
utilized prior to expiration.
Based on our consideration of preliminary information, we recorded valuation allowances of $10 million and $231 million, respectively on the
acquisition dates for the portion of the acquired net deferred tax assets that we do not believe is more likely than not to be realized. Our preliminary
acquisition date assignment of deferred income taxes and the related valuation allowance are subject to adjustment as discussed in Note 2—
Acquisitions.
The activity of our gross unrecognized tax benefits (excluding both interest and any related federal benefit) during 2011 was as follows:

Unrecognized tax benefits at December 31, 2010
Assumed in Qwest and Savvis acquisitions
Decrease due to the reversal of tax positions taken in a prior year
Decrease from the lapse of statute of limitations
Settlements
Unrecognized tax benefits at December 31, 2011

Unrecognized Tax
Benefits
(Dollars in millions)
$
311
206
(13)
(1)
(392)
$
111

Upon the dismissal of our refund appeal in October 2011, we recorded a $242 million settlement related to the treatment of universal service
fund receipts of certain subsidiaries acquired in our Embarq acquisition, effectively settling the issue for the 1990 through 1994 years. We are
currently in the process of dismissing our (2004-2006) proceedings, due to an agreement in place with the IRS Chief Counsel's office. Dismissal of
the Tax Court proceedings will result in an agreed tax deficiency amount for each period. Since the Tax Court proceedings involved years that
Embarq was owned by Sprint, Sprint will receive the deficiency and the payment to the IRS will trigger a settlement obligation under the Tax
Sharing agreement with Sprint. During 2011, Qwest also withdrew their claims associated with the treatment of universal services fund receipts
resulting in a $141 million settlement decrease in our unrecognized tax benefits. Due to Qwest's NOL carryforward, the settlement of the position
resulted in a reduction in our unrecognized tax benefit but no cash payment is required.
If we were to prevail on all unrecognized tax benefits recorded on our balance sheet, we would recognize approximately $118 million (including
interest and net of federal benefit), which would lower our effective tax rate.
Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented
before related tax benefits) of approximately $33 million and $12 million at December 31, 2011 and December 31, 2010, respectively.
We file income tax returns, including returns for our subsidiaries, with federal, state and local jurisdictions. Our uncertain income tax positions
are related to tax years that are currently under or remain subject to examination by the relevant taxing authorities.
Beginning with our 2009 tax year, we are subject to annual examination by the IRS.
In 2010, Qwest and its subsidiaries filed amended federal income tax returns for 2006-2007 to make protective claims with respect to items
reserved in their audit settlements and to correct items not addressed in prior audits. Those amended federal income tax returns are subject to
adjustment in an IRS audit. Additionally, in 2009, Qwest and its subsidiaries filed amended federal income tax returns
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for 2002-2005 to make protective claims with respect to items reserved in their audit settlements and to correct items not addressed in prior audits.
Those amended federal income tax returns are subject to adjustment in an IRS audit.
Our open income tax years by major jurisdiction are as follows at December 31, 2011:
Jurisdiction
Federal
State
Florida
Louisiana
Minnesota
New York
North Carolina
Oregon
Texas
Other states

Open tax years
2008—current
2006—current
2008—current
1996—1999 and 2002—current
2001—2006 and 2008—current
2006—current
2002—current
2008—current
2005—current

Since the period for assessing additional liability typically begins upon the filing of a return, it is possible that certain jurisdictions could
assess tax for years prior to the open tax years disclosed above. Additionally, it is possible that certain jurisdictions in which we do not believe we
have an income tax filing responsibility, and accordingly did not file a return, may attempt to assess a liability, or that other jurisdictions to which
we pay taxes may attempt to assert that we owe additional taxes.
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Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of
statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of
applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may
decrease by up to $9 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments
and events, many of which are outside our control.
(13) Segment Information
For several years prior to 2011, we reported our operations as a single segment. However, after our acquisitions of Qwest on April 1, 2011 and
Savvis on July 15, 2011, we have reorganized our business into the following operating segments:
•

Regional markets. Consists generally of providing strategic and legacy products and services to residential consumers, small to
medium-sized businesses and regional enterprise customers. Our strategic products and services offered to these customers include
our private line, broadband, Multi-Protocol Label Switching ("MPLS"), hosting and video services. Our legacy services offered to
these customers include local and long-distance service;

•

Business markets. Consists generally of providing strategic and legacy products and services to enterprise and government
customers. Our strategic products and services offered to these customers include our private line, broadband, MPLS, hosting and
video services. Our legacy services offered to these customers include local and long-distance service;

•

Wholesale markets. Consists generally of providing strategic and legacy products and services to other communications
providers. Our strategic products and services offered to these customers are mainly private line (including special access) and
MPLS. Our legacy services offered to these customers include unbundled network elements ("UNEs") which allow our wholesale
customers the use our network or a combination of our network and their own networks to provide voice and data services to their
customers, long-distance and switched access services; and

•

Savvis operations. Currently consists of the entire centrally-managed operations of our Savvis subsidiaries, which provides
hosting and network services primarily to business customers when provided by Legacy Savvis. Some of these services are the
same as those provided through our business markets segment. In the future, we may reclassify the revenues and expenses
associated with those business markets services as part of our Savvis operations segment. However, until we are able to further
integrate Legacy Savvis, we will continue to classify those services as part of the business markets segment.

We may make further changes to our segment reporting as we continue to integrate the operations of Legacy Qwest and Legacy Savvis.
In addition, we have revised the way we categorize our products and services and report our related revenues. These products and services
are now described as follows:
•

Strategic services, which include primarily private line (including special access), broadband, hosting (including cloud hosting and
managed hosting), colocation, multi protocol line switching ("MPLS") (which is a data networking technology that can deliver the
quality of service required to support real-time voice and video), video (including DIRECTV), voice over Internet Protocol ("VoIP")
and Verizon Wireless services;

•

Legacy services, which include primarily local, long-distance, switched access, public access, integrated services digital network
("ISDN") (which uses regular telephone lines to support
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voice, video and data applications), and traditional wide area network ("WAN") services (which allows a local communications
network to link to networks in remote locations);
•

Data integration, which is telecommunications equipment we sell that is located on customers' premises and related professional
services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic
broadband networks for our government and business customer; and

•

Other revenues, which consists primarily of USF revenue and surcharges.

We have revised our prior period revenue classifications to conform to our current categories.
Previously, we had categorized our products and services related to revenue as voice, data and network access. These products and services
were described as follows:
•

Voice. We offered local calling services to residential and business customers within our local service area, generally for a fixed
monthly charge. We offered a number of enhanced voice services (such as call forwarding, caller identification, conference calling,
voicemail, selective call ringing and call waiting) to our local exchange customers for an additional monthly fee. We also offered
long-distance services to our customers based on either usage or pursuant to flat-rate calling plans.

•

Data. We derived our data revenues primarily from monthly recurring charges for providing broadband access services, data
transmission services over special circuits and private lines and switched digital television services. Our special access data service
consisted of providing dedicated circuits connecting other carriers' networks to their customers' locations, wireless carriers' cell
towers to mobile switching centers, or business customers to our network. Although the traffic handled through special access
facilities may have included voice as well as data, we reported revenues associated with special access as data revenues.

•

Network Access. We derived our network access revenues primarily from providing wholesale services to various carriers and
customers in connection with the use of our facilities to originate and terminate their interstate and intrastate voice transmissions.
This revenue also included charges for receiving universal support funds, receiving reciprocal compensation from CLECs and
wireless service providers for terminating their calls on our networks and offering certain network facilities and related services to
CLECs. Our revenues for switched access services depended primarily on the level of call volumes.

•

Other. We derived our other revenues principally by providing fiber transport, security monitoring services, leasing, selling,
installing and maintaining customer premise telecommunications equipment and wiring and providing payphone services.

In connection with the recent reorganization of our segments, we also revised the way we categorize our segment revenues and expenses. Our
segment revenues include all revenues from our strategic services, legacy services and data integration as described in more detail above. We
report our segment expenses for regional markets, business markets and wholesale markets as follows:
•

Direct expenses, which primarily are specific, incremental expenses incurred as a direct result of providing services and products to
segment customers, along with selling, general and administrative expenses that are directly associated with specific segment
customers or activities; and

•

Allocated expenses, which are determined by applying activity-based costing and other methodologies to include network
expenses, facilities expenses and other expenses such as fleet, product management, and real estate expenses.
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We do not assign depreciation and amortization expense to our segments, as the related assets and capital expenditures are centrallymanaged. Other unassigned operating expenses consist primarily of expenses for centrally-managed administrative functions (such as finance,
information technology, legal and human resources), severance expenses and restructuring expenses. Interest expense is also excluded from
segment results because we manage our financing on a total company basis and have not allocated assets or debt to specific segments. In
addition, other income (expense) does not relate to our segment operations and is therefore excluded from our segment results. Our segment
results do not include any intersegment revenue or expenses. Our chief operating decision maker does not review assets and capital expenditures
by segment, nor does he include the centrally-managed income and expenses noted above in the calculation of segment income.
Our operating revenues for our products and services consisted of the following categories for the years ended December 31, 2011 and 2010:

Strategic services
Legacy services
Data integration
Other
Total operating revenues

$

$

Years Ended December 31,
2011
2010
(Dollars in millions)
6,254
2,049
7,680
4,288
537
158
880
547
15,351
7,042

Due to system limitations we have not reported our 2009 segment information using our current segments or our 2009 revenues using our
current presentation of products and services, as we have deemed it impracticable to do so. Our operating revenues for our products and services
consisted of the following categories for the years ended December 31, 2010 and 2009:

Voice
Data
Network access
Other
Total operating revenues

$

$

Years Ended December 31,
2010
2009
(Dollars in millions)
3,138
2,168
1,909
1,202
1,080
928
915
676
7,042
4,974

Other operating revenues include revenue from universal support funds which allows us to recover a portion of our costs under federal and
state cost recovery mechanisms and certain surcharges to our customers, including billings for our required contributions to several USF
programs. These surcharge billings to our customers are reflected on a gross basis in our statements of operations (included in both operating
revenues and expenses) and aggregated approximately $392 million, $115 million and $84 million for the years ended December 31, 2011, 2010 and
2009, respectively. We also generate other operating revenues from leasing and subleasing of space in our office buildings, warehouses and other
properties. We centrally-manage the activities that generate these other operating revenues and consequently these revenues are not included in
any of our four segments presented below.
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Segment information for the years ended December 31, 2011 and 2010 is summarized below:

Total segment revenues
Total segment expenses
Total segment income

$
$

Total margin percentage
Regional markets:
Revenues
Expenses
Income

$
$

Margin percentage
Business markets:
Revenues
Expenses
Income

$
$

Margin percentage
Wholesale markets:
Revenues
Expenses
Income

$
$

Margin percentage
Savvis operations:
Revenues
Expenses
Income

$
$

Margin percentage

Years Ended December 31,
2011
2010
(Dollars in millions)
14,471
6,495
6,535
2,403
7,936
4,092
55%

63%

7,832
3,398
4,434

4,640
1,783
2,857

57%

62%

2,861
1,736
1,125

266
120
146

39%

55%

3,295
1,021
2,274

1,589
500
1,089

69%

69%

483
380
103

—
—
—

21%

—

The following table reconciles segment income to net income for the years ended December 31, 2011 and 2010:

Total segment income
Other operating revenues
Depreciation and amortization
Other unassigned operating expenses
Other income (expense), net
Income tax expense
Net income

$

$
137

Years Ended December 31,
2011
2010
(Dollars in millions)
7,936
4,092
880
547
(4,026)
(1,434)
(2,765)
(1,145)
(1,077)
(529)
(375)
(583)
573
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We do not have any single customer that provides more than 10% of our total operating revenues. Substantially all of our revenues come from
customers located in the United States.
(14) 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 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 entities 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-ofreturn 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 were 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:

Elimination of removal costs embedded in accumulated depreciation
Establishment of asset retirement obligation
Elimination of other regulatory assets and liabilities
Net extraordinary gain before income tax expense
Income tax expense associated with extraordinary gain
Extraordinary gain attributable to CenturyLink, Inc.
Basic earnings per common share of extraordinary gain
Diluted earnings per common share of extraordinary gain

Gain (loss)
(Dollars in millions)
$
221
(2)
(2)
217
(81)
$
136
.68
.68

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 lives related to the depreciation rates used that were established by regulatory authorities.
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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.
(15) Quarterly Financial Data (Unaudited)
First
Quarter
2011
Operating
revenues $
Operating
income
Net
income
Basic
earnings
per
common
share
Diluted
earnings
per
common
share
2010
Operating
revenues $
Operating
income
Net
income
Basic
earnings
per
common
share
Diluted
earnings
per
common
share

Second
Third
Fourth
Quarter
Quarter
Quarter
(Dollars in millions, except per share amounts)

Total

1,696

4,406

4,596

4,653

15,351

464

480

548

533

2,025

211

115

138

109

573

.69

.19

.23

.18

1.07

.69

.19

.23

.18

1.07

1,800

1,772

1,748

1,722

7,042

545

523

506

486

2,060

253

238

232

225

948

.84

.79

.76

.74

3.13

.84

.79

.76

.74

3.13

These results include Savvis operations for periods beginning July 15, 2011 and Qwest operations for periods beginning April 1, 2011 (See
Note 2—Acquisitions).
(16) Commitments and Contingencies
In this section, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter. Until and
unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to
represent.
We have established accrued liabilities for the matters described below where losses are deemed probable and reasonably estimable.
Litigation Matters Relating to CenturyLink and Embarq
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 $34 million. The lawsuits allege that Sprint
Nextel has breached contracts, violated tariffs, and violated the Federal Communications Act by failing to pay these charges. One lawsuit, filed on
behalf of all legacy Embarq operating entities, was tried in federal court in Virginia in August 2010 and, in March 2011, a ruling was issued in our
favor and against Sprint Nextel. We currently expect Sprint Nextel to file an appeal of this decision. The other lawsuit, filed on behalf of all Legacy

CenturyLink operating entities, is pending in federal court in Louisiana. In that case, in early 2011 the Court dismissed certain of CenturyLink's
claims, referred other claims to
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the FCC, and stayed the litigation. We have not deferred revenue related to these matters as an adverse outcome is not probable based upon
current circumstances.
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, a group of retirees filed a putative class action lawsuit challenging the decision to make certain modifications in retiree benefits
programs relating to life insurance, medical insurance and prescription drug benefits, generally effective January 1, 2006 and January 1, 2008
(which, at the time of the modifications, was expected to reduce estimated future expenses for the subject benefits by more than $300 million).
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. The Court certified a class on certain of plaintiffs'
claims, but rejected class certification as to other claims. Embarq and other defendants continue to vigorously contest these claims and charges.
On October 14, 2011, the Fulghum lawyers filed a new, related lawsuit, Abbott et al. v. Sprint Nextel et al. CenturyLink/Embarq is not named a
defendant in the lawsuit. In Abbott, approximately 1,800 plaintiffs allege breach of fiduciary duty in connection with the changes in retiree benefits
that also are at issue in the Fulghum case. The Abbott plaintiffs are all members of the class that was certified in Fulghum on claims for allegedly
vested benefits (Counts I and III), and the Abbott claims are similar to the Fulghum breach of fiduciary duty claim (Count II), on which the
Fulghum court denied class certification. We have not accrued a liability for these matters as it is premature to determine whether an accrual is
warranted and, if so, a reasonable estimate of probable liability.
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. We have accrued an amount that we believe is probable for these matters; however, the amount is not material to our financial
statements.
Litigation Matters Relating to Qwest
The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate Qwest to
indemnify its former directors, officers or employees with respect to certain of the matters described below, and Qwest has been advancing legal
fees and costs to certain former directors, officers or employees in connection with certain matters described below.
On September 29, 2010, the trustees in the Dutch bankruptcy proceeding for KPNQwest, N.V. (of which Qwest was a major shareholder) filed a
lawsuit in district court in Haarlem, the Netherlands, alleging tort and mismanagement claims under Dutch law. Qwest and Koninklijke KPN N.V.
("KPN") are defendants in this lawsuit along with a number of former KPNQwest supervisory board members and a former officer of KPNQwest,
some of whom were formerly affiliated with Qwest. Plaintiffs allege, among other things, that defendants' actions were a cause of the bankruptcy of
KPNQwest, and they seek damages for the bankruptcy deficit of KPNQwest, which is claimed to be approximately €4.200 billion (or approximately
$5.4 billion based on the exchange rate on December 31, 2011), plus statutory interest. Two lawsuits asserting similar claims were previously filed
against Qwest and others
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in federal courts in New Jersey in 2004 and Colorado in 2009; those courts dismissed the lawsuits without prejudice on the grounds that the claims
should not be litigated in the United States.
On September 13, 2006, Cargill Financial Markets, Plc and Citibank, N.A. filed a lawsuit in the District Court of Amsterdam, the Netherlands,
against Qwest, KPN, KPN Telecom B.V., and other former officers, employees or supervisory board members of KPNQwest, some of whom were
formerly affiliated with Qwest. The lawsuit alleges that defendants misrepresented KPNQwest's financial and business condition in connection
with the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of
approximately €219 million (or approximately $284 million based on the exchange rate on December 31, 2011).
We have not accrued a liability for the above matters as it is premature to determine whether an accrual is warranted and, if so, a reasonable
estimate of probable liability. We will continue to defend against the pending KPNQwest litigation matters vigorously.
Several putative class actions relating to the installation of fiber-optic cable in certain rights-of-way were filed against Qwest on behalf of
landowners on various dates and in various courts in Alabama, Arizona, California, Colorado, Delaware, Florida, Georgia, Illinois (where there is a
federal and a state court case), Indiana, Iowa, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada,
New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia, and Washington. For
the most part, the complaints challenge our right to install our fiber-optic cable in railroad rights-of-way. The complaints allege that the railroads
own the right-of-way as an easement that did not include the right to permit us to install our fiber-optic cable in the right-of-way without the
Plaintiffs' consent. Most of the actions purport to be brought on behalf of state-wide classes in the named Plaintiffs' respective states, although
two of the currently pending actions purport to be brought on behalf of multi-state classes. Specifically, the Illinois state court action purports to
be on behalf of landowners in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin, and the Indiana state court action
purports to be on behalf of a national class of landowners. In general, the complaints seek damages on theories of trespass and unjust enrichment,
as well as punitive damages. On July 18, 2008, a federal district court in Massachusetts entered an order preliminarily approving a settlement of all
of the actions described above, except the action pending in Tennessee. On September 10, 2009, the court denied final approval of the settlement
on grounds that it lacked subject matter jurisdiction. On December 9, 2009, the court issued a revised ruling that, among other things, denied a
motion for approval as moot and dismissed the matter for lack of subject matter jurisdiction. The parties are now engaged in negotiating and
finalizing settlements on a state-by-state basis, and have filed and received final approval of settlements in Alabama and Illinois federal court, and
in Tennessee state court. Final approval also has been granted in federal court actions in Idaho and North Dakota, to which Qwest is not a party.
We have accrued an amount that we believe is probable for these matters; however, the amount is not material to our financial statements.
Other
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, various tax issues, occasional grievance hearings before labor
regulatory agencies, patent infringement allegations and miscellaneous third party tort actions. The outcome of these other proceedings is not
predictable. However, 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.
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Capital Leases
We lease certain facilities and equipment under various capital lease arrangements. Depreciation of assets under capital leases is included in
depreciation and amortization expense. Payments on capital leases are included in repayments of long-term debt, including current maturities in the
consolidated statements of cash flows.
The table below summarizes our capital lease activity:

2011
Assets acquired through
capital leases
Depreciation expense
Cash payments towards
capital leases

$

Years Ended December 31,
2010
(Dollars in millions)

2009

696
89

—
—

—
—

76

—

—

December 31,
December 31,
2011
2010
(Dollars in millions)
Assets included in property, plant and
equipment
Accumulated depreciation

$

698
91

—
—

The future minimum payments under capital leases as of December 31, 2011 are included in our consolidated balance sheet as follows:
Future
Minimum
Payments
(Dollars in
millions)
Capital lease obligations:
2012
2013
2014
2015
2016
2017 and thereafter
Total minimum payments
Less: amount representing interest and executory costs
Present value of minimum payments
Less: current portion
Long-term portion

$

$

147
140
121
89
53
231
781
(165)
616
(112)
504

Operating Leases
CenturyLink leases various equipment, office facilities, retail outlets, switching facilities, and other network sites. These leases, with few
exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with
rent escalations,
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are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the
initial non-cancelable term plus any term under renewal options that are reasonably assured. For the years ended December 31, 2011, 2010 and
2009, our gross rental expense was $401 million, $174 million and $107 million. We also received sublease rental income for the year ended
December 31, 2011 of $17 million. We did not have any material sublease rental income for the years ended December 31, 2010 and 2009.
At December 31, 2011, our future rental commitments for operating leases were as follows:

2012
2013
2014
2015
2016
2017 and thereafter

Future
Minimum
Payments
(Dollars in
millions)
$
280
244
208
178
147
928

Total future minimum payments(1)

$

(1)

1,985

Minimum payments have not been reduced by minimum sublease rentals of $119 million due in the future under non-cancelable subleases.

Purchase Obligations
We have several commitments primarily for marketing activities and support services from a variety of vendors to be used in the ordinary
course of business totaling $706 million at December 31, 2011. Of this amount, we expect to purchase $268 million in 2012, $191 million in 2013
through 2014, $99 million in 2015 through 2016 and $148 million in 2017 and thereafter. These amounts do not represent our entire anticipated
purchases in the future, but represent only those items for which we are contractually committed.
(17) Other Financial Information
Other Current Assets

Prepaid expenses
Other
Total other current assets

$
$

December 31,
2011
2010
(Dollars in millions)
240
150
390

41
33
74

(18) Labor Union Contracts
Over 40% of our employees are members of various bargaining units represented by the Communications Workers of America and the
International Brotherhood of Electrical Workers. We believe that relations with our employees continue to be generally good. Approximately
15,000 or 75%
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of our union-represented employees are subject to collective bargaining agreements that expire throughout 2012.
(19) Dividends
Our Board of Directors declared the following dividends payable in 2011 and 2010:

Date Declared
November 15,
2011
August 23,
2011
May 18, 2011
January 24,
2011
November 9,
2010
August 24,
2010
May 21, 2010
February 25,
2010

Record Date

Dividend
Per Share

Total Amount
(in millions)

Payment Date

December 6, 2011

.725

$

449

December 16, 2011

September 6, 2011
June 6, 2011

.725
.725

$
$

449
436

September 16, 2011
June 16, 2011

February 18, 2011

.725

$

222

February 25, 2011

December 7, 2010

.725

$

220

December 20, 2010

September 7, 2010
June 8, 2010

.725
.725

$
$

220
220

September 20, 2010
June 21, 2010

March 9, 2010

.725

$

219

March 22, 2010

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of
judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future
events and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will
detect all errors or fraud. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance
regarding management's control objectives.
Our Chief Executive Officer, Glen F. Post, III, and our Chief Financial Officer, R. Stewart Ewing, Jr., have evaluated the design and operation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the "Exchange Act")
at December 31, 2011. Based on the evaluation, Messrs. Post and Ewing concluded that our disclosure controls and procedures are designed, and
are effective, to provide reasonable assurance that the information required to be disclosed by us in the reports that we file under the Exchange
Act is timely recorded, processed, summarized and reported and to ensure that information required to be disclosed in the reports that we file or
submit under the Exchange Act is accumulated and communicated to our management, including Messrs. Post and Ewing, in a manner that allows
timely decisions regarding required disclosure.
We completed our acquisitions of Savvis on July 15, 2011, and Qwest on April 1, 2011. We have extended our oversight and monitoring
processes that support our internal control over financial reporting to include the acquired operations. Except for these extensions, we did not
make any changes to our internal control over financial reporting during 2011 that materially affected, or that we believe are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.

PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the Proxy Statement.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Equity Compensation Plan Information
The following table provides information as of December 31, 2011 about our equity compensation plans under which Common Shares are
authorized for issuance:
Number of
securities to be
issued upon
exercise of
outstanding
options and rights(1)
(a)
Equity compensation plans
approved by shareholders
Equity compensation plans not
approved by shareholders(4)
Totals

Weightedaverage
exercise price
of outstanding
options and
rights(2)
(b)

Number of securities
remaining available for
future issuance under
plans (excluding
securities reflected in
column (a))
(c)

2,113,862(1) $

41.39

32,113,146(3)

10,334,529(5)
12,448,391 $

29.51
31.05

—
32,113,146

(1)

The total includes 150,385 potentially issuable restricted stock units, which contain market provisions and have a maximum payout of 200%. This payout could be
reduced to zero if specified total shareholder return targets as compared to the S&P 500 are not met over a specified period.

(2)

The total number of securities issued and outstanding includes restricted stock units, which do not have an exercise price. Consequently, these awards were excluded
from the computation of weighted-average exercise price of outstanding options and rights.

(3)

This amount includes 3,423,780 shares remaining to be granted under our shareholder-approved employee stock purchase plan.

(4)

These amounts represent common shares to be issued upon exercise of options and restricted stock units outstanding under four equity plans: the Legacy Qwest
Equity Incentive Plan, the Amended and Restated Savvis 2003 Incentive Compensation Plan, the Savvis 199 Stock Option Plan, and the 2008 Legacy Embarq
Equity Incentive Plan (the "Legacy Plans"). Each of the Legacy Plans was assumed in connection with a merger. No additional equity awards will be granted under
any of the Legacy Plans.

(5)

The total includes 179,138 potentially issuable restricted stock units, which contain market provisions and have a maximum payout of 200%. This payout could be
reduced to zero if specified total shareholder return targets as compared to the S&P 500 are not met over a specified period.

The balance of the information required by Item 12 is incorporated by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference to the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the Proxy Statement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as
part of this electronic submission.
Exhibit
Number
2.1

Description
Agreement and Plan of Merger, dated as of October 26, 2008, among CenturyLink, Inc., Embarq Corporation and Cajun Acquisition Company (incorporated by reference to
Exhibit 99.1 of the Current Report on Form 8-K filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on October 30, 2008).

2.2

Agreement and Plan of Merger, dated as of April 21, 2010, among CenturyLink, Inc., its subsidiary SB44 Acquisition Company, and Qwest Communications International Inc.
(incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed by CenturyLink (File No. 001-07784) with the Securities and Exchange Commission on
April 27, 2010).

2.3

Agreement and Plan of Merger, dated as of April 26, 2011, among CenturyLink, Inc., SAVVIS, Inc. and Mimi Acquisition Company (incorporated by reference to Exhibit 2.1 of
the Current Report on Form 8-K filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on April 27, 2011).

3.1

Amended and Restated Articles of Incorporation of CenturyLink, Inc., as amended through May 21, 2010 (incorporated by reference to Exhibit 3.1 of our Quarterly Report on
Form 10-Q for the period ended June 30, 2010).

3.2

Bylaws of CenturyLink, Inc., as amended and restated through November 4, 2010 (incorporated by reference to Exhibit 3.2 of our Quarterly Report on Form 10-Q for the period
ended September 30, 2010).

4.1

Form of common stock certificate (incorporated by reference to Exhibit 4.1 of our Quarterly Report on Form 10-Q for the period ended June 30, 2010).

4.2

Instruments relating to CenturyLink's Revolving Credit Facility.

4.3

a.

Four-Year Revolving Credit Facility, dated January 19, 2011, between CenturyLink, Inc. and the lenders named therein (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed by CenturyLink, Inc. on January 24, 2011).

b.

Form of related Guarantee Agreement (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed be CenturyLink, Inc. on January 24, 2011).

Instruments relating to indebtedness of Qwest Communications International, Inc. and its subsidiaries.
a.

Indenture, dated as of April 15, 1990, by and between the Mountain States Telephone and Telegraph Company and The First National Bank of Chicago (incorporated by
reference to Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-03040).

b.

First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. and The First National Bank of Chicago (incorporated by
reference to Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-03040).

c.

Indenture, dated as of November 4, 1998, with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.'s Registration Statement
on Form S-4, filed February 2, 1999, File No. 333-71603).

d.

Indenture, dated as of November 27, 1998, with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.'s Registration Statement
on Form S-4, filed February 2, 1999, File No. 333-71603).

e.

Indenture, dated as of June 29, 1998, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., and The First National Bank of Chicago (now known as Bank
One Trust Company, N. A.), as trustee (incorporated by reference to U S WEST's Current Report on Form 8-K, dated November 18, 1998, File No. 1-14087).

f.

Indenture, dated as of October 15, 1999, by and between Qwest Corporation and Bank One Trust Company, N.A., as trustee (incorporated by reference to Qwest
Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 1-03040).

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g.

First Supplemental Indenture, dated as of June 30, 2000, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., Qwest Communications International Inc.,
and Bank One Trust Company, as trustee (incorporated by reference to Qwest Communications International Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, File No. 1-15577).

h.

Officer's Certificate of Qwest Corporation, dated March 12, 2002 (including forms of 87/8% notes due March 15, 2012) (incorporated by reference to Qwest Corporation's
Form S-4, File No. 333-115119).

i.

Indenture, dated as of December 26, 2002, between Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and Bank One
Trust Company, N.A., as trustee (incorporated by reference to Qwest Communications International Inc.'s Current Report on Form 8-K filed on January 10, 2003, File
No. 1-15577).

j.

First Supplemental Indenture, dated as of December 26, 2002, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital
Funding, Inc. and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), supplementing the Indenture, dated as of November 4, 1998,
with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.'s Annual Report on Form 10-K for the year ended December 31,
2003, as originally filed on March 11, 2004, File No. 1-15577).

k.

First Supplemental Indenture, dated as of December 26, 2002, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital
Funding, Inc. and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), supplementing the Indenture, dated as of November 27, 1998,
with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.'s Annual Report on Form 10-K for the year ended December 31,
2003, as originally filed on March 11, 2004, File No. 1-15577).

l.

Second Supplemental Indenture, dated as of December 4, 2003, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital
Funding, Inc. and Bank One Trust Company, N.A. (as successor in interest to Bankers Trust Company), supplementing the Indenture, dated as of November 4, 1998,
with Bankers Trust Company (incorporated by reference to Qwest Communications International Inc.'s Annual Report on Form 10-K for the year ended December 31,
2003, as originally filed on March 11, 2004, File No. 1-15577).

m.

Second Supplemental Indenture, dated as of December 4, 2003, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital
Funding, Inc. and Bank One Trust Company, N.A. (as successor in interest to Bankers Trust Company), supplementing the Indenture, dated as of November 27, 1998,
with Bankers Trust Company (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2003, as originally filed on March 11,
2004, File No. 1- 15577).

n.

Indenture, dated as of February 5, 2004, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and J.P. Morgan
Trust Company (incorporated by reference to Qwest Communications International Inc.'s Annual Report on Form 10-K for the year ended December 31, 2003, as
originally filed on March 11, 2004, File No. 1-15577).

o.

First Supplemental Indenture, dated as of August 19, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest
Communications International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 1-15577).

p.

Second Supplemental Indenture, dated November 23, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest
Corporation's Current Report on Form 8-K filed on November 23, 2004, File No. 1-03040).

q.

First Supplemental Indenture, dated June 17, 2005, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and U.S.
Bank National Association (incorporated by reference to Qwest Communications International Inc.'s Current Report on Form 8-K filed on June 23, 2005, File No. 115577).

r.

Third Supplemental Indenture, dated as of June 17, 2005, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest
Communications International Inc.'s Current Report on Form 8-K filed on June 23, 2005, File No. 1-15577).

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4.4

s.

Second Supplemental Indenture, dated June 23, 2005, among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital Funding, Inc. and
U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.'s Current Report on Form 8-K filed on June 23, 2005, File No. 115577).

t.

Indenture, dated as of November 8, 2005, by and between Qwest Communications International Inc. and U.S. Bank National Association (incorporated by reference to
Qwest Communications International Inc.'s Current Report on Form 8-K filed on November 14, 2005, File No. 1-15577).

u.

First Supplemental Indenture, dated as of November 8, 2005, by and between Qwest Communications International Inc. and U.S. Bank National Association (incorporated
by reference to Qwest Communications International Inc.'s Current Report on Form 8-K filed on November 14, 2005, File No. 1-15577).

v.

First Supplemental Indenture, dated as of November 16, 2005, by and among Qwest Services Corporation, Qwest Communications International Inc., Qwest Capital
Funding, Inc. and J.P. Morgan Trust Company, N.A. as successor to Bank One Trust Company, N.A. (incorporated by reference to Qwest Communications
International Inc.'s Current Report on Form 8-K filed on November 21, 2005, File No. 1-15577).

w.

Fourth Supplemental Indenture, dated August 8, 2006, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest
Communications International Inc.'s Current Report on Form 8-K filed on August 8, 2006, File No. 1-15577).

x.

Fifth Supplemental Indenture, dated May 16, 2007, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest
Communications International Inc.'s Current Report on Form 8-K filed on May 18, 2007, File No. 1-15577).

y.

Sixth Supplemental Indenture, dated April 13, 2009, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest
Communications International Inc.'s Current Report on Form 8-K filed on April 13, 2009, File No. 1-15577).

z.

Third Supplemental Indenture, dated September 17, 2009, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital
Funding, Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.'s Current Report on Form 8-K filed on
September 21, 2009, File No. 1-15577).

aa.

Fourth Supplemental Indenture, dated January 12, 2010, by and among Qwest Communications International Inc., Qwest Services Corporation, Qwest Capital
Funding, Inc. and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.'s Current Report on Form 8-K filed on
January 13, 2010, File No. 1-15577).

bb.

Seventh Supplemental Indenture, dated June 8, 2011, between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation's
Form 8-A filed on June 7, 2011, File No. 1-03040).

cc.

Eighth Supplemental Indenture, dated September 21, 2011, between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest
Corporation's Form 8-A filed on September 20, 2011, File No. 1-03040).

dd.

Ninth Supplemental Indenture, dated October 4, 2011, between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation's
Current Report on Form 8-K filed on October 4, 2011, File No. 1-03040).

Instruments relating to indebtedness of Embarq Corporation.
a.

Indenture, dated as of May 17, 2006, by and between Embarq Corporation and J.P. Morgan Trust Company, National Association, a national banking association, as
trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by Embarq Corporation (File No. 001-32732) with the Securities and Exchange
Commission on May 18, 2006).

b.

6.738% Global Note due 2013 of Embarq Corporation (incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K for the year ended December 31, 2006
filed by Embarq Corporation (File No. 001-32372) with the Securities and Exchange Commission on March 9, 2007).

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4.5

10.1

c.

7.082% Global Note due 2016 of Embarq Corporation (incorporated by reference to Exhibit 4.3 to the Annual Report on Form 10-K for the year ended December 31, 2006
filed by Embarq Corporation (File No. 001-32372) with the Securities and Exchange Commission on March 9, 2007).

d.

7.995% Global Note due 2036 of Embarq Corporation (incorporated by reference to Exhibit 4.4 to the Annual Report on Form 10-K for the year ended December 31, 2006
filed by Embarq Corporation (File No. 001-32372) with the Securities and Exchange Commission on March 9, 2007).

Instruments relating to CenturyLink's public senior debt.
a.

Indenture dated as of March 31, 1994 between CenturyLink and Regions Bank (formerly First American Bank & Trust of Louisiana), as Trustee (incorporated by reference
to Exhibit 4.1 of our Registration Statement on Form S-3, Registration No. 33-52915).

b.

Form of CenturyLink's 7.2% Senior Notes, Series D, due 2025 (incorporated by reference to Exhibit 4.27 to our Annual Report on Form 10-K for the year ended
December 31, 1995).

c.

Form of CenturyLink's 6.875% Debentures, Series G, due 2028, (incorporated by reference to Exhibit 4.9 to our Annual Report on Form 10-K for the year ended
December 31, 1997).

d.

Form of CenturyLink's 7.875% Senior Notes, Series L, due 2012 (incorporated by reference to Exhibit 4.2 of our Registration Statement on Form S-4, File No. 333100480).

e.

Third Supplemental Indenture dated as of February 14, 2005 between CenturyLink and Regions Bank, as Trustee, designating and outlining the terms and conditions of
CenturyLink's 5% Senior Notes, Series M, due 2015 (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K dated February 15, 2005).

f.

Form of 5% Senior Notes, Series M, due 2015 (included in Exhibit 4.5(e)).

g.

Fourth Supplemental Indenture dated as of March 26, 2007 between CenturyLink and Regions Bank, as Trustee, designating and outlining the terms and conditions of
CenturyLink's 6.0% Senior Notes, Series N, due 2017 and 5.5% Senior Notes, Series O, due 2013 (incorporated by reference to Exhibit 4.1 of our Current Report on
Form 8-K dated March 29, 2007).

h.

Form of 6.0% Senior Notes, Series N, due 2017 and 5.5% Senior Notes, Series O, due 2013 (included in Exhibit 4.5(g)).

i.

Fifth Supplemental Indenture dated as of September 21, 2009 between CenturyLink and Regions Bank, as Trustee, designating and outlining the terms and conditions of
CenturyLink's 7.60% Senior Notes, Series P, due 2039 and 6.15% Senior Notes, Series Q, due 2019 (incorporated by reference to Exhibit 4.1 of our Current Report on
Form 8-K dated September 21, 2009).

j.

Form of 7.60% Senior Notes, Series P, due 2019 and 6.15% Senior Notes, Series Q, due 2019 (included in Exhibit 4.5(i)).

k.

Sixth Supplemental Indenture, dated as of June 16, 2011, between CenturyLink and Regions Bank, as Trustee, designating and outlining the terms and conditions of
CenturyLink's 5.15% Senior Notes, Series R, due 2017 and 6.45% Senior Notes, Series S, due 2021 (incorporated by reference to our Current Report on Form 8-K filed
on June 16, 2011).

l.

Form of 5.15% Senior Notes, Series R, due 2017 and 6.45% Senior Notes, Series S, due 2021 (included in Exhibit 4.5(k).

Qualified Employee Benefit Plans of CenturyLink, Inc. (excluding several narrow-based qualified plans that cover union employees or other limited groups of employees).

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a.

CenturyLink Dollars & Sense 401(k) Plan and Trust, as amended and restated through December 31, 2006 (incorporated by reference to Exhibit 10.1(a) of the Annual
Report on Form 10-K for the year ended December 31, 2006 filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on March 1,
2007), as amended by the First Amendment and the Second Amendment thereto, each dated December 31, 2007 (incorporated by reference to Exhibit 10.1(a) of the Annual
Report on Form 10-K for the year ended December 31, 2007 filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on
February 29, 2008), as amended by the Third Amendment thereto dated November 20, 2008 (incorporated by reference to Exhibit 10.1(a) to the Annual Report on
Form 10-K for the year ended December 31, 2008 filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on February 27, 2009),
as amended by the Fourth Amendment thereto dated June 30, 2009 (incorporated by reference to Exhibit 10.1(a) to the Quarterly Report on Form 10-Q filed by
CenturyLink, Inc. for the period ended June 30, 2009), as amended by the Fifth Amendment thereto dated September 15, 2009 (incorporated by reference to Exhibit 10.1(a)
to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2009), as amended by the Sixth Amendment thereto, dated December 30,
2009 (incorporated by reference to Exhibit 10.1(a) to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2009), as amended by
the Seventh Amendment thereto, effective May 20, 2010 (incorporated by reference to Exhibit 10.1(a) to the Quarterly Report on Form 10-Q filed by CenturyLink, Inc. for
the period ended September 30, 2010) and as amended by the Eighth Amendment thereto, effective January 1, 2011 (incorporated by reference to Exhibit 10.1(a) to the
Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2010).

b.

CenturyLink Union 401(k) Plan and Trust, as amended and restated through December 31, 2006 (incorporated by reference to Exhibit 10.1(b) of the Annual Report on
Form 10-K for the year ended December 31, 2006 filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on March 1, 2007), as
amended by the First Amendment thereto dated May 29, 2007 (incorporated by reference to Exhibit 10.1(b) of the Quarterly Report on Form 10-Q filed by
CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on May 7, 2008), as amended by the Second Amendment thereto dated
December 31, 2007 (incorporated by reference to Exhibit 10.1(b) of the Annual Report on Form 10-K for the year ended December 31, 2007 filed by CenturyLink, Inc.
(File No. 001-07784) with the Securities and Exchange Commission on February 29, 2008), as amended by the Third Amendment thereto dated November 20, 2008
(incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2008 filed by CenturyLink, Inc. (File No. 001-07784) with the Securities
and Exchange Commission on February 27, 2009), as amended by the Fourth Amendment thereto dated June 30, 2009 (incorporated by reference to Exhibit 10.1(b) to the
Quarterly Report on Form 10-Q filed by CenturyLink, Inc. for the period ended June 30, 2009), as amended by the Fifth Amendment thereto dated September 15, 2009
(incorporated by reference to Exhibit 10.1(b) to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2009), as amended by the
Sixth Amendment thereto, dated December 30, 2009 (incorporated by reference to Exhibit 10.1(b) to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the
year ended December 31, 2009), as amended by the Seventh Amendment thereto, effective May 20, 2010 (incorporated by reference to Exhibit 10.1(b) to the Quarterly
Report on Form 10-Q filed by CenturyLink, Inc. for the period ended September 30, 2010) and as amended by the Eighth Amendment thereto, effective January 1, 2011
(incorporated by reference to Exhibit 10.1(b) to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2010).

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c.

10.2

CenturyLink Retirement Plan, as amended and restated through December 31, 2006 (incorporated by reference to Exhibit 10.1(c) of the Annual Report on Form 10-K for
the year ended December 31, 2006 filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on March 1, 2007), as amended by
Amendment No. 1 thereto dated April 2, 2007 (incorporated by reference to Exhibit 10.1(c) of the Quarterly Report on Form 10-Q filed by CenturyLink, Inc. (File
No. 001-07784) with the Securities and Exchange Commission on May 7, 2008), as amended by Amendment No. 2 thereto dated as of December 31, 2007 (incorporated
by reference to Exhibit 10.1(c) of the Annual Report on Form 10-K for the year ended December 31, 2007 filed by CenturyLink, Inc. (File No. 001-07784) with the
Securities and Exchange Commission on February 29, 2008), as amended by Amendment No. 3 thereto dated October 24, 2008 (incorporated by reference to the Annual
Report on Form 10-K for the year ended December 31, 2008 filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on
February 27, 2009), as amended by Amendment No. 4 dated June 30, 2009 (incorporated by reference to Exhibit 10.1(c) to the Quarterly Report on Form 10-Q filed by
CenturyLink, Inc. for the period ended June 30, 2009), as amended by Amendment No. 5 thereto dated September 15, 2009 (incorporated by reference to Exhibit 10.1(c) to
the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2009), as amended by Amendment No. 6 thereto, dated December 30, 2009
(incorporated by reference to Exhibit 10.1(c) to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2009), as amended by
Amendment No. 7 thereto, effective at various dates during 2010 (incorporated by reference to Exhibit 10.1(c) to the Quarterly Report on Form 10-Q filed by
CenturyLink, Inc. for the period ended September 30, 2010) and as amended by Amendment No. 8 thereto, effective January 1, 2011 (incorporated by reference to
Exhibit 10.1(c) to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2010).

Stock-based Incentive Plans and Agreements of CenturyLink, Inc.
a.

Amended and Restated 1983 Restricted Stock Plan, as amended and restated through February 23, 2010 (incorporated by reference to Exhibit 10.2(a) to the Annual Report
on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2009).

b.

Amended and Restated 2000 Incentive Compensation Plan, as amended through May 23, 2000 (incorporated by reference to Exhibit 10.2 of our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000) and amendment thereto dated May 29, 2003 (incorporated by reference to Exhibit 10.2 of our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003).

c.

(i)

Form of Stock Option Agreement, pursuant to the 2000 Incentive Compensation Plan and dated as of May 21, 2001, entered into by CenturyLink and its officers
(incorporated by reference to Exhibit 10.2(e) of our Annual Report on Form 10-K for the year ended December 31, 2001).

(ii)

Form of Stock Option Agreement, pursuant to the 2000 Incentive Compensation Plan and dated as of February 25, 2002, entered into by CenturyLink and its
officers (incorporated by reference to Exhibit 10.2(d) (ii) of our Annual Report on Form 10-K for the year ended December 31, 2002).

Amended and Restated 2002 Directors Stock Option Plan, dated as of February 25, 2004 (incorporated by reference to Exhibit 10.2(e) of our Annual Report on Form 10-K
for the year ended December 31, 2003) and amendment thereto dated October 24, 2008 (incorporated by reference to Exhibit 10.2(d) of our Annual Report on Form 10-K
for the year ended December 31, 2008).
(i)

Form of Stock Option Agreement, pursuant to the foregoing plan, entered into by CenturyLink in connection with options granted to the outside directors as of
May 10, 2002 (incorporated by reference to Exhibit 10.2 of Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2002).

(ii)

Form of Stock Option Agreement, pursuant to the foregoing plan, entered into by CenturyLink in connection with options granted to the outside directors as of
May 9, 2003 (incorporated by reference to Exhibit 10.2(e)(ii) of our Annual Report on Form 10-K for the year ended December 31, 2003).

(iii)

Form of Stock Option Agreement, pursuant to the foregoing plan, entered into by CenturyLink in connection with options granted to the outside directors as of
May 7, 2004 (incorporated by reference to Exhibit 10.2(d)(iii) of our Annual Report on Form 10-K for the year ended December 31, 2005).

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d.

e.

Amended and Restated 2002 Management Incentive Compensation Plan, dated as of February 25, 2004 (incorporated by reference to Exhibit 10.2(f) of our Annual Report
on Form 10-K for the year ended December 31, 2003) and amendment thereto dated October 24, 2008 (incorporated by reference to Exhibit 10.2(e) of our Annual Report on
Form 10-K for the year ended December 31, 2008).
(i)

Form of Stock Option Agreement, pursuant to the foregoing plan, entered into between CenturyLink and certain of its officers and key employees at various dates
during 2002 following May 9, 2002 (incorporated by reference to Exhibit 10.4 of our Quarterly Report on Form 10-Q for the period ended September 30, 2002).

(ii)

Form of Stock Option Agreement, pursuant to foregoing plan and dated as of February 24, 2003, entered into by CenturyLink and its officers (incorporated by
reference to Exhibit 10.2(f)(ii) of our Annual Report on Form 10-K for the year ended December 31, 2002).

(iii)

Form of Stock Option Agreement, pursuant to foregoing plan and dated as of February 25, 2004, entered into by CenturyLink and its officers (incorporated by
reference to Exhibit 10.2(f)(iii) of our Annual Report on Form 10-K for the year ended December 31, 2003).

(iv)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 24, 2003, entered into by CenturyLink and its executive officers
(incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the period ended March 31, 2003).

(v)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 25, 2004, entered into by CenturyLink and its executive officers
(incorporated by reference to Exhibit 10.2(f)(v) of our Quarterly Report on Form 10-Q for the period ended March 31, 2004).

(vi)

Form of Stock Option Agreement, pursuant to foregoing plan and dated as of February 17, 2005, entered into by CenturyLink and its executive officers
(incorporated by reference to Exhibit 10.2(e)(v) of our Annual Report on Form 10-K for the year ended December 31, 2004).

(vii)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 17, 2005, entered into by CenturyLink and its executive officers
(incorporated by reference to Exhibit 10.2(e)(vi) of our Annual Report on Form 10-K for the period ended December 31, 2004).

Amended and Restated 2005 Directors Stock Plan, as amended and restated through February 23, 2010 (incorporated by reference to Exhibit 10.2(f) to the Annual Report
on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2009).
(i)

Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink and each of its outside directors as of May 13, 2005
(incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K dated May 13, 2005).

(ii)

Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink and each of its outside directors as of May 12, 2006
(incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the period ended June 30, 2006).

(iii)

Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink and each of its outside directors as of May 11, 2007
(incorporated by reference to Exhibit 10.2(f)(iii) of our Annual Report on Form 10-K for the period ended December 31, 2008).

(iv)

Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink and each of its outside directors as of May 9, 2008
(incorporated by reference to Exhibit 10.2(f)(iv) of our Annual Report on Form 10-K for the period ended December 31, 2008).

(v)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 8, 2009, entered into between CenturyLink, Inc. and each of its outside
directors on such date who remained on the Board following July 1, 2009 (incorporated by reference to Exhibit 10.2(b) to the Quarterly Report on Form 10-Q
filed by CenturyLink, Inc. for the period ended June 30, 2009).

(vi)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 8, 2009, entered into between CenturyLink, Inc. and each of its outside
directors who retired on July 1, 2009 (incorporated by reference to Exhibit 10.2(c) to the Quarterly Report on Form 10-Q filed by CenturyLink, Inc. for the period
ended June 30, 2009).

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f.

g.

(vii)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of July 2, 2009, entered into between CenturyLink, Inc. and each of its outside
directors named to the Board on July 1, 2009 (incorporated by reference to Exhibit 10.1(d) to the Quarterly Report on Form 10-Q filed by CenturyLink, Inc. for
the period ended June 30, 2009).

(viii)

Restricted Stock Agreement, pursuant to the foregoing plan and dated as of July 2, 2009, entered into between CenturyLink, Inc. and William A. Owens in
payment of Mr. Owens' 2009 supplemental chairman's fees (incorporated by reference to Exhibit 10.2(e) to the Quarterly Report on Form 10-Q filed by
CenturyLink, Inc. for the period ended June 30, 2009).

(ix)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 21, 2010, entered into between CenturyLink, Inc. and seven of our
outside directors on such date (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by CenturyLink, Inc. for the period ended
June 30, 2010).

Amended and Restated 2005 Management Incentive Compensation Plan, as amended and restated through February 23, 2010 (incorporated by reference to Exhibit 10.2(g)
to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2009)
(i)

Form of Stock Option Agreement, pursuant to the foregoing plan, entered into between CenturyLink and certain officers and key employees at various dates since
May 12, 2005 (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the period ended September 30, 2005).

(ii)

Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink and certain officers and key employees at various dates
since May 12, 2005 (incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for the period ended September 30, 2005).

(iii)

Form of Stock Option Agreement, pursuant to the foregoing plan and dated as of February 21, 2006, entered into between CenturyLink and its executive officers
(incorporated by reference to Exhibit 10.2(g)(iii) of our Annual Report on Form 10-K for the year ended December 31, 2005).

(iv)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 21, 2006, entered into between CenturyLink and its executive
officers (incorporated by reference to Exhibit 10.2(g) (iv) of our Annual Report on Form 10-K for the year ended December 31, 2005).

(v)

Form of Stock Option Agreement, pursuant to the foregoing plan and dated as of February 26, 2007, entered into between CenturyLink and its executive officers
(incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

(vi)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 26, 2007, entered into between CenturyLink and its executive
officers (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

(vii)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 21, 2008, entered into between CenturyLink and its executive
officers ((incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).

(viii)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 26, 2009 (incorporated by reference to Exhibit 10.2(g) of our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2009).

(ix)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of March 8, 2010 (incorporated by reference to Exhibit 10.2 of our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2010).

Amended and Restated CenturyLink Legacy Embarq 2008 Equity Incentive Plan, as amended and restated through February 23, 2010 (incorporated by reference to
Exhibit 10.2(h) to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2009).
(i)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 21, 2010, entered into between CenturyLink and four of its outside
directors as of such date (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the period ended June 30, 2010).

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(ii)

Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 21, 2010, entered into between CenturyLink and William A. Owens in
payment of Mr. Owens' 2010 supplemental chairman's fees (incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for the period ended
June 30, 2010).

(iii)

Form of Restricted Stock Agreement, dated as of September 7, 2010 by and between CenturyLink, Inc. and Dennis G. Huber (incorporated by reference to
Exhibit 10.16 of our Quarterly Report on Form 10-Q for the period ended September 30, 2010).

h.

Form of Retention Award Agreement, pursuant to the equity incentive plans of CenturyLink or Embarq and dated August 23, 2010, entered into between CenturyLink, Inc.
and certain officers and key employees as of such date (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the period ended September 30,
2010).

i.

CenturyLink 2011 Equity Incentive Plan (incorporated by reference to CenturyLink, Inc.'s Proxy Statement for its 2011 Annual Meeting of Shareholders, File No. 1-07784).
(i)

Form of Restricted Stock Agreement for executive officers (incorporated by reference to Exhibit 10.2(a)(i) of our Quarterly Report on Form 10-Q for the period ended
June 30, 2011).

(ii)

Form of Restricted Stock Agreement for non-management directors (incorporated by reference to Exhibit 10.2(a)(ii) of our Quarterly Report on Form 10-Q for the
period ended June 30, 2011).

10.3

Key Employee Incentive Compensation Plan, dated January 1, 1984, as amended and restated as of November 16, 1995 (incorporated by reference to Exhibit 10.1(f) of our Annual
Report on Form 10-K for the year ended December 31, 1995) and amendment thereto dated November 21, 1996 (incorporated by reference to Exhibit 10.1(f) of our Annual Report
on Form 10-K for the year ended December 31, 1996), amendment thereto dated February 25, 1997 (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10Q for the quarter ended March 31, 1997), amendment thereto dated April 25, 2001 (incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001), amendment thereto dated April 17, 2000 (incorporated by reference to Exhibit 10.3(a) of our Annual Report on Form 10-K for the year ended December 31,
2001) and amendment thereto dated February 27, 2007 (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).

10.4

Supplemental Dollars & Sense Plan, 2008 Restatement, effective January 1, 2008, (incorporated by reference to Exhibit 10.3(c) of our Annual Report on Form 10-K for the year
ended December 31, 2007) and amendment thereto dated October 24, 2008 (incorporated by reference to Exhibit 10.3(c) of our Annual Report on Form 10-K for the year ended
December 31, 2008) and amendment thereto dated December 27, 2010 (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K filed by CenturyLink, Inc. for
the year ended December 31, 2010).

10.5

*

Supplemental Defined Benefit Pension Plan, effective as of January 1, 2012, included herein.

10.6

Amended and Restated Salary Continuation (Disability) Plan for Officers, dated November 26, 1991 (incorporated by reference to Exhibit 10.16 of our Annual Report on Form 10K for the year ended December 31, 1991).

10.7

2010 Executive Officer Short-Term Incentive Program (incorporated by reference to our 2010 Proxy Statement filed on Form 14A with the Securities and Exchange Commission on
April 7, 2010).

10.8

Amended and Restated CenturyLink 2001 Employee Stock Purchase Plan, dated as of June 30, 2009 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on
Form 10-Q filed by CenturyLink, Inc. for the period ended June 30, 2009).

10.9

Form of Indemnification Agreement entered into by CenturyLink, Inc. and each of its directors as of July 1, 2009 (incorporated by reference to Exhibit 99.3 of the Current Report on
Form 8-K filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on July 1, 2009).

10.10

Form of Indemnification Agreement entered into by CenturyLink, Inc. and each of its officers as of July 1, 2009 (incorporated by reference to Exhibit 10.5 to the Quarterly Report
on Form 10-Q filed by CenturyLink, Inc. for the period ended June 30, 2009).

10.11

Change of Control Agreement, effective January 1, 2011, by and between Glen F. Post, III and CenturyLink (incorporated by reference to Exhibit 10.11 to the Annual Report on
Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2010).

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10.12

Form of Change of Control Agreement, effective January 1, 2011 by and between CenturyLink and each of its other executive officers (incorporated by reference to Exhibit 10.12 to
the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2010).

10.13

Amended and Restated CenturyLink, Inc. Bonus Life Insurance Plan for Executive Officers, dated as of April 3, 2008 (incorporated by reference to Exhibit 10.4 of our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2008) and First Amendment thereto (incorporated by reference to Exhibit 10.13 of our Quarterly Report on Form 10-Q for the
period ended September 30, 2010).

10.14

Certain Material Agreements and Plans of Embarq Corporation.

10.15

a.

Agreement Regarding Special Compensation and Post Employment Restrictive Covenants, dated December 12, 1995, by and between Sprint Corporation and Dennis G.
Huber, which continues to govern certain payments being made to Mr. Huber as of the date of this report (incorporated by reference to Exhibit 10.4 to the Quarterly Report
on Form 10-Q filed by Embarq Corporation (File No. 001-32372) with the Securities and Exchange Commission on October 30, 2008).

b.

Amendment 2008-1 to the Employment Agreement between Embarq Corporation and Dennis G. Huber, dated December 22, 2008 (incorporated by reference to
Exhibit 10.7 to the Annual Report on Form 10-K for the year ended December 31, 2008 filed by Embarq Corporation (File No. 001-32372) on February 13, 2009).

c.

Embarq Corporation 2006 Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed by
CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on July 1, 2009).

d.

Form of 2007 Award Agreement for executive officers of Embarq Corporation (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by
Embarq Corporation (File No. 001-32372) with the Securities and Exchange Commission on February 27, 2007).

e.

Form of 2008 Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Embarq Corporation (File
No. 001-32372) with the Securities and Exchange Commission on March 4, 2008).

f.

Form of 2009 Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Embarq Corporation (File
No. 001-32732) with the Securities and Exchange Commission on March 5, 2009).

g.

Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Embarq Corporation (File No. 001-32372)
with the Securities and Exchange Commission on March 4, 2008).

h.

Amendment to Outstanding RSUs granted in 2007 and 2008 under the Embarq Corporation 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.16 to the
Annual Report on Form 10-K for the year ended December 31, 2008 filed by Embarq Corporation (File No. 001-32372) on February 13, 2009).

i.

Form of 2006 Award Agreement between Embarq Corporation and Richard A. Gephardt (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed
by Embarq Corporation (File No. 001-32372) with the Securities and Exchange Commission on August 1, 2006), as amended by the amendment thereto dated June 26,
2009 (incorporated by reference to Exhibit 10.6 (m) to the Quarterly Report on Form 10-Q filed by CenturyLink, - Inc. for the period ended June 30, 2009).

j.

Amended and Restated Executive Severance Plan, including Form of Participation Agreement entered into between Embarq Corporation and William E. Cheek
(incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by Embarq Corporation (File No. 001-32372) with the Securities and Exchange
Commission on October 30, 2008).

k.**

Embarq Supplemental Executive Retirement Plan, as amended and restated as of January 1, 2009 (incorporated by reference to Exhibit 10.27 to the Annual Report on
Form 10-K for the year ended December 31, 2008 filed by Embarq Corporation (File No. 001-32372) on February 13, 2009) amendment thereto dated December 27, 2010
(incorporated by reference to Exhibit 10.14(o) to the Annual Report on Form 10-K filed by CenturyLink, Inc. for the year ended December 31, 2010) and second
amendment thereto dated November 15, 2011, included herein.

Certain Material Agreements and Plans of Qwest Communications International Inc.

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Table of Contents

10.16

Equity Incentive Plan, as amended and restated (incorporated by reference to Qwest Communications International Inc.'s Proxy Statement for the 2007 Annual Meeting of
Stockholders, File No. 1-15577).

b.

Forms of restricted stock, performance share and option agreements used under Equity Incentive Plan, as amended and restated (incorporated by reference to Qwest
Communications International Inc.'s Current Report on Form 8-K filed on October 24, 2005, Annual Report on Form 10-K for the year ended December 31, 2005,
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, Annual Report on Form 10-K for the year ended December 31, 2006, Current Report on Form 8-K
filed on September 12, 2008, Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, and Annual Report on Form 10-K for the year ended December 31,
2010, File No. 1-15577).

c.**

Deferred Compensation Plan for Nonemployee Directors, as amended and restated, Amendment to Deferred Compensation Plan for Nonemployee Directors (incorporated by
reference to Qwest Communications International Inc.'s Current Report on Form 8-K filed on December 16, 2005 and Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008, File No. 1-15577) and Amendment No. 2011-1 to Deferred Compensation Plan for Nonemployee Directors, included herein.

d.

Qwest Nonqualified Pension Plan (incorporated by reference to Qwest Communications International Inc.'s Annual Report on Form 10-K for the year ended December 31,
2009, File No. 1-15577).

e.

Severance Agreement, dated August 26, 2009, by and between Qwest Communications International Inc. and Christopher K. Ancell (incorporated by reference to Qwest
Communications International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 1-15577).

f.

Letter, dated September 4, 2009, from Qwest to Christopher K. Ancell (incorporated by reference to Qwest Communications International Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009, File No. 1-15577).

g.

Form of Amendment Agreement, dated as of December 20, 2010, by and between Qwest Communications International Inc. and Christopher K. Ancell (incorporated by
reference to Qwest Communications International Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010, File No. 1-15577).

h.

Letter, dated September 9, 2010, between CenturyLink, Inc. and Christopher K. Ancell (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q
filed by CenturyLink, Inc. for the period ended June 30, 2011).

Certain Material Agreements and Plans of Savvis, Inc.

10.17

10.18

a.

a.

SAVVIS, Inc. Amended and Restated 2003 Incentive Compensation Plan (incorporated by reference to SAVVIS, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006, File No. 0-29375) , as amended by Amendment No. 1 (incorporated by reference to SAVVIS, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2006, File No. 0-29375), Amendment No. 2 (incorporated by reference to SAVVIS, Inc.'s Current Report on Form 8-K filed on May 15, 2007, File
No. 0-29375), Amendment No. 3 (incorporated by reference to SAVVIS, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File No. 0-29375),
Amendment No. 4 (incorporated by reference to SAVVIS, Inc.'s Current Report on Form 8-K filed on May 22, 2009, File No. 0-29375) and Amendment No. 5
(incorporated by reference to SAVVIS, Inc.'s Current Report on Form 8-K filed on May 22, 2009, File No. 0-29375).

b.

Form agreements under Amended and Restated 2003 Incentive Compensation Plan applicable to awards held by James E. Ousley: Form of Non-Qualified Stock Option
Agreement (incorporated by reference to Savvis, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 0-29375); and Form of Stock
Unit Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Savvis, Inc. (File No. 0-29375) with the Securities and Exchange
Commission on August 23, 2005).

c.

Form of Indemnification Agreement between Savvis, Inc. and James E. Ousley (incorporated by reference to SAVVIS, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2010).

Amended and Restated Employment Agreement, Confidentiality, Severance and Non-Competition Agreement, dated as of September 2, 2011, by and among James E. Ousley,
Savvis, Inc. and CenturyLink, Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by CenturyLink, Inc. for the period ended September 30,
2011).
*

Form of Restricted Stock Agreement, dated October 7, 2011, by and between CenturyLink, Inc. and James E. Ousley.

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Table of Contents
10.19

Employment Agreement, dated as of September 7, 2010 by and between CenturyLink, Inc. and Dennis G. Huber (incorporated by reference to Exhibit 10.15 of our Quarterly Report
on Form 10-Q for the period ended September 30, 2010).

12*

Ratio of Earnings to Fixed Charges.

21*

Subsidiaries of CenturyLink, Inc.

23*

Independent Registered Public Accounting Firm Consent.

31.1*

Certification of the Chief Executive Officer of CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of the Chief Financial Officer of CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32*
101*

Certification of the Chief Executive Officer and Chief Financial Officer of CenturyLink, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Financial statements from the Annual Report on Form 10-K of CenturyLink, Inc. for the year ended December 31, 2011, formatted in XBRL: (i) the Consolidated Statements of
Operations, (ii) the Consolidated Statements of Comprehensive (Loss) Income (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the
Consolidated Statements of Stockholders' Equity and (vi) the Notes to the Consolidated Financial Statements.

*

Exhibit filed herewith.

**

Portions of Exhibits 10.14(k) and 10.15(c) filed herewith.

Note:

Our Corporate Governance Guidelines and Charters of our Board of Director Committees are located on our website at www.centurylink.com.

158

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CenturyLink, Inc.
Date: February 27, 2012

By: /s/ David D. Cole
David D. Cole
Senior Vice President, Controller and Operations Support
(Chief Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
/s/ Glen F. Post, III

Chief Executive Officer,
President and Director

February 27, 2012

Chairman of the Board

February 27, 2012

Executive Vice President, Chief
Financial
Officer and Assistant Secretary

February 27, 2012

February 27, 2012

David D. Cole

Senior Vice President, Controller
and
Operations Support

/s/ Charles L. Biggs

Director

February 27, 2012

Director

February 27, 2012

Director

February 27, 2012

Director

February 27, 2012

Glen F. Post, III

/s/ William A. Owens
William A. Owens

/s/ R. Stewart Ewing, Jr.
R. Stewart Ewing, Jr.

/s/ David D. Cole

Charles L. Biggs

/s/ Virginia Boulet
Virginia Boulet

/s/ Peter C. Brown
Peter C. Brown

/s/ Richard A. Gephardt
Richard A. Gephardt

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Table of Contents
/s/ W. Bruce Hanks

Director

February 27, 2012

W. Bruce Hanks

/s/ Gregory J. McCray

Director

February 27, 2012

Director

February 27, 2012

Director

February 27, 2012

Director

February 27, 2012

Director

February 27, 2012

Director

February 27, 2012

Director

February 27, 2012

Director

February 27, 2012

Director

February 27, 2012

Gregory J. McCray

/s/ C. G. Melville, Jr.
C. G. Melville, Jr.

/s/ Edward A. Mueller
Edward A. Mueller

/s/ Fred R. Nichols
Fred R. Nichols

/s/ Harvey P. Perry
Harvey P. Perry

/s/ Michael J. Roberts
Michael J. Roberts

/s/ Laurie A. Siegel
Laurie A. Siegel

/s/ James A. Unruh
James A. Unruh

/s/ Joseph R. Zimmel
Joseph R. Zimmel

160

(Back To Top)

Section 2: EX-10.5 (EX-10.5)
Exhibit 10.5
CENTURYLINK, INC.
SUPPLEMENTAL DEFINED BENEFIT PLAN
Amended and Restated Effective January 1, 2012
I.

Purpose of the Plan

1.01
This CenturyLink, Inc. Supplemental Defined Benefit Plan was established by CenturyLink, Inc. and its Subsidiaries to provide a
method for attracting and retaining key employees; to provide a method for recognizing the contributions of such personnel; and to promote
executive and managerial flexibility, thereby advancing the interests of the Company and its stockholders. In addition, this Plan is intended to
provide to a select group of management and highly compensated employees a more adequate level of retirement benefits in combination with the
Company’s general retirement program. This Plan is not intended to constitute a qualified plan under Code §401(a) and is designed to be exempt
from the participation, vesting, funding and fiduciary responsibility rules of ERISA. This Plan is intended to comply with Code §409A. This Plan
was amended and restated effective January 1, 2005 and was again amended and restated effective January 1, 2008 to comply with the Final
Treasury Regulations under Code §409A and to make certain other changes. This Plan is now amended and restated effective January 1, 2012 to
incorporate amendments adopted subsequent to the January 1, 2008 restatement and to make certain other changes.
Contemporaneously herewith the amendment and restatement of this Plan effective January 1, 2008, the Company amended the
CenturyLink, Inc. Supplemental Executive Retirement Plan (“SERP”), a plan aggregated with this Plan pursuant to Treasury Regulation §1.409A-1
(c)(2), to eliminate any annuity benefits that the SERP was otherwise scheduled to pay after December 31, 2008 to Participants in the SERP who did
not elect a lump sum, and to transfer the obligation to pay such annuities to this Plan. Accordingly, this Plan was amended to increase the amount
of annuity benefits to be paid from this Plan by the amount of annuity benefits being assumed by it from the SERP after December 31, 2008.
II.

Definitions
As used in this Plan, the following terms shall have the meanings indicated, unless the context otherwise specifies or requires:
2.01

“ACTIVE PARTICIPANT” shall have the meaning assigned to the term in Section 10.03(a).

2.02
“ACTUARIAL EQUIVALENT” shall mean the amount of pension of a different type or payable at a different age that has the
same value as computed by the actuary on the same basis as that prescribed in Section 2.2 of the Retirement Plan.
2.03
“AFFILIATE” (and variants thereof) shall mean a person or entity that controls, or is controlled by, or is under common control
with, another specified person or entity, either directly or indirectly.
2.04
“BENEFIT YEARS” shall mean Years of Credited Service for benefit accrual purposes as determined under Section 2.51 of the
Retirement Plan. No additional Benefit Years shall be credited after December 31, 2010.

2.05

“BOARD” shall mean the Board of Directors of the Company.

2.06

“CAUSE”
(a)

“Cause” shall mean:
(i)

conviction of a felony;

(ii)

habitual intoxication during working hours;

(iii)

habitual abuse of or addiction to a controlled dangerous substance; or

(iv)
the willful and continued failure of the Participant to substantially perform the Participant’s duties with the
Company or its Affiliates (other than any such failure resulting from incapacity due to physical or mental illness or the Participant’s termination of
employment for Good Reason) for a period of 15 days after a written demand for substantial performance is delivered to the Participant by the
Board which specifically identifies the manner in which the Board believes that the Participant has not substantially performed the Participant’s
duties.

(b)
For purposes of this Section 2.06, no act or failure to act on the part of the Participant shall be considered “willful”
unless it is done, or omitted to be done, by the Participant in bad faith and without reasonable belief that the Participant’s action or omission was
in the best interests of the Company or its Affiliates. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted
by the Board or upon the instructions of a senior officer of the Company or based upon the advice of counsel for the Company or its Affiliates
shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Company or its
Affiliates. Any termination by the Company or any of its Affiliates of the Participant’s employment shall not be deemed to be for Cause unless the
Participant’s action or inaction meets the foregoing standard and until there shall have been delivered to the Participant a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Participant and the Participant is given an opportunity, together with counsel, to be heard
before the Board), finding that, in the good faith opinion of the Board, the Participant is guilty of the conduct described in subsection (a) above,
and specifying the particulars thereof in detail.
(c)
No action or inaction shall be deemed the basis for Cause unless the Participant is terminated therefor within 120 days
after such action or omission is known to the Chief Executive Officer of the Company.
(d)
In the event that the existence of Cause shall become an issue in any action or proceeding between the Company and
the Participant, the Company shall, notwithstanding the finding of the Board referenced above, have the burden of establishing that the actions or
inactions deemed the basis for Cause did in fact occur and do constitute Cause and that the Company has satisfied the procedural requirements of
this provision. The satisfaction of the Company’s burden shall require clear and convincing evidence. Any purported termination of employment
of the Participant by the Company which does not meet
2

each and every substantive and procedural requirement of this provision shall be treated for all purposes under this Plan as a termination of
employment without Cause.
2.07
Control”:

“CHANGE IN CONTROL” shall mean the occurrence of any of the following, each of which shall constitute a “Change in

(a)
the acquisition by any person of beneficial ownership of 30% or more of the outstanding shares of the common stock,
$1.00 par value per share (the “Common Stock”), of CenturyLink, Inc., or 30% or more of the combined voting power of CenturyLink, Inc.’s then
outstanding securities entitled to vote generally in the election of directors; provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change of Control: (i) any acquisition (other than a Business Combination (as defined below) which
constitutes a Change of Control under subsection (c) hereof) of Common Stock directly from CenturyLink, Inc., (ii) any acquisition of Common
Stock by CenturyLink, Inc. or its Subsidiaries, (iii) any acquisition of Common Stock by any employee benefit plan (or related trust) sponsored or
maintained by CenturyLink, Inc. or any corporation controlled by CenturyLink, Inc., or (iv) any acquisition of Common Stock by any corporation
pursuant to a Business Combination that does not constitute a Change of Control under subsection (c)) hereof; or
(b)
individuals who, as of January 1, 2006, constitute the Board of Directors of CenturyLink, Inc. (the “Incumbent Board”)
cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to such
date whose election, or nomination for election by CenturyLink, Inc.’s shareholders, was approved by a vote of at least two-thirds of the directors
then comprising the Incumbent Board shall be considered a member of the Incumbent Board, unless such individual’s initial assumption of office
occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other than the incumbent Board; or
(c)
consummation of a reorganization, share exchange, merger or consolidation (including any such transaction involving
any direct or indirect subsidiary of CenturyLink, Inc., or sale or other disposition of all or substantially all assets of CenturyLink, Inc. (a “Business
Combination”); provided, however, that in no such case shall any such transaction constitute a Change of Control if immediately following such
Business Combination: (i) the individuals and entities who were the beneficial owners of CenturyLink, Inc.’s outstanding Common Stock and
CenturyLink, Inc.’s voting securities entitled to vote generally in the election of directors immediately prior to such Business Combination have
direct or indirect beneficial ownership, respectively, of more than 50% of the then outstanding shares of common stock, and more than 50% of the
combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the surviving or
successor corporation, or, if applicable, the ultimate parent company thereof (the “Post-Transaction Corporation”), and (ii) except to the extent
that such ownership existed prior to the Business Combination, no person (excluding the Post-Transaction Corporation and any employee benefit
plan or related trust of either CenturyLink, Inc., the Post-Transaction Corporation or any subsidiary of either corporation) beneficially owns,
directly or indirectly, 20% or more of the then outstanding shares of common stock of the corporation resulting from such Business Combination
or 20% or more of the combined voting power of the then outstanding voting securities of such corporation, and (iii) at least a majority of the
members of the board of directors of the Post-Transaction Corporation were members of the Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board, providing for such Business Combination; or
3

(d)

approval by the shareholders of CenturyLink, Inc. of a complete liquidation or dissolution of CenturyLink, Inc.

For purposes of this Section 2.07, the term “person” shall mean a natural person or entity, and shall also mean the group or syndicate
created when two or more persons act as a syndicate or other group (including, without limitation, a partnership or limited partnership) for the
purpose of acquiring, holding, or disposing of a security, except that “person” shall not include an underwriter temporarily holding a security

pursuant to an offering of the security.
2.08

“409A CHANGE IN CONTROL EVENT” shall mean a Change in Control Event as defined in Treasury Regulation §1.409A-3(i)

2.09

“CODE” shall mean the Internal Revenue Code of 1986, as amended.

2.10

“COMMITTEE” shall mean the CenturyLink Employee Benefits Committee.

2.11

“COMPENSATION COMMITTEE” shall mean the Compensation Committee of the Board.

2.12

“COMPANY” shall mean CenturyLink, Inc.

(5).

2.13
“DISABLED” OR “DISABILITY” shall have the meaning set forth in Treasury Regulation §1.409A-3(i)(4). Specifically,
“Disabled” or “Disability” shall mean that, by reason of any medically determinable physical or mental impairment which can be expected to result
in death or can be expected to last for a continuous period of not less than 12 months, a Participant is (i) unable to engage in any substantial
gainful activity or (ii) receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering
employees of the Participant’s Employer. A Participant will be deemed disabled if determined to be disabled in accordance with the Employer’s
disability program, provided that the definition of disability under such disability insurance program complies with the definition in the preceding
sentence. Also, prior to January 1, 2012 but not after December 31, 2011, a Participant will be deemed disabled if determined to be totally disabled
by the Social Security Administration.
2.14
“EFFECTIVE DATE” of this Plan, as amended and restated herein, shall mean January 1, 2012. The Effective Date of the original
Plan was January 1, 1999.
2.15
“ELIGIBLE TERMINATION” shall mean a termination of an Active Participant’s (as defined in Section 10.03(a)) employment by
the Company or its Affiliates other than for Cause, death or Disability, or a voluntary termination of employment by an Active Participant for Good
Reason, provided that either of such terminations occur within three years after a Change in Control.
2.16
“EMPLOYER” shall mean the Company, any Subsidiary thereof, and any Affiliate designated by the Company as a participating
employer under this Plan.
2.17

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.
4

2.18
“FINAL AVERAGE PAY” shall mean a Participant’s Final Average Compensation as determined under Section 2.25 of the
Retirement Plan, without taking into account the limitations contained in Sections 2.14(d) and (e) and 5.7 thereof.
2.19

“GOOD REASON” shall mean Good Reason as defined in the Participant’s Change of Control Agreement.

2.20

“NORMAL RETIREMENT DATE” shall mean the first day of the month coincident with or next following a Participant’s 65th

birthday.
2.21
“PARTICIPANT” shall mean any officer of the Employer who is granted participation in the Plan in accordance with the
provisions of Article III.
2.22
time to time.

“PLAN” shall mean the CenturyLink, Inc. Supplemental Defined Benefit Plan, as set forth herein and as it may be amended from

2.23
“RETIREMENT PLAN” shall mean the CenturyLink Retirement Plan, as it may be amended from time to time. References herein
to sections of the Retirement Plan are based on the amended and restated Plan document as in effect on December 31, 2006.
2.24

“SERP” means the CenturyLink, Inc. Supplemental Executive Retirement Plan, as described in Article I.

2.25
“SOCIAL SECURITY COVERED COMPENSATION” shall mean the amount determined pursuant to Section 2.46 of the
Retirement Plan.
2.26
“SPECIFIED EMPLOYEE” shall mean a Participant who is a key employee of the Employer under Treasury Regulation §1.409A-1
(i) because of final and binding action taken by the Board or its Compensation Committee, or by operation of law or such regulation.
2.27
“SUBSIDIARY” shall mean any corporation in which CenturyLink, Inc. owns, directly or indirectly through subsidiaries, at least
fifty percent (50%) of the combined voting power of all classes of stock.
III.

Participation

3.01
Subject to Section 3.04, any employee who is either one of the officers of an Employer in a position to contribute materially to the
continued growth and future financial success of an Employer, or one who has made a significant contribution to the Employer’s operations,

thereby meriting special recognition, shall be eligible to participate provided the following requirements are met:
(a)

The officer is employed on a full-time basis by the Employer and is compensated by a regular salary; and

(b)

The coverage of the officer is duly approved by the Compensation Committee.
5

3.02
Subject to Section 3.04, if a Participant who retired or otherwise terminated employment is rehired, he shall not again become a
Participant in this Plan unless the coverage of the officer is again duly approved by the Compensation Committee.
3.03
It is intended that participation in this Plan shall be extended only to those officers who are members of a select group of
management or highly compensated employees, as determined by the Compensation Committee.
3.04
Plan Participation Freeze. Notwithstanding the foregoing, effective January 1, 2011, no employee shall be eligible to participate
in this Plan if his employment with the Employer began after December 31, 2010. In addition, effective January 1, 2011, no employee whose
employment with the Employer began before January 1, 2011 shall be eligible to participate in the Plan after December 31, 2010, except that any
employee who was a Participant in the Plan on December 31, 2010 shall remain a Participant solely with respect to any vested but unpaid Plan
benefit he or she may have accrued under the Plan.
IV.

Normal Retirement

4.01
Subject to the provisions of Articles XII and XIII, the monthly retirement benefit payable to a Participant shall commence on his
Normal Retirement Date, provided he has had a separation from service, and shall be the excess, if any, of the sum of the amounts determined
pursuant to Sections 6.1(a)(1) and (a)(2) of the Retirement Plan (as modified by Section 6.1(g) of the Retirement Plan, which freezes Retirement Plan
benefits at the level accrued as of December 31, 2010, with the exception of limited transition benefits under Section 6.1(g)(2) of such plan),
computed without taking into account the limitations contained in Sections 2.14(d) and (e) and 5.7 thereof over the amount so determined taking
into account such limitations; the resulting benefit shall be further reduced by the amount determined pursuant to Section 6.1(a)(3) of the
CenturyLink Retirement Plan, if any.
4.02
Benefit Freeze. In accordance with Section 6.1 of the Retirement Plan, the Normal Retirement benefit under this Plan shall be
frozen at the level accrued as of December 31, 2010, and shall not increase after such date, with the exception of any applicable transition benefit
increases in accordance with Section 4.01 of this Plan. The freezing of benefits pursuant to this Section 4.02 also applies to all Plan benefits that are
determined by reference to the Normal Retirement benefit under Section 6.1 of the Retirement Plan (including but not limited to benefits under the
following Articles of this Plan: Late Retirement under Article V; Early Retirement under Article VI; Disability Retirement under Article VII; Spouses’
Benefits under Article VIII; and Benefits for Terminated Vested Participants under Article X).
V.

Late Retirement

5.01
If a Participant remains employed beyond his Normal Retirement Date, his late retirement benefit shall commence on the first day
of the month coincident with or next following his actual date of separation from service, subject to the provisions of Articles XII and XIII.
5.02
Subject to Section 4.02, a Participant’s late retirement benefit shall be the excess, if any, of the sum of the amounts determined
pursuant to Sections 6.1(a)(1) and (2) and 6.3 of the Retirement Plan, computed without taking into account the limitations contained in Sections
2.14(d) and (e) and 5.7 thereof, over the amount so determined taking into account
6

such limitations; the resulting benefit shall be further reduced by the amount determined pursuant to Section 6.1(a)(3) of the Retirement Plan, if
any.
VI.

Early Retirement

6.01
A Participant who has attained age 55 and who has completed 5 or more Years of Service, is eligible for early retirement. An
eligible Participant’s early retirement benefit shall commence on the first day of the month coincident with or next following the date he terminates
employment, subject to the provisions of Articles XII and XIII.
6.02
Subject to Section 4.02, a Participant’s early retirement benefit shall be the excess, if any, of the sum of the amounts determined
pursuant to Sections 6.1(a)(1) and (2) and 6.2 of the Retirement Plan, computed without taking into account the limitations contained in Sections
2.14(d) and (e) and 5.7 thereof, over the amount so determined taking into account such limitations; the resulting benefit shall be further reduced
by the amount determined pursuant to Section 6.1(a)(3) of the Retirement Plan, if any.
VII.

Disability

7.01
Subject to Section 4.02, a Participant who becomes Disabled prior to retirement or termination of service will be entitled to a
disability benefit equal to the excess, if any, of the sum of the amounts determined pursuant to Sections 6.1(a)(1) and (2) and 6.4 of the Retirement
Plan, computed without taking into account the limitations contained in Sections 2.14(d) and (e) and 5.7 thereof, over the amount so determined

taking into account such limitations; the resulting benefit shall be further reduced by the amount determined pursuant to Section 6.1(a)(3) of the
Retirement Plan, if any.
7.02

A Participant’s disability benefit shall commence on his Normal Retirement Date, subject to the provision of Articles XII and

XIII.
VIII.

Death Benefit for Spouse

8.01
A spouse of a Participant shall be entitled to a benefit computed in accordance with Section 8.02 if the Participant dies before the
Annuity Starting Date (as defined in the Retirement Plan) and if the requirements of (a) and (b) below are satisfied:
(a)

the Participant had earned a nonforfeitable right to benefits under the Retirement Plan, and

(b)

the Participant was legally married to the surviving spouse at death and was so married for the year preceding death.

8.02
Subject to Section 4.02, the monthly death benefit payable to the spouse of a Participant shall be the excess of an amount
determined pursuant to Sections 6.1(a)(1) and (2) of the Retirement Plan, computed without taking into account the limitations contained in
Sections 2.14(d) and (e) and 5.7 thereof, over the amount so determined taking into account such limitations; the resulting benefit shall be further
reduced by the amount determined pursuant to Section 6.1(a)(3) of the Retirement Plan, if any. The benefit payable to a spouse who qualifies for a
spouse’s benefit under Section 8.01 shall be further reduced as follows:
7

(a)
If, at death, the Participant is age 55 or over, or actively employed by the Company with 30 or more Years of Service
under the Retirement Plan, the benefit of the spouse shall be the amount payable to the spouse as beneficiary of the survivor annuity portion of
the joint and survivor annuity under Section 11.01 with respect to the Participant, determined as though the Participant had retired on the first day
of the month in which death occurs. On the death of a Participant with 30 or more Years of Service under the Retirement Plan before age 55, the
Participant shall be assumed to be age 55 for purposes of this subsection (a).
(b)
If the Participant does not meet the requirements of subsection (a) above, at death, the benefit of the spouse shall be
the amount payable to the spouse as beneficiary under the survivor annuity portion of the joint and survivor annuity under Section 11.01 with
respect to the Participant, determined as though the Participant had separated from service on the date of death, if not already separated, and had
survived until age 55.
8.03
Subject to the provisions of Articles XII and XIII, benefits for a spouse under Section 8.02(a) shall commence as of the last day
of the month following the first day of the month coinciding with or following the date of death of the Participant, and benefits under Section 8.02
(b) shall commence on the first day of the month following the first day of the month coinciding with or following the later of the date of death of
the Participant or the date on which the Participant would have attained age 55, subject to the provisions of Articles XII and XIII.
8.04
IX.

If a Participant has no surviving spouse at the date of his or her death, no death benefit shall be paid under this Plan.

Reemployment

9.01
If a Participant who retired or otherwise terminated employment for any reason and commenced receiving benefits under this
Plan is later rehired by the Company, an Affiliate or a Subsidiary, such Participant’s benefit payments shall continue as if the Participant had not
been rehired. Subject to Sections 3.04 and 4.02, if the Participant is again approved for coverage by the Compensation Committee under
Section 3.02, the Participant’s benefits upon his subsequent retirement or termination of employment for any reason shall be determined as follows:
(a)
If a Participant retires on his Normal Retirement Date, the monthly retirement benefit shall be determined pursuant to
Article IV, reduced by the Actuarial Equivalent of the benefit payments the Participant previously received.
(b)
If a Participant remains employed beyond his Normal Retirement Date, the late retirement benefit payable to a Participant
upon his late retirement shall be determined pursuant to Article V, reduced by the Actuarial Equivalent of the benefit payments the Participant
previously received.
(c)
If a Participant retires prior to his Normal Retirement Date and is eligible for early retirement according to Section 6.01,
the early retirement benefit payable to a Participant shall be determined pursuant to Section 6.02, reduced by the Actuarial Equivalent of the benefit
payments the Participant previously received.
8

(d)
The benefit payable under subsections (a) through (c) above shall not be less than the amount he received from his
previous retirement or from his previous termination of employment for any reason.
(e)
X.

The benefit payable under subsections (a) through (c) shall be in the same form as the Participant was receiving.

Termination of Service; Change in Control

10.01 If a Participant voluntarily or involuntarily terminates employment prior to death, Disability or retirement, he shall be entitled only
to his vested accrued benefits at the time of termination and shall be vested in such accrued benefits in accordance with the following schedule:
Years of Service

Vested

less than 5
5 or more

0%
100%

10.02 Subject to Section 4.02, a Participant’s vested accrued benefit shall be equal to the excess of an amount determined pursuant to
Sections 6.1(a)(1) and (2) and 6.6 of the Retirement Plan, computed without taking into account the limitations contained in Sections 2.14(d) and
(e) and 5.7 thereof, over the amount so determined taking into account such limitations; the resulting benefit shall be further reduced by the
amount determined pursuant to Sections 6.1(a)(3) and 6.6 of the Retirement Plan, if any. Payment of the amount so determined shall commence on
the first day of the month following the Participant’s 55th birthday, subject to the provisions of Articles XII and XIII. Nonvested accrued benefits
shall be forfeited.
10.03 (a)
Notwithstanding anything to the contrary in this Plan or in any applicable law or regulation, upon the occurrence of a
Change in Control (the “CIC Effective Date”), the accrued benefit of each Participant (other than any Participant whose service as an employee
was terminated prior to full vesting of his accrued benefit under Section 10.01) and the benefits conferred under this Section shall automatically
vest and thereafter may not be adversely affected in any matter without the prior written consent of the Participant. Notwithstanding anything to
the contrary in this Plan, upon the occurrence of a Change in Control, any Participant who is then employed by the Company or its Subsidiaries
(“Active Participant”) shall, if the Change in Control is a 409A Change in Control Event, have an irrevocable right to receive, and the Company
shall be irrevocably obligated to pay, a lump sum cash payment in an amount determined pursuant to this Section if during a period commencing
upon the CIC Effective Date and ending on the second anniversary of the occurrence of the 409A Change in Control Event, the Active Participant
voluntarily or involuntarily separates from service (“Termination”). The lump sum cash payment payable to Active Participants under this
Section (the “Lump Sum Payment”) shall be paid on the first day of the month following the date of Termination, subject to the provisions of
Articles XII and XIII.
(b)

The amount of each Lump Sum Payment shall be determined as follows:

(i)
With respect to any Active Participant who, after giving effect to the terms of subsection (b)(iv) below, is
eligible as of the date of Termination to receive benefits under Article IV or V of this Plan, the Lump Sum Payment shall equal the Present Value (as
9

defined below) of the stream of payments to which such participant would have otherwise been entitled to receive immediately upon Termination
in accordance with Article IV or V of this Plan (assuming such benefits are paid in the form of a lifetime annuity), based upon such participant’s
Final Average Pay, Social Security Covered Compensation and Benefit Years as of the date of Termination, after giving effect to the terms of
subsection (b)(iv) below.
(ii)
With respect to any Active Participant who, after giving effect to the terms of subsection (b)(iv) below, is not
eligible as of the date of Termination to receive benefits under Article IV, V or VI of this Plan, the Lump Sum Payment shall equal the product of
(A) the Present Value, calculated as of age 65, of the stream of payments to which such Participant would have otherwise been entitled to receive
at age 65 in accordance with the terms of this Plan based on the same assumptions and terms set forth in subsection (b)(i) above, multiplied times
(B) such discount factor as is necessary to reduce the amount determined under subsection (b)(ii)(A) above to its Present Value, it being
understood that in calculating such discount factor, no discount shall be applied to reflect the possibility that such Participant may die prior to
attaining age 65.
(iii)
With respect to any Active Participant who, after giving effect to the terms of subsection (b)(iv) below, is
eligible as of the date of Termination to receive benefits under Article VI of this Plan, the Lump Sum Payment shall equal the greater of (A) the
Present Value of the stream of payments to which such participant would have otherwise been entitled to receive immediately upon Termination in
accordance with Article VI of this Plan, based upon the assumptions and terms set forth in subsection (b)(i) above, or (B) the Present Value,
calculated as of age 65, of the stream of payments to which such Participant would otherwise be entitled to receive at age 65 in accordance with
this Plan, determined in the same manner and subject to the same assumptions and terms set forth in subsection (b)(ii) above.
(iv)
In calculating the payment due to any Active Participant under this Section who has incurred an Eligible
Termination, the number of years of Benefit Years of the Active Participant shall be deemed to equal the number of years determinable under the
other Sections of this Plan plus three years and the Active Participant’s age shall be deemed to equal his actual age plus three years; provided,
however, that in no event shall the provisions of this subsection be applicable if the application thereof will reduce an Active Participant’s Lump
Sum Payment from the amount that would otherwise be payable with the addition of less than three years of service, age or both.
(v)
As used in this Section with respect to any amount, the “Present Value” of such amount shall mean the
discounted value of such amount that is determined by making customary present value calculations in accordance with generally accepted
actuarial principles, provided that (A) the discount interest rate applied in connection therewith shall equal the interest rate quoted by the
Bloomberg Municipal AAA General Obligation 5-Year Index (as of the close of business on the first business day of the calendar quarter in which
such present value calculations are made) or, in the event such index is no longer published, any similar index for comparable municipal securities
and (B) the mortality table applied in connection therewith shall be the mortality table prescribed by the Commissioner of Internal Revenue under
Code §417(e)(3)(A)(ii)(I) or any successor table prescribed by such organization.

(c)
Notwithstanding anything to the contrary in this Plan, upon the occurrence of a 409A Change in Control Event, each
Participant who has already begun to receive periodic payments under this Plan (“Retired Participant”) shall have an irrevocable and
unconditional
10

right to receive, and the Company shall be irrevocably and unconditionally obligated to pay, a lump sum payment in an amount equal to the
present value of the Participant’s future stream of payments which would otherwise be payable under this Plan. Such lump sum payment shall be
paid on the first day of the month following the date of the 409A Change in Control Event. The Company shall offer to assist such Participant in
purchasing at such Participant’s cost an annuity for the benefit of such Participant.
(d)
Notwithstanding anything to the contrary in this Plan, upon the occurrence of 409A Change in Control Event, any
Participant (other than a Retired Participant) who is then a former employee of the Company or its subsidiaries whose accrued benefit is vested
under Section 10.01 (“Inactive Participant”) shall have an irrevocable and unconditional right to receive, and the Company shall be irrevocably and
unconditionally obligated to pay, a lump sum payment in an amount determined in the manner provided in subsection (b)(ii) or (iii), as applicable;
provided, however, that no Inactive Participant will be entitled to the benefits of subsection (b)(iv). Such lump sum payment shall be paid on the
first day of the month following the date of the 409A Change in Control Event.
XI.

Form of Benefit Payment

11.01 The normal form of benefit payment for a Participant who is not married on his benefit commencement date is an annuity payable
monthly for the lifetime of the Participant or in the case of a Participant who is married on his benefit commencement date, the normal form of
benefit payment is an Actuarially Equivalent annuity payable monthly for the lifetime of the Participant and a survivor annuity payable monthly to
the spouse (if living) upon the Participant’s death which is 50% of the amount of the amount of the annuity payable during the lifetime of the
Participant, in each case payable in accordance with the Company’s standard payroll practices with payments commencing as of the first day of
the month following the Participant’s benefit commencement date.
11.02 Each of the following Participants who were receiving annuity payments under the SERP prior to January 1, 2009 shall receive the
following biweekly benefits from the Plan in the following forms of payment, beginning with the first payroll period ending after December 31, 2008,
and the Plan hereby assumes the obligation for such annuity payments:
Personnel
Number

59165
25872

Name

Cunningham, Marvin
Dalrymple, Gyl

Bi-weekly
Benefit

Form of Payment

2,544.86 100% Joint & Survivor
426.72 Single Life Annuity

The bi-weekly benefit payable under this Section shall be increased annually to reflect increases in cost of living at a rate of 3% per
annum. This increase shall take effect January 1 of each year on the benefit in pay status beginning January 1, 2010.
Payments pursuant to this Section 11.02: (i) shall be in addition to any other payments pursuant to the Plan; (ii) shall be subject to
acceleration as outlined in the Plan (in circumstances including but not limited to those set forth in Section 10.03(c)); and (iii) shall not be increased
as a result of a Change in Control.
11

11.03 A Participant may, before any annuity payment has been made, elect the optional form of payment which is the Actuarial
Equivalent of a Participant’s basic monthly pension, which shall begin on his benefit commencement date. The optional form of payment is as
follows:
Alternative Joint and Survivor Annuity
(a)
Under an Alternative Joint and Survivor Annuity, a reduced amount shall be payable to the Participant for his lifetime.
The beneficiary, whether or not the Participant’s spouse, if surviving at the Participant’s death, shall be entitled to receive thereafter a lifetime
survivor benefit in an amount equal to 100% of the reduced amount that had been payable to the Participant. If the beneficiary is not the
Participant’s spouse who is entitled to a 50% survivor annuity under Section 11.01, the Participant may elect that the survivor annuity be 50% of
the reduced amount payable to the Participant.
(b)
The reduced amount payable to the retired Participant shall be the Actuarial Equivalent of the amount determined under
Article IV, V, VI, VII, VIII or X, as the case may be. The appropriate actuarial factor shall be determined for any Participant and his beneficiary as of
the commencement date of the Participant’s benefit.
(c)
If the Participant designates any individual other than his spouse as his beneficiary, the annual amount of the
Participant’s annuity under the Alternative Joint and Survivor Annuity shall not be less than 50% of the annual benefit calculated as a single life
annuity, and the beneficiary’s survivor annuity under the Alternative Joint and Survivor Annuity shall be reduced to the extent necessary to
reflect any adjustment required by this subsection (c) in the amount of the Participant’s annuity under the Alternative Joint and Survivor Annuity.

XII.

Acceleration of Payments

12.01 Cash-Out of De Minimis Distributions. Notwithstanding any other provision of this Plan, if the single sum actuarial present
value of the Participant’s, Beneficiary’s or Spouse’s benefit under this Plan and all other plans that would be treated as a single plan with this Plan
pursuant to Treasury Regulation §1.409A-1(c)(2) does not exceed the applicable dollar amount under Code §402(g)(1)(B) ($17,000 in 2012), then
such amount shall be paid in one lump sum to the person entitled to payment on the date the first annuity payment would otherwise be paid under
this Plan. Such payment is mandatory but shall only occur if the Participant’s interest under the Plan (as determined in accordance with Treasury
Regulation §1.409A-1(c)(2)) is terminated and liquidated in its entirety in conjunction with the payment.
12.02 Taxes. If at any time this Plan fails to meet the requirements of Code §409A, an amount equal to the amount required to be
included in the Participant’s income as a result of the failure to comply with the requirements of Code §409A shall be paid to the Participant in one
lump sum on the first day of the month following the Company’s determination that the failure has occurred.
To the full extent permitted under Treasury Regulation §1.409A-3(j)(4) but subject to the limitations thereunder, the Committee in its sole
discretion may make a lump sum payment to a Participant in an amount that is needed to pay (a) the Participants’ state, local or foreign tax
obligations (and the income tax withholding related to the state, local and foreign tax amount)
12

that arise from participation in this Plan and that apply before the Participant’s Plan benefit is paid to the Participant and/or (b) the Federal
Insurance Contributions Act (FICA) tax imposed under Code §§3201, 3211, 3231(e)(1) and 3231(e)(8) on the Participant’s Plan benefits and the
income tax imposed at the source on wages under Code §3401 or the corresponding withholding provisions of applicable state, local or foreign tax
laws as a result of payment of the FICA amount and the additional income tax at source on wages attributable to the pyramiding Code §3401 wages
and taxes.
12.03 Domestic Relations Orders. If this Plan receives a domestic relations order as defined in Code §414(p)(1)(B) and ERISA §206(d)
(3)(B)(ii), the Committee shall accelerate the time or schedule of a payment to an individual other than the Participant in order to fulfill such order,
provided that the provisions of ERISA §§206(d)(3)(C) through (F) shall apply as if this Plan were governed by Part 2 of Title I of ERISA.
12.04 Conflicts of Interest and Ethics Rules. The Committee shall accelerate the time or schedule of a payment under this Plan as may
be necessary: (a) to comply with an ethics agreement between the Participant and the Federal government or (b) to comply with applicable Federal,
state, local or foreign ethics laws or conflict of interest laws; each as described in Treasury Regulation §1.409A-3(j)(4)(iii).
XIII.

Delay of Payments

13.01
circumstances:

A payment otherwise due hereunder shall be delayed to a date after the designated payment date under the following

(a)
Notwithstanding any other provision hereof, payments which constitute deferred compensation under Code §409A and
the Treasury Regulations thereunder and which are not exempt from coverage by Code §409A and the Treasury Regulations thereunder shall
commence upon termination of employment of a Participant who is a Specified Employee on the first day of the seventh month following the date
of the Specified Employee’s termination of employment, or, if earlier, the date of death of the Specified Employee. On the first day of such seventh
month or on the first day of the month following the earlier death of the Specified Employee, the Specified Employee or his estate or spouse, as the
case may be, shall be paid the amount to which the Specified Employee normally would be entitled hereunder on such date plus the amounts which
would have been previously paid to the Specified Employee but for the fact that he was a Specified Employee. Nevertheless, for all other purposes
of this Agreement, the payments shall be deemed to have commenced on the date they would have had the Employee not been a Specified
Employee.
(b)
Notwithstanding any other provision hereof, a Participant shall not have separated from service with the Employer on
account of termination of employment for reasons other than death if he would not be deemed to have experienced a termination of employment
under the default rules of Treasury Regulation §1.409A-1(h).
(c)
Payments that would violate loan covenants or other contractual terms to which the Employer is a party, where such a
violation would result in material harm to the Employer (in such case, payment will be made at the earliest date at which the Employer reasonably
anticipates that the making of the payment will not cause such violation, or such violation will not cause material harm to the Employer).
13

(d)
Payment where the Employer reasonably anticipates that the making of the payment will violate Federal securities laws
or other applicable law, provided that the payment shall be made at the earliest date at which the Employer reasonably anticipates that the making
of the payment will not cause such violation. (The making of a payment that would cause inclusion in gross income or the application of any
penalty provision or other provision of the Code is not treated as a violation of applicable law.)
(e)
Payments the deduction for which the Employer reasonably anticipates would be limited by the application of Code
§162(m) (in such case, payment will be made at either the earliest date at which the Employer reasonably anticipates that the deduction of the
payment will not be so limited or the calendar year in which the Participant separates from service).

(f)
Payment may also be delayed upon such other events and conditions as the Commissioner of Internal Revenue may
prescribe in generally applicable guidance published in the Internal Revenue Bulletin.
XIV.

Additional Restrictions on Benefit Payments

14.01
Employer.
XV.

In no event will there be a duplication of benefits payable under this Plan because of employment by more than one participating

Administration and Interpretation

15.01 The Plan shall be administered by the Committee. The Committee shall have full power and authority to interpret and administer
the Plan and, subject to the provisions herein set forth, to prescribe, amend and rescind rules and regulations and make all other determinations
necessary or desirable for the administration of this Plan.
15.02 The decision of the Committee relating to any question concerning or involving the interpretation or administration of this Plan
shall be final and conclusive.
XVI.

Nature of this Plan

16.01 Benefits under this Plan shall generally be payable by the Employer from its own funds, and such benefits shall not (a) impose
any obligation upon the trust(s) of the other employee benefit programs of the Employer, (b) be paid from such trust(s) or (c) have any effect
whatsoever upon the amount or payment of benefits under the other employee benefit programs of the Employer. Participants have only an
unsecured right to receive benefits under this Plan from the Employer as general creditors of the Employer. The Employer may deposit amounts in a
trust established by the Employer for the purpose of funding the Employer’s obligations under this Plan. Participants and their beneficiaries,
however, have no secured interest or special claim to the assets of such trust, and the assets of the trust shall be subject to the payment of claims
of general creditors of the Employer upon the insolvency or bankruptcy of the Employer, as provided in the trust.
XVII.

Employment Relationship

17.01 An employee shall be considered to be in the employment of the Company and its Subsidiaries as long as he remains an
employee of the Company, any Subsidiary or any
14

corporation to which substantially all of the assets and business of the Company are transferred. Nothing in the adoption of this Plan or the
designation of any Participant shall confer on any employee the right to continued employment by the Company or a Subsidiary, or affect in any
way the right of the Company or such Subsidiary to terminate his employment at any time. Any question as to whether and when there has been a
termination of an employee’s employment, and the cause, notice or other circumstances of such termination, shall be determined by the Committee,
and its determination shall be final.
XVIII. Amendment and Termination of Plan
18.01

The Company may terminate this Plan and accelerate any payments due (or that may become due) under this Plan:

(a)
Within 12 months of a corporate dissolution of the Company taxed under Code §331, or with the approval of a
bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that the amounts deferred under this Plan are included in the Participant’s gross
income in the latest of (i) the calendar year in which the termination occurs, (ii) the calendar year in which the amount is no longer subject to a
substantial risk of forfeiture or (iii) the first calendar year in which the payment is administratively practicable.
(b)
Within the 30 days preceding or the 12 months following a 409A Change in Control Event provided that Treasury
Regulation §1.409A-3(j)(4)(ix)(B) is complied with.
(c)

In the Company’s discretion, provided that Treasury Regulation §1.409A-3(j)(4)(ix)(C) is complied with.

(d)
Due to such other events and conditions as the Commissioner of the IRS may prescribe in generally applicable guidance
published in the Internal Revenue Bulletin.
18.02 The Company, acting through the Compensation Committee, the Board, or any person or entity designated by the Compensation
Committee or the Board, may amend this Plan. The Committee cannot amend this Plan for any reason, unless authorized to do so by the
Compensation Committee or the Board. Notwithstanding any other provision of this Plan, it is the intention of the Company that no payment or
entitlement pursuant to this Plan will give rise to any adverse tax consequences to any Participant under Code §409A and Treasury Regulations
and other interpretive guidance issued thereunder, including that issued after the date hereof (collectively, “Section 409A”). This Plan and any
amendments hereto shall be interpreted to that end and (1) to the maximum extent permitted by law, no effect shall be given to any provision herein,
any amendment hereto or any action taken hereunder in a manner that reasonably could be expected to give rise to adverse tax consequences
under Section 409A and (2) the Company shall take any corrective action reasonably within its control that is necessary to avoid such adverse tax
consequences. No amendments shall divest otherwise vested rights of Participants, their Beneficiaries or Spouses.
XIX.

Binding Effect

19.01 This Plan shall be binding on the Company, each Subsidiary and any designated Affiliate, the successors and assigns thereof,
and any entity to which substantially all of the assets or business of the Company, a Subsidiary, or a designated Affiliate are transferred.
15

XX.

Construction

20.01 The masculine gender, where appearing in this Plan, shall be deemed to include the feminine gender, and the singular may
indicate the plural, unless the context clearly indicates the contrary. The words “hereof”, “herein”, “hereunder” and other similar compounds of the
word “here” shall, unless otherwise specifically stated, mean and refer to the entire Plan, not to any particular provision or Section. Article and
Section headings are included for convenience of reference and are not intended to add to, or subtract from, the terms of this Plan.
20.02 This Plan shall be interpreted in a manner that does not give rise to any adverse tax consequences to any Participant under Code
§409A and the Treasury Regulations and other interpretive guidance issued thereunder. Any provision of this Plan that would cause a violation of
Code §409A, if followed, shall be disregarded.
20.03

Any reference to any section of the Code or the Treasury Regulations shall be deemed to also refer to any successor provisions

thereto.
XXI.

Demand For Benefits

21.01 (a)
Filing of Claims for Benefits. Benefits shall ordinarily be paid to a Participant without the need for demand, and to a
beneficiary upon receipt of the beneficiary’s address and Social Security Number (and evidence of death of the Participant, if needed).
Nevertheless, a Participant or a person claiming to be a beneficiary who claims entitlement to a benefit can file a claim for benefits in writing with
the Committee.
(b)
Notification to Claimant of Decision. If a claim is wholly or partially denied, a notice of the decision rendered in
accordance with the rules set forth below will be furnished to the claimant not later than 90 days after receipt of the claim by the Committee.
If special circumstances require an extension of time for processing the claim, the Committee will give the claimant a written notice of the
extension prior to the end of the initial 90-day period. In no event will the extension exceed an additional 90 days. The extension notice will indicate
the special circumstances requiring an extension of time and the date by which the Committee expects to render its final decision.
(c)
Content of Notice. The Committee will provide to every claimant who is denied a claim for benefits written or electronic
notice setting forth in a clear and simple manner: (i) the specific reason or reasons for denial; (ii) the specific reference to pertinent plan provisions
on which denial is based; (iii) a description of any additional material or information necessary for the claimant to perfect the claim and an
explanation of why such materials or information are necessary; and (iv) appropriate information as to the steps to be taken if the claimant wishes
to submit his or her claim for review, including a statement of the claimant’s right to bring a civil action under ERISA §502(a) following an adverse
determination on review.
(d)
Review Procedure. After the claimant has received written notification of an adverse benefit determination, the claimant
or a duly authorized representative will have 60 days within which to appeal, in writing, such determination. The claimant may submit written
comments, documents, records, and any other information relevant to the claim for benefits. The Committee will provide the claimant, upon request
and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the claimant’s claim for
16

benefits. The review will take into account all items submitted by the claimant, regardless of whether such information was submitted or considered
in the initial benefit determination.
(e)
Decision on Review. The decision on review by the Committee will be rendered as promptly as is feasible, but not later
than 60 days after the receipt of a request for review, unless the Committee in its sole discretion determines that special circumstances require an
extension of time for processing, in which case a decision will be rendered as promptly as is feasible, but not later than 120 days after receipt of a
request for review.
If an extension of time for review is required because of special circumstances, written notice of the extension will be furnished to the
claimant before termination of the initial 60-day review period and shall indicate the special circumstances requiring an extension of time and the
date by which the Committee expects to render the determination on review.
The decision on review will be in written or electronic form. In the event of an adverse benefit determination, the decision shall contain: (1)
specific reasons for the adverse determination, written in a clear and simple manner; (2) specific references to the pertinent plan provisions on
which the determination is based; (3) a statement that the claimant may request, free of charge, reasonable access to and copies of all documents,
records and other information relevant to the claim for benefits; and (4) the claimant’s right to bring an action under ERISA §502(a).
(f)
Failure to Establish and Follow Reasonable Claims Procedure. In the case of the failure of the Committee to establish
or follow claims procedures consistent with the requirements of U.S. Department of Labor Regulation §2560.503-1, the claimant shall be deemed to

have exhausted the administrative remedies available under the Plan and shall be entitled to pursue any available remedies under ERISA §502(a) on
the basis that the Plan has failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim.

EXECUTED this

day of December, 2011.
EMBARQ CORPORATION

By:
Marina Pearson
Title: Vice President, Human Resources,
Compensation & Benefits
17

(Back To Top)

Section 3: EX-10.14(K) (EX-10.14(K))
EXHIBIT 10.14(k)
SECOND AMENDMENT
TO THE
EMBARQ SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, Embarq Corporation (the “Company”) established the Embarq Supplement Executive Retirement Plan effective as of May 17, 2006, as
most recently amended and restated effective January 1, 2009, and as subsequently further amended (the “Plan”); and
WHEREAS, Sections 7.1 and 8.9 of the Plan provide that the Board of Directors of the Company (the “Board”) may, in its sole discretion, amend
the Plan; and
WHEREAS, by action dated November 15, 2011, the Board of Directors of Embarq Corporation delegated its amendment authority with regard to
the Plan to the CenturyLink Plan Design Committee; and
WHEREAS, the CenturyLink Plan Design Committee wishes to amend the Plan in order to clarify certain provisions therein and make certain other
changes;
NOW, THEREFORE, the Plan is hereby amended as follows:
1.

Effective November 15, 2011, the definition of “Committee” in Section 2.1 of the Plan (“Definitions”) is hereby amended in its entirety to
read as follows:
“Committee” means the CenturyLink Employee Benefits Committee.

2.

Effective January 1, 2011, Section 5.4 of the Plan (“Form of Payment”) is hereby amended in its entirety to read as follows:
5.4

Form of Payment.
(a)

Default Form of Payment. Subject to the exceptions under Section 5.4(c), benefits payable to a Participant under the
Plan shall be distributed as follows:
(i)

If the Participant does not make a timely election (as described under subsection (ii) below), then such benefits
shall be payable in the form of an annuity for the Participant’s life, or

(ii)

if the Participant so elects, in the form of a Qualified Joint and Survivor Annuity, using the actuarial factors for
conversion, as provided under the Qualified Pension Plan as of the date of the Participant’s election. Such
election must be made by the Participant in writing and will only be effective if it is received by the Committee
at least 30 days before the Participant’s Benefit Commencement Date;

provided, however, that the election as to the form of payment of a Participant who was a participant in the
Sprint Supplemental Executive Retirement Plan immediately prior to the Effective Date will apply to any

benefits paid under this Plan, unless a subsequent election to change the form of payment is made.
(b)

Form of Payment of Vested Enhanced Benefit. Notwithstanding anything in the Plan to the contrary, if the Participant is
receiving payment of his or her Vested Benefit in the form of an annuity at the time he or she becomes entitled to an
Enhanced Benefit, the Vested Enhanced Benefit shall be paid in the same form as the Vested Benefit then being paid.

(c)

Exception to Default Form of Payment — Lump Sum Payment.
(i)

(ii)

Notwithstanding Section 5.4(a) and subject to Section 5.4(c)(ii):
(A)

If the actuarial equivalent of the present value of a Participant’s Vested Benefit hereunder is valued at
not more than two times the limit on the amount of contributions permitted under Section 402(g) of
the Code on the date of such Participant’s Separation from Service, the Company shall pay the
equivalent actuarial value of such Vested Benefit in a lump sum on the 180th day after the
Participant’s Separation from Service with an Employer.

(B)

Subject to Section 5.4(b), if the actuarial equivalent of the present value of a Participant’s Vested
Enhanced Benefit, if any, is valued at not more than two times the limit on the amount of
contributions permitted under Section 402(g) of the Code on the later of (i) first day of the 25th month
following such Participant’s Separation from Service with the Employer or (ii) first day of the month
coincident with or next following the Participant’s 55th birthday, as applicable, the equivalent actuarial
value of such Vested Enhanced Benefit shall be paid in a lump sum in accordance with Section 5.1
(b) above.

Notwithstanding Section 5.4(a):
2

(d)

3.

If the actuarial equivalent of the present value of the Participant’s Vested Benefit hereunder is valued
at not more than one time the limit on the amount of contributions permitted under Section 402(g) of
the Code on May 1, 2009, the Company shall pay the equivalent actuarial value of such Vested
Benefit in a lump sum on May 1, 2009.

(B)

Subject to Section 5.4(b), if the actuarial equivalent of the present value of a Participant’s Vested
Enhanced Benefit hereunder is valued at not more than one time the limit on the amount of
contributions permitted under Section 402(g) of the Code on the first day of the 25th month following
such Participant’s Separation from Service with the Employer, the Company shall pay the equivalent
actuarial value of such Vested Enhanced Benefit in a lump sum within 60 days after the first day of the
25th month following such Participant’s Separation from Service with the Employer.

For purposes of this Section 5.4, such actuarial equivalent amount shall be determined in the same manner that the
amount of an involuntary cash out distribution is computed under the Qualified Pension Plan. The payment of a lump
sum amount under this Section 5.4 shall be a complete discharge of any obligations to such individual and his or her
beneficiaries hereunder.

Effective January 1, 2011, a new Section 5.5 (“Limitation of Actuarial Adjustments”) is hereby added to the Plan and shall in its entirety
read as follows:
5.5

4.

(A)

Limitation of Actuarial Adjustments. Notwithstanding any Plan provision to the contrary, in no event shall there be an actuarial
adjustment of a Participant’s Vested Benefit or Enhanced Benefit if the Benefit Commencement Date is after the Participant’s
attainment of age 65.

Effective January 1, 2011, Exhibit 4 to the Plan is hereby amended in its entirety to read as follows:
Exhibit 4
Equivalent Actuarial Value of a Vested Enhanced Benefit if (i) the Participant Separates from Service due to an Involuntary Termination
without Cause, whether or not such Participant has attained age 55, (ii) the Participant has a Vested Benefit in accordance with Section 4.2
of the Plan and (iii) the sum of
3

Participant’s age and years of Credited Service equal at least 75 as of the end of the period during which severance is actually paid:
Age When
Benefits Begin

Percentage
of Benefits

55

75.0

56
57
58
59
60
61
62
63
64
65 or older
5.

Effective November 15, 2011, Section 7.1 of the Plan (“Amendment”) is hereby amended in its entirety to read as follows:
7.1

6.

[Reserved.]

Effective November 15, 2011, Section 8.9 of the Plan (“Amendments”) is hereby amended in its entirety to read as follows:
8.9

7.

77.5
80.0
82.5
85.0
87.5
90.0
92.5
95.0
97.5
100.0

Amendments. The Board or its authorized delegate may amend this Plan in its sole discretion. Any such amendment shall be
effective at such date as the Board or its authorized delegate may determine, except that no such amendment, other than an
amendment of a minor nature or permitted in accordance with the terms of the trust, if any, described in Section 8.4, may apply to
any period prior to the announcement of the amendment.

Effective November 15, 2011, Section 8.10 of the Plan (“Plan Termination”) is hereby amended in its entirety to read as follows:
8.10

Plan Termination. The Board or its authorized delegate may at any time terminate this Plan in whole or in part in which case no
further benefits shall accrue hereunder with respect to any affected Participant. If an Employer ceases to be a Subsidiary of the
Company, the participation in this Plan of all Participants employed by that Employer will terminate and no further benefits for
such Participants shall accrue hereunder. There shall be no acceleration of any benefits payable under this Plan upon termination
of the Plan, except as permitted under Section 409A of the Code.
4

8.

Except as amended above, each and every provision of the Plan, as it previously may have been amended, shall remain in full force and
effect without change or modification.

9.

Any inconsistent provision of the Plan shall be read to be consistent with this Amendment and its purposes.

10.

The Effective Date of each item of this Amendment shall be as indicated as indicated above.

Signature in Counterparts. The undersigned agree to be bound by their telecopied signatures and agree that the Company may rely on their
telecopied signatures. This Resolution may be executed in multiple counterparts which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned, being all of the members of the CenturyLink Plan Design Committee, hereby approve, adopt and
execute this Amendment on this
day of December, 2011.
CENTURYLINK PLAN DESIGN COMMITTEE

By:

By:

Charles Wheeler, Chair
Title: Sr. Vice President, Human Resources

G. Clay Bailey, Member
Title: Sr. Vice President, Treasurer

By:

By:

Joseph Osa, Member
Title: Vice President, Human Resources, Labor

Marina Pearson, Member
Title: Vice President, Human Resources, Compensation & Benefits

By:
Mark Stites, Member
Title: Vice President, Legal
5

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Section 4: EX-10.15(C) (EX-10.15(C))
EXHIBIT 10.15(c)
AMENDMENT 2011-1
TO THE
QWEST COMMUNICATIONS INTERNATIONAL INC.
DEFERRED COMPENSATION PLAN
WHEREAS, Qwest Communications International Inc. (the “Company”) established the Qwest Communications International Inc. Deferred
Compensation Plan effective as of January 1, 1999, as most recently amended and restated effective January 1, 2005, and as subsequently further
amended (the “Plan”); and
WHEREAS, Section 11.1 of Part A of the Plan permits the Company to amend the Plan by action of the Board of Directors of the Company;
provided, however, that no amendment shall be effective to decrease or restrict the value of a Plan participant’s account balance in existence at the
time the amendment is made and subject to other limitations not herein relevant.
WHEREAS, by action dated November 15, 2011, the Board has delegated its authority to amend the Plan to the CenturyLink Plan Design
Committee; and
WHEREAS, the CenturyLink Plan Design Committee wishes to amend Part A of the Plan in order to cause the cessation of active participation,
deferrals and other contributions thereunder after December 31, 2011 and to make other desired changes;
NOW, THEREFORE, the Plan is hereby amended as follows:
1.

Effective January 1, 2012, Section 1.23 of Part A of the Plan (“Participant”) is hereby amended in its entirety to read as follows:
1.23

2.

Effective January 1, 2012, a new Section 2.4 (“Selection, Enrollment and Eligibility in Plan Years After December 31, 2011”) is hereby added
to Part A of the Plan and shall in its entirety read as follows:
2.4

3.

“Participant” shall mean any Employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii)
who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election
Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and
(vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in
the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant’s benefits under the Plan
as a result of applicable law or property settlements resulting from legal separation or divorce. Notwithstanding any Plan
provision to the contrary, there shall be no new Participants after December 31, 2011, and any Employee who is a Participant as
of December 31, 2011 shall remain a Participant solely with respect to his Account Balance as of December 31, 2011 (as
subsequently adjusted in accordance with the Plan’s terms, such as for earnings, losses, distributions, etc.).

Selection, Enrollment and Eligibility In Plan Years After December 31, 2011. Notwithstanding any Plan provision to the contrary,
(a) no Employee shall be selected to participate in the Plan after December 31, 2011, (b) there shall be no new Participants after
December 31, 2011, and (c) after December 31, 2011, Participants who have an Account Balance as of December 31, 2011 shall not
be able to make deferrals of Annual Salary, Bonus, Commissions and Other Compensation earned after December 31, 2011;
provided, however, each Participant with an Account Balance as of December 31, 2011 shall remain a Participant with respect to
that Account Balance (as subsequently adjusted in accordance with the Plan’s terms, such as for earnings, losses,
distributions, etc.).

Effective January 1, 2012, Section 3.3 of Part A of the Plan (“Election to Defer; Effect of Election Form”) is hereby amended in its entirety
to read as follows:
3.3

Election to Defer; Effect of Election Form.
(a)

First Plan Year. In connection with a Participant’s commencement of participation in the Plan, the Participant shall make
an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along
with such other elections as the Committee or its designated agent deems necessary or desirable under the Plan. For
these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the
Committee or its designated agent (in accordance with Section 2.2 above) and accepted by the Committee.

(b)

Subsequent Plan Years. For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such
other elections as the Committee or its designated agent deems necessary or desirable under the Plan, shall be made by
timely delivering to the Committee or its designated agent, in accordance with its rules and procedures, before the end
of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is
timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year.

(c)

Plan Years after December 31, 2011. No Participant shall be permitted to make an irrevocable deferral election for any
Plan Year that commences after December 31, 2011.
2

4.

Effective January 1, 2012, Section 3.5 of Part A of the Plan (“Annual Company Matching Amount”) is hereby amended in its entirety to
read as follows:
3.5

5.

Annual Company Matching Amount. For each Plan Year, the Company shall make a matching contribution to each Participant’s
Company Matching Account using: (a) the sum of the Participant’s total deferrals to this Plan for the Plan Year and his deferrals
to the 401(k) Plan for the Plan Year of the 401(k) Plan that ends with or within such Plan Year; multiplied by (b) the matching
contribution formula set forth in the 401(k) Plan for the Plan Year of the 401(k) Plan that ends with or within such Plan Year
(without regard to the 401(k) Plan’s limits on pre-tax deferrals or includable compensation); and then reduced by (c) the amount
of actual Company matching contributions to the 401(k) Plan for such Plan Year. If a Participant is not employed by an Employer
as of the last day of a Plan Year other than by reason of his or her Retirement or death, the Annual Company Matching Amount
for such Plan Year shall be zero (0). The foregoing sentence shall not apply to grandfathered former participants in the US WEST
Deferred Compensation Plan. In the event of Retirement or death, a Participant shall be credited with the Annual Company
Matching Amount for the Plan Year in which he or she Retires or dies. Notwithstanding any Plan provision to the contrary, the
Company shall not make any Company matching contributions to any Participant’s Company Matching Account under the Plan
after December 31, 2011.

Effective November 15, 2011, Section 11.1 of the Plan (“Amendment”) is hereby amended in its entirety to read as follows:
11.1

Amendment. Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the
action of its board of directors or the delegate of the board of directors; provided, however, that: (i) no amendment or
modification shall be effective to decrease or restrict the value of a Participant’s Account Balance in existence at the time the
amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the
effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the
Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification, and (ii) no
amendment or modification of this Section 11.1 or Section 12.2 of the Plan shall be effective. The amendment or modification of
the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of
the date of the amendment or modification.
3

6.

Effective November 15, 2011, Section 11.4 of the Plan (“Termination”) is hereby amended in its entirety to read as follows:
11.4

Termination. Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no
guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each
Employer reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan at any time with respect to
any or all of its participating Employees by action of its board of directors or the delegate of the board of directors.

7.

Except as amended above, each and every provision of the Plan, as it previously may have been amended, shall remain in full force and
effect without change or modification.

8.

Any inconsistent provision of the Plan shall be read to be consistent with this Amendment and its purposes.

9.

The Effective Date of each item of this Amendment shall be as indicated above.

Signature in Counterparts. The undersigned agree to be bound by their telecopied signatures and agree that the Company may rely on their
telecopied signatures. This Resolution may be executed in multiple counterparts which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned, being all of the members of the CenturyLink Plan Design Committee, hereby approve, adopt and
execute this Amendment on this
day of December, 2011.
CENTURYLINK PLAN DESIGN COMMITTEE

By:
Title:

By:
Charles Wheeler, Chair
Sr. Vice President, Human Resources

By:
Title:

Title:

G. Clay Bailey, Member
Sr. Vice President, Treasurer

By:
Joseph Osa, Member
Vice President, Human Resources, Labor

Title:

Marina Pearson, Member
Vice President, Human Resources,
Compensation & Benefits

By:
Title:

Mark Stites, Member
Vice President, Legal
4

(Back To Top)

Section 5: EX-10.18 (EX-10.18)
EXHIBIT 10.18
RESTRICTED STOCK AGREEMENT
UNDER THE
CENTURYLINK 2011 EQUITY INCENTIVE PLAN
(2011 Grants to Section 16 Officers other than CEO)
This RESTRICTED STOCK AGREEMENT (this “Agreement”) is entered into as of October 7, 2011, by and between CenturyLink, Inc.
(“CenturyLink”) and James E. Ousley (“Award Recipient”).
WHEREAS, CenturyLink maintains the CenturyLink 2011 Equity Incentive Plan (the “Plan”) under which the Compensation Committee, or
a duly authorized subcommittee thereof (the “Committee”), of the Board of Directors of CenturyLink (the “Board”) may, directly or indirectly,
among other things, grant restricted shares of CenturyLink’s common stock, $1.00 par value per share (the “Common Stock”), to key employees of
CenturyLink or its subsidiaries (collectively, the “Company”), subject to such terms, conditions, or restrictions as it may deem appropriate; and
WHEREAS, pursuant to the Plan, the Committee has awarded to the Award Recipient restricted shares of Common Stock on the terms
and conditions specified below.
NOW, THEREFORE, the parties agree as follows:
1.
AWARD OF SHARES
Upon the terms and conditions of the Plan and this Agreement, CenturyLink as of the date of this Agreement (the “Grant Date”) hereby
awards to the Award Recipient a total of
restricted shares of Common Stock (the “Restricted Stock”) that vest, subject to Sections 2,
3 and 4 hereof, in installments as follows:
Scheduled Vesting Date
December 31, 2012

Number of Shares

2.
AWARD RESTRICTIONS ON
RESTRICTED STOCK
2.1
In addition to the conditions and restrictions provided in the Plan, neither the shares of Restricted Stock nor the right to vote the
Restricted Stock, to receive accrued dividends thereon or to enjoy any other rights or interests thereunder or hereunder may be sold, assigned,
donated, transferred, exchanged, pledged, hypothecated, or otherwise encumbered prior to vesting. Except as otherwise provided in this
Section 2.1, the Award Recipient shall be entitled
1

to all rights of a shareholder of CenturyLink with respect to the Restricted Stock, including the right to vote the shares. All dividends and other
distributions relating to the Restricted Stock will accrue when declared and be paid to the Award Recipient only upon the vesting of the related
Restricted Stock.
2.2
If the shares of Restricted Stock have not already vested or been forfeited under the terms of this Agreement or the Plan, all of
the shares of Restricted Stock shall vest and all restrictions set forth in Section 2.1 shall lapse on the date on which the employment of the Award
Recipient terminates as a result of (i) death or (ii) disability within the meaning of Section 22(e)(3) of the Internal Revenue Code.
2.3
(a)
If the shares of Restricted Stock have not already vested or been forfeited under the terms of this Agreement or the
Plan, and the Award Recipient’s employment is terminated by CenturyLink without Cause (as defined below) or by the Award Recipient for Good
Reason (as defined below) within 18 months following a Change of Control of CenturyLink (as defined in the Plan), then all Restricted Stock shall
vest immediately and all restrictions set forth in Section 2.1 shall lapse.

(b)
(i)
For purposes of this Section 2.3, “Cause” shall mean the Award Recipient’s (A) willful breach of any
nondisclosure, noncompetition, nonsolicitation or nondisparagement covenants contained in any agreement between the Company and
the Award Recipient; (B) conviction of, or plea of guilty or nolo contendere to, a felony or other crime involving dishonesty or moral
turpitude; (C) workplace conduct resulting in the payment of civil monetary penalties or the incurrence of civil non-monetary penalties
that will materially restrict or prevent the Award Recipient from discharging his obligations to the Company; (D) habitual intoxication
during working hours or habitual abuse of or addiction to a controlled substance; (E) material breach of the Company’s insider trading,
corporate ethics and compliance policies and programs or any other Board-adopted policies applicable to management conduct;
(F) participation in the public reporting of any information contained in any report filed by the Company with the Securities and Exchange
Commission that was impacted by the Award Recipient’s knowing or intentional fraudulent or illegal conduct; or (G) substantial, willful
and repeated failure to perform duties as instructed by or on behalf of the Board in writing.
(ii)
The Award Recipient’s employment shall not be deemed terminated for Cause unless the Company shall have
delivered to the Award Recipient a termination notice with a copy of a resolution adopted by the affirmative vote of not less than
three-quarters of the entire Board at a meeting called partly or wholly for such purpose (after reasonable notice is provided to the
Award Recipient and the Award Recipient has had an opportunity, with counsel, to be heard by the Board) finding that the
Award Recipient should be terminated for Cause and specifying in reasonable detail the grounds therefor.
(iii)
No action or inaction shall be deemed the basis for Cause unless the Award Recipient is terminated therefor
prior to the first anniversary of the date on which such action or omission is first known to the Chief Executive Officer of the
Company.
2

(c)
For purpose of this Section 2.3, “Good Reason” shall mean any termination qualifying as a termination for “good
reason” under any change of control agreement in effect between the Company and the Award Recipient, or if no such agreement is in
place, any of the following events or conditions described in this Section 2.3(c), but only if the Award Recipient shall have provided
written notice to the Company within 90 days of the initial existence or occurrence of such event or condition and the Company shall have
failed to cure such event or condition within 30 days of its receipt of such notice:
(i)
Any failure of the Company or its Affiliates to provide the Award Recipient with a position, authority, duties
and responsibilities at least commensurate in all material respects with the most significant of those held, exercised and assigned
at any time during the 180-day period immediately preceding the Change of Control. The Award Recipient’s position, authority,
duties and responsibilities after a Change of Control shall not be considered commensurate in all material respects with the
Award Recipient’s position, authority, duties and responsibilities prior to a Change of Control unless after the Change of Control
the Award Recipient holds an equivalent position with, and exercises substantially equivalent authority, duties and
responsibilities on behalf of, either the Post-Transaction Company or the Company;
(ii)
The assignment to the Award Recipient of any duties inconsistent in any material respect with the Award
Recipient’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities at the time
of the Change of Control, or any other action that results in a diminution in any material respect in such position, authority,
duties or responsibilities;
(iii)
A reduction of the Award Recipient’s base salary in effect as of the date of the Change of Control without the
Award Recipient’s consent, except for across-the-board salary reductions similarly affecting all or substantially all similarlysituated officers of the Company and the Post-Transaction Company;
(iv)
The Award Recipient is advised of, manifests an awareness of, or becomes aware of facts that would cause a
reasonable person to inquire into any failure in any material respect by the Company or its Affiliates to comply with any of the
provisions of this Agreement; or
(v)
Any directive requiring the Award Recipient to be based at any office or location more than 50 miles from the
location the Award Recipient was based prior to the Change of Control, or requiring the Award Recipient to travel on business
to a substantially greater extent than required immediately prior to the Change of Control.
(d)
For purpose of this Section 2.3, “Affiliate” (or variants thereof) shall mean a person that controls, or is controlled by or
is under common control with, another specified person, either directly or indirectly.
3

2.4
If the shares of Restricted Stock have not already vested or been forfeited under the terms of this Agreement or the Plan, and the
Award Recipient’s employment terminates because of retirement on or after attaining the age of 55 with at least ten years of prior service with the
Company but prior to the Award Recipient attaining age 65, then, provided the Committee has specifically approved such action, all Restricted
Stock shall vest immediately and all restrictions set forth in Section 2.1 shall lapse.
2.5
If the shares of Restricted Stock have not already vested or been forfeited under the terms of this Agreement or the Plan, and the
Award Recipient’s employment terminates because of retirement on or after age 65, then, provided the Committee has specifically approved such

action, all Restricted Stock shall vest immediately and all restrictions set forth in Section 2.1 shall lapse.
3.
TERMINATION OF EMPLOYMENT
All unvested Restricted Stock shall automatically terminate and be forfeited if the employment of the Award Recipient terminates for any
reason, unless and to the extent otherwise provided in Section 2.
4.
FORFEITURE OF AWARD
4.1
If, at any time during the Award Recipient’s employment by the Company or within 18 months after termination of employment,
the Award Recipient engages in any activity in competition with any activity of the Company, or inimical, contrary or harmful to the interests of the
Company, including but not limited to: (a) conduct relating to the Award Recipient’s employment for which either criminal or civil penalties against
the Award Recipient may be sought, (b) conduct or activity that results in termination of the Award Recipient’s employment for cause, (c) violation
of the Company’s policies, including, without limitation, the Company’s insider trading, ethics and corporate compliance policies and programs,
(d) participating in the public reporting of any financial or operating result that was impacted by the participant’s knowing or intentional fraudulent
or illegal conduct; (e) accepting employment with, acquiring a 5% or more equity or participation interest in, serving as a consultant, advisor,
director or agent of, directly or indirectly soliciting or recruiting any employee of the Company who was employed at any time during the Award
Recipient’s tenure with the Company, or otherwise assisting in any other capacity or manner any company or enterprise that is directly or
indirectly in competition with or acting against the interests of the Company or any of its lines of business (a “competitor”), except for (i) any
isolated, sporadic accommodation or assistance provided to a competitor, at its request, by the Award Recipient during the Award Recipient’s
tenure with the Company, but only if provided in the good faith and reasonable belief that such action would benefit the Company by promoting
good business relations with the competitor and would not harm the Company’s interests in any substantial manner or (ii) any other service or
assistance that is provided at the request or with the written permission of the Company, (f) disclosing or misusing any confidential information or
material concerning the Company, (g) engaging in, promoting, assisting or otherwise participating in a hostile takeover attempt of the Company or
any other transaction or proxy contest that could reasonably be expected to result in a Change of
4

Control not approved by the Board or (h) making any statement or disclosing any information to any customers, suppliers, lessors, lessees,
licensors, licensees, regulators, employees or others with whom the Company engages in business that is defamatory or derogatory with respect to
the business, operations, technology, management, or other employees of the Company, or taking any other action that could reasonably be
expected to injure the Company in its business relationships with any of the foregoing parties or result in any other detrimental effect on the
Company, then the award of Restricted Stock granted hereunder shall automatically terminate and be forfeited effective on the date on which the
Award Recipient engages in such activity and (1) all shares of Common Stock acquired by the Award Recipient pursuant to this Agreement (or
other securities into which such shares have been converted or exchanged) shall be returned to the Company or, if no longer held by the Award
Recipient, the Award Recipient shall pay to the Company, without interest, all cash, securities or other assets received by the Award Recipient
upon the sale or transfer of such stock or securities, and (2) all unvested shares of Restricted Stock shall be forfeited.
4.2
If the Award Recipient owes any amount to the Company under Section 4.1 above, the Award Recipient acknowledges that the
Company may, to the fullest extent permitted by applicable law, deduct such amount from any amounts the Company owes the Award Recipient
from time to time for any reason (including without limitation amounts owed to the Award Recipient as salary, wages, reimbursements or other
compensation, fringe benefits, retirement benefits or vacation pay). Whether or not the Company elects to make any such set-off in whole or in
part, if the Company does not recover by means of set-off the full amount the Award Recipient owes it, the Award Recipient hereby agrees to pay
immediately the unpaid balance to the Company.
4.3
The Award Recipient may be released from the Award Recipient’s obligations under Sections 4.1 and 4.2 above only if the
Committee determines in its sole discretion that such action is in the best interests of the Company.
5.
STOCK CERTIFICATES
No stock certificates evidencing the Restricted Stock shall be issued by CenturyLink until the lapse of restrictions under the terms hereof.
Instead, ownership of the Restricted Stock shall be evidenced by a book entry with the applicable restrictions reflected. Upon the lapse of
restrictions on shares of Restricted Stock, CenturyLink shall issue the vested shares of Restricted Stock (either through book entry issuances or
delivery of a stock certificate) in the name of the Award Recipient or his or her nominee, subject to the other terms and conditions hereof, including
those governing any withholdings of shares under Section 6 below. Upon receipt of any such vested shares, the Award Recipient is free to hold
or dispose of such shares, subject to (i) applicable securities laws, (ii) CenturyLink’s policy statement on insider trading, and (iii) CenturyLink’s
stock ownership guidelines then in effect.
5

6.
WITHHOLDING TAXES
Notwithstanding any Plan provision to the contrary, at the time that all or any portion of the Restricted Stock vests, CenturyLink will

withhold from the shares the Award Recipient otherwise would receive hereunder the number of whole shares of Common Stock, rounding up if
necessary, having a value equal to the minimum statutory amount required to be withheld under federal, state and local law.
7.
ADDITIONAL CONDITIONS
Anything in this Agreement to the contrary notwithstanding, if, at any time prior to the vesting of the Restricted Stock in accordance with
Section 1 or 2 hereof, CenturyLink further determines, in its sole discretion, that the listing, registration or qualification (or any updating of any
such document) of the shares of Common Stock issuable pursuant hereto is necessary on any securities exchange or under any federal or state
securities or blue sky law, or that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in
connection with the issuance of shares of Common Stock pursuant thereto, or the removal of any restrictions imposed on such shares, such shares
of Common Stock shall not be issued, in whole or in part, or the restrictions thereon removed, unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions not acceptable to CenturyLink. CenturyLink agrees to use
commercially reasonable efforts to issue all shares of Common Stock issuable hereunder on the terms provided herein.
8.
NO CONTRACT OF EMPLOYMENT INTENDED
Nothing in this Agreement shall confer upon the Award Recipient any right to continue in the employment of the Company, or to interfere
in any way with the right of the Company to terminate the Award Recipient’s employment relationship with the Company at any time.
9.
BINDING EFFECT
Upon being duly executed and delivered by CenturyLink and the Award Recipient, this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors, administrators, legal representatives and successors. Without limiting the
generality of the foregoing, whenever the term “Award Recipient” is used in any provision of this Agreement under circumstances where the
provision appropriately applies to the heirs, executors, administrators or legal representatives to whom this award may be transferred by will or by
the laws of descent and distribution, the term “Award Recipient” shall be deemed to include such person or persons.
6

10.
INCONSISTENT PROVISIONS
The shares of Restricted Stock granted hereby are subject to the terms, conditions, restrictions and other provisions of the Plan as fully
as if all such provisions were set forth in their entirety in this Agreement. If any provision of this Agreement conflicts with a provision of the Plan,
the Plan provision shall control, except with regard to this Agreement’s limitations on the Committee’s discretion provided in the last sentence of
Section 2.6. The Award Recipient acknowledges receipt from CenturyLink of a copy of the Plan and a prospectus summarizing the Plan and further
acknowledges that the Award Recipient was advised to review such materials prior to entering into this Agreement. The Award Recipient waives
the right to claim that the provisions of the Plan are not binding upon the Award Recipient and the Award Recipient’s heirs, executors,
administrators, legal representatives and successors.
11.
ATTORNEYS’ FEES AND EXPENSES
Should any party hereto retain counsel for the purpose of enforcing, or preventing the breach of, any provision hereof, including, but not
limited to, the institution of any action or proceeding in court to enforce any provision hereof, to enjoin a breach of any provision of this
Agreement, to obtain specific performance of any provision of this Agreement, to obtain monetary or liquidated damages for failure to perform any
provision of this Agreement, or for a declaration of such parties’ rights or obligations hereunder, or for any other judicial remedy, then the
prevailing party shall be entitled to be reimbursed by the losing party for all costs and expenses incurred thereby, including, but not limited to,
attorneys’ fees (including costs of appeal).
12.
GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of the State of Louisiana.
13.
SEVERABILITY
If any term or provision of this Agreement, or the application thereof to any person or circumstance, shall at any time or to any extent be
invalid, illegal or unenforceable in any respect as written, the Award Recipient and CenturyLink intend for any court construing this Agreement to
modify or limit such provision so as to render it valid and enforceable to the fullest extent allowed by law. Any such provision that is not
susceptible of such reformation shall be ignored so as to not affect any other term or provision hereof, and the remainder of this Agreement, or the
application of such term or provision to persons or circumstances other than those as to which it is held invalid, illegal or unenforceable, shall not
be affected thereby and each term and provision of this Agreement shall be valid and enforced to the fullest extent permitted by law.

7

14.
ENTIRE AGREEMENT; MODIFICATION
The Plan and this Agreement contain the entire agreement between the parties with respect to the subject matter contained herein. This
Agreement may not, without the Award Recipient’s consent, be amended or modified so as to materially adversely affect the Award Recipient’s
rights under this Agreement, except (i) as provided in the Plan, as it may be amended from time to time in the manner provided therein, or (ii) by a
written document signed by each of the parties hereto. Any oral or written agreements, representations, warranties, written inducements, or other
communications with respect to the subject matter contained herein made prior to the execution of the Agreement shall be void and ineffective for
all purposes.
15.
ELECTRONIC DELIVERY AND EXECUTION OF DOCUMENTS
15.1
The Company may, in its sole discretion, deliver any documents related to the Award Recipient’s current or future participation
in the Plan or any other equity compensation plan of the Company by electronic means or request Award Recipient’s consent to the terms of an
award by electronic means. The plan documents may, but do not necessarily, include: the Plan, any grant notice, this Agreement, the Plan
prospectus, and any reports of CenturyLink provided generally to CenturyLink’s shareholders. In addition, the Award Recipient may deliver by
electronic means any grant notice or award agreement to the Company or to such third party involved in administering the applicable plan as the
Company may designate from time to time. Such means of electronic delivery may include the delivery of a link to a Company intranet or the
Internet site of a third party involved in administering the applicable plan, the delivery of the document via e-mail or such other means of electronic
delivery specified by the Company. By accepting the terms of this Agreement, the Award Recipient also hereby consents to participate in such
plans and to execute agreements setting the terms of participation through an on-line or electronic system as described herein.
15.2
The Award Recipient acknowledges that the Award Recipient has read Section 15.1 of this Agreement and consents to the
electronic delivery and electronic execution of plan documents as described in Section 15.1. The Award Recipient acknowledges that he or she
may receive from the Company a paper copy of any documents delivered electronically at no cost to the Award Recipient by contacting the
Company by telephone or in writing. The Award Recipient further acknowledges that the Award Recipient will be provided with a paper copy of
any documents if the attempted electronic delivery of such documents to the Award Recipient fails. Similarly, the Award Recipient understands
that the Award Recipient must provide the Company or any designated third party administrator with a paper copy of any documents if the
attempted electronic delivery of such documents by the Award Recipient fails. The Award Recipient may revoke his or her consent to the
electronic delivery and execution of documents described in Section 15.1 or may change the electronic mail address to which such documents are
to be delivered (if Award Recipient has provided an electronic mail address) at any time by notifying the Company of such revoked consent or
revised e-mail address by telephone, postal service or electronic mail. Finally, the Award Recipient understands that he or she is not required to
consent to electronic delivery or execution of documents described in Section 15.1
8

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered effective as of the day and
year first above written.

CENTURYLINK, INC.

By:
Glen F. Post, III
Chief Executive Officer and President

James E. Ousley
Award Recipient
9

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Section 6: EX-12 (EX-12)

QuickLinks -- Click here to rapidly navigate through this document
Exhibit 12

CENTURYLINK, INC.
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
Years Ended December 31,
2010
2009
2008
(Dollars in millions)

2011
Income before income tax
expense
Less: Income from equity
investee
Add: estimated fixed charges
Add: estimated amortization of
capitalized interest
Add: distributed income of
equity investee
Less: interest capitalized
Total earnings available for
fixed charges
Estimate of interest factor on
rentals
Interest expense, including
amortization of premiums,
discounts and debt issuance
costs
Interest capitalized
Total fixed charges
Ratio of earnings to fixed
charges

$

948
(13)
1,223

$

$

1,531
(16)
615

2007

813

561

620

(19)
418

(13)
229

(16)
245

12

2

2

1

2

14
(25)

16
(13)

20
(3)

16
(2)

10
(2)

2,159

2,135

1,231

792

859

126

57

48

27

31

1,072
25
1,223

545
13
615

367
3
418

200
2
229

212
2
245

1.77

3.47

2.94

3.46

3.51

QuickLinks
Exhibit 12
CENTURYLINK, INC. CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)

(Back To Top)

Section 7: EX-21 (EX-21)
EXHIBIT 21
CENTURYLINK, INC.
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 2011

Subsidiary

State of
incorporation
or formation

Actel, LLC
Bloomingdale Telephone Company, Inc. (20%)
Century Cellunet International, Inc.
Cellunet of India Limited
Century Interactive Fax, Inc.
Century Telephone of West Virginia, Inc.
CenturyTel Acquisition LLC
CenturyTel of Adamsville, Inc.
CenturyTel of Arkansas, Inc.
CenturyTel Broadband Services, LLC
CenturyTel TeleVideo, Inc.
CenturyTel/Teleview of Wisconsin, Inc.
Qwest Broadband Services, Inc.
CenturyTel Broadband Wireless, LLC
CenturyTel of Central Indiana, Inc.
CenturyTel of Central Louisiana, LLC
CenturyTel of Chatham, LLC
CenturyTel of Chester, Inc.
CenturyTel of Claiborne, Inc.
CenturyTel of East Louisiana, LLC
CenturyTel of Evangeline, LLC
CenturyTel Fiber Company II, LLC
CenturyTel Holdings, Inc.
Century Marketing Solutions, LLC
CenturyTel Arkansas Holdings, Inc.
CenturyTel of Central Arkansas, LLC
CenturyTel of Northwest Arkansas, LLC
CenturyTel Holdings Alabama, Inc.
CenturyTel of Alabama, LLC
CenturyTel Holdings Missouri, Inc.
CenturyTel of Missouri, LLC

Delaware
Michigan
Louisiana
Mauritius
Louisiana
West Virginia
Louisiana
Tennessee
Arkansas
Louisiana
Wisconsin
Wisconsin
Delaware
Louisiana
Indiana
Louisiana
Louisiana
Iowa
Tennessee
Louisiana
Louisiana
Louisiana
Louisiana
Louisiana
Arkansas
Louisiana
Louisiana
Alabama
Louisiana
Missouri
Louisiana

CenturyTel Investments of Texas, Inc.
CenturyTel of the Northwest, Inc.
Brown Equipment Corp.
Carter Company, Inc.
Honomach PR, Inc.
Cascade Autovon Company
CenturyTel/Cable Layers, Inc.
CenturyTel of Central Wisconsin, LLC
CenturyTel of Colorado, Inc.

Delaware
Washington
Nevada
Hawaii
Puerto Rico
Washington
Wisconsin
Delaware
Colorado

CenturyTel of Eagle, Inc.
CenturyTel of Eastern Oregon, Inc.
CenturyTel Entertainment, Inc.
CenturyTel of Fairwater-Brandon-Alto, LLC
CenturyTel of Forestville, LLC
CenturyTel of the Gem State, Inc. (97%)
CenturyTel of Inter Island, Inc.
CenturyTel of Larsen-Readfield, LLC
CenturyTel of the Midwest-Kendall, LLC
CenturyTel of the Midwest-Wisconsin, LLC
CenturyTel of Minnesota, Inc.
CenturyTel of Monroe County, LLC
CenturyTel of Montana, Inc. (99%)
CenturyTel of Northern Wisconsin, LLC
CenturyTel of Northwest Wisconsin, LLC
CenturyTel of Oregon, Inc.
CenturyTel of Paradise, Inc.
CenturyTel of Cowiche, Inc.
CenturyTel of Postville, Inc.
CenturyTel of Southern Wisconsin, LLC
CenturyTel of the Southwest, Inc.
CenturyTel Telecom Service, Inc.
CenturyTel Telephone Utilities, Inc.
CenturyTel of Upper Michigan, Inc.
CenturyTel of Washington, Inc.
CenturyTel/WORLDVOX, Inc.
CenturyTel of Wyoming, Inc.
Eagle Valley Communications Corporation

Colorado
Oregon
Washington
Delaware
Delaware
Idaho
Washington
Delaware
Delaware
Delaware
Minnesota
Delaware
Oregon
Delaware
Delaware
Oregon
Washington
Washington
Iowa
Delaware
New Mexico
Washington
Washington
Michigan
Washington
Oregon
Wyoming
Colorado

International Communications Holdings, Inc.
Pacific Telecom, Inc. (Shell)
PTI Communications of Ketchikan, Inc.
PTI Communications of Minnesota, Inc.
PTI Transponders, Inc.
Universal Manufacturing Corp.
CenturyTel of Idaho, Inc.
CenturyTel Interactive Company
CenturyTel Internet Holdings, Inc.
centurytel.com, LLC
CenturyTel Investments, LLC
CenturyTel Long Distance, LLC
CenturyTel of Michigan, Inc.
CenturyTel Midwest - Michigan, Inc.
CenturyTel Mobile Communications, Inc.
CenturyTel of Mountain Home, Inc.
CenturyTel of North Louisiana, LLC
CenturyTel of North Mississippi, Inc.
CenturyTel of Northern Michigan, Inc.
CenturyTel of Northwest Louisiana, Inc.
CenturyTel of Odon, Inc.
CenturyTel of Ohio, Inc.
CenturyTel of Ooltewah-Collegedale, Inc.
CenturyTel of Port Aransas, Inc.
CenturyTel of Redfield, Inc.
CenturyTel of Ringgold, LLC
CenturyTel SM Telecorp, Inc.
CenturyTel Telecommunications, Inc.
CenturyTel of San Marcos, Inc.
CenturyTel San Marcos Investments, LLC
CenturyTel Security Systems, Inc.
CenturyTel Service Group, LLC
CenturyTel Solutions, LLC
CenturyTel of South Arkansas, Inc.
CenturyTel of Southeast Louisiana, LLC
CenturyTel of Southwest Louisiana, LLC
CenturyTel Supply Group, Inc.
CenturyTel/Tele-Max, Inc.

Delaware
Oregon
Alaska
Minnesota
Oregon
Wisconsin
Delaware
Louisiana
Louisiana
Louisiana
Louisiana
Louisiana
Michigan
Michigan
Louisiana
Arkansas
Louisiana
Mississippi
Michigan
Louisiana
Indiana
Ohio
Tennessee
Texas
Arkansas
Louisiana
Texas
Texas
Texas
Delaware
Louisiana
Louisiana
Louisiana
Arkansas
Louisiana
Louisiana
Louisiana
Texas

Subsidiary

State or
Jurisdiction of
Incorporation

CenturyTel of Lake Dallas, Inc.
CenturyTel Web Solutions, LLC
CenturyTel of Wisconsin, LLC
Embarq Corporation
Carolina Telephone and Telegraph Company LLC
NOCUTS, Inc.
SC One Company
Centel Corporation
Centel Capital Corporation
Centel-Texas, Inc.
Central Telephone Company of Texas
EQ Central Texas Equipment LLC
Central Telephone Company
Central Telephone Company of Virginia
Embarq Florida, Inc.
The Winter Park Telephone Company
CenturyLink Sales Solutions, Inc.
Embarq, Inc.
Embarq Capital Corporation
SC Seven Company
Embarq Communications, Inc.
Embarq Communications of Virginia, Inc.
Embarq Holdings Company LLC
Embarq Directory Trademark Company, LLC
Embarq Interactive Holdings LLC
Embarq Interactive Markets LLC
Embarq Management Company
EQ Management Equipment LP
Embarq Mid-Atlantic Management Services Company
Embarq Minnesota, Inc.
Embarq Missouri, Inc.
SC Eight Company
Embarq Network Company LLC
Embarq Payphone Services, Inc.
EQ Equipment Leasing, Inc.

Texas
Louisiana
Louisiana
Delaware
North Carolina
Pennsylvania
Kansas
Kansas
Delaware
Texas
Texas
Texas
Delaware
Virginia
Florida
Florida
Delaware
Kansas
Delaware
Delaware
Delaware
Virginia
Delaware
Delaware
Delaware
Delaware
Delaware
Nevada
North Carolina
Minnesota
Missouri
Kansas
Delaware
Florida
Delaware

United Telephone Company of the Carolinas LLC
SC Two Company
United Telephone Company of Eastern Kansas
United Telephone Company of Florida
Vista-United Telecommunications (49%)
United Telephone Company of Indiana, Inc.
SC Four Company
United Telephone Company of Kansas
Embarq Midwest Management Services Company
United Teleservices, Inc.
United Telephone Company of New Jersey, Inc.
United Telephone Company of the Northwest
United Telephone Company of Ohio
SC Five Company
United Telephone Company of Pennsylvania LLC, The
SC Six Company
Valley Network Partnership (40% aggregate)
United Telephone Company of Southcentral Kansas
United Telephone Company of Texas, Inc.
EQ United Texas Equipment LLC
United Telephone Company of the West
United Telephone Southeast LLC
SC Three Company
Hillsboro Telephone Company, Inc. (20%)
Lafayette MSA Limited Partnership (49%)

South Carolina
Kansas
Delaware
Florida
Florida
Indiana
Kansas
Kansas
Kansas
Kansas
New Jersey
Oregon
Ohio
Kansas
Pennsylvania
Kansas
Virginia
Arkansas
Texas
Texas
Delaware
Virginia
Kansas
Wisconsin
Delaware

Madison River Communications Corp.
Gallatin River Holdings L.L.C.
Gallatin River Communications L.L.C.
Madison River Communications, LLC
Gulf Communications, LLC
Savannah River Communications, LLC
Madison River Finance Corp.
Madison River Holdings LLC
Madison River LTD Funding LLC
Coastal Communications, Inc.
Coastal Utilities, Inc.
Coastal Long Distance Services LLC
Gulf Coast Services, Inc.

Subsidiary

Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Georgia
Georgia
Alabama

State or
Jurisdiction of
Incorporation

Gulf Long Distance LLC
Gulf Telephone Company
Madison River Management LLC
Mebtel, Inc.
Pacific Telecom Cellular of Alaska RSA #1, Inc.
Qwest Communications International, Inc.
EUnet International Limited
EUnet International B.V.
Qwest B.V.
KPNQwest N.V. (44.34%)
Qwest B.V.
Qwest Capital Funding, Inc.
Qwest Europe LLC
Qwest Foundation
Qwest Services Corporation
CenturyLink Investment Management Company
Qwest Communications Company, LLC
Qwest Communications Corporation of Virginia
Qwest International Services Corporation
Qwest N Limited Partnership (98.5%)
Qwest Transoceanic, Inc.
Qwest Communications International Ltd.
Qwest Holdings, BV
Qwest France SAS
Qwest Germany GmbH
Qwest Netherlands BV
Qwest Peru S.R.L.
Qwest Telecommunications Asia, Limited
Qwest Australia Pty Limited
Qwest Communications Japan Corporation
Qwest Communications Korea, Limited
Qwest Hong Kong Telecommunications, Limited
Qwest Singapore Pte Ltd.
Qwest Taiwan Telecommunications, Limited
Qwest Corporation

Alabama
Alabama
Delaware
North Carolina
Alaska
Delaware
United Kingdom
Netherlands
Netherlands
Netherlands
Netherlands
Colorado
Delaware
Colorado
Colorado
Colorado
Delaware
Virginia
Delaware
Delaware
Delaware
United Kingdom
Netherlands
France
Germany
Netherlands
Peru
Hong Kong
Australia
Japan
Korea
Hong Kong
Singapore
Taiwan
Colorado

1200 Landmark Center Condominium Association, Inc.
CenturyLink Technologies India Private Limited
Block 142 Parking Garage Association
Qwest Database Services, Inc.
SMS/800, Inc. (33.3%)
Qwest India Holdings, LLC
CenturyLink Technologies India Private Limited
The El Paso County Telephone Company
MoveARoo, LLC (33.3%)
Qwest Dex Holdings, Inc.
Qwest Government Services, Inc.
Qwest LD Corp.

Nebraska
India
Colorado
Colorado
District of Columbia
Delaware
India
Colorado
Delaware
Delaware
Colorado
Delaware

Qwest Wireless, L.L.C.
SAVVIS, Inc.
SAVVIS Argentina S.A.
SAVVIS Australia Pty. Ltd.
SAVVIS Canada, Inc.
SAVVIS Communications Canada, Inc.
2099418 Ontario Corp.
SAVVIS Communications Chile, S.A.
SAVVIS Communications Corporation
SAVVIS Federal Systems, Inc.
SAVVIS Communications International, Inc.
SAVVIS Communications Private Limited
SAVVIS Korea Limited
SAVVIS Communications K.K.
SAVVIS do Brasil Ltda.
SAVVIS Telecommunicacões Ltda.
SAVVIS do Brasil Participacoes Ltda.
SAVVIS Comunicacoes Ltda.
SAVVIS Europe B.V.
SAVVIS Europe BV Sucursal en España
SAVVIS Europe B.V., The Netherlands, filial Sweden
SAVVIS France S.A.S.
SAVVIS Germany GmbH
SAVVIS Hong Kong Ltd.
SAVVIS Hungary Telecommunications KFT
SAVVIS Italia S.r.l.

Delaware
Delaware
Argentina
Australia
Delaware
Canada
Ontario
Chile
Missouri
Delaware
Delaware
India
Korea
Japan
Brazil
Brazil
Brazil
Brazil
Netherlands
Spain
Sweden
France
Germany
Hong Kong
Hungary
Italy

State or
Jurisdiction of
Incorporation

Subsidiary

SAVVIS Malaysia Sd. Ltd.
SAVVIS Mexico, S.A. de C.V.
SAVVIS New Zealand Limited
SAVVIS Philippines, Inc.
SAVVIS Poland Sp Zo.o.
SAVVIS Singapore Company Pte. Ltd.
SAVVIS Switzerland A.G.
SAVVIS Taiwan Limited
SAVVIS (Thailand) Limited
SAVVIS U.K. Limited
SkyComm Technologies Corporation (50.0%)
Spectra Communications Group, LLC
TelUSA Holdings, LLC (89%)
Telephone USA of Wisconsin, LLC
Western Re, Inc.

Malaysia
Mexico
New Zealand
Philippines
Poland
Singapore
Switzerland
Taiwan
Thailand
United Kingdom
Delaware
Delaware
Delaware
Delaware
Vermont

Certain of the Company’s smaller subsidiaries have been intentionally omitted from this exhibit pursuant to rules and regulations of the Securities
and Exchange Commission.

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Section 8: EX-23 (EX-23)
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
CenturyLink, Inc.:
We consent to the incorporation by reference in the Registration Statement (No. 333-165607) on Form S-3, the Registration Statements (No. 3360061, No. 333-160391, No. 333-37148, No. 333-60806, No. 333-150157, No. 333-124854, No. 333-174291, No. 333-167339, No. 333-150188, and No. 333-

174571) on Form S-8, and the Registration Statements (No. 33-48956, No. 333-17015, No. 333-167339, No. 333-174291, and No. 333-155521)
on Form S-4 of CenturyLink, Inc. of our reports dated February 27, 2012, with respect to the consolidated balance sheets of CenturyLink, Inc. and
subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, cash flows, and
stockholders’ equity for each of the years in the three-year period ended December 31, 2011, and related financial statement schedule, and the
effectiveness of internal control over financial reporting as of December 31, 2011, which reports appear in the December 31, 2011 annual report on
Form 10-K of CenturyLink, Inc.

/s/ KPMG LLP
Shreveport, Louisiana
February 27, 2012

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Section 9: EX-31.1 (EX-31.1)
QuickLinks -- Click here to rapidly navigate through this document
Exhibit 31.1
CERTIFICATION
I, Glen F. Post, III, Chief Executive Officer and President, certify that:
1.

I have reviewed this annual report on Form 10-K of CenturyLink, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d-15(f)) for the registrant and have:

5.

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and

d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors:
a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.

Date: February 27, 2012

/s/ Glen F. Post, III
Glen F. Post, III
Chief Executive Officer and President

QuickLinks
Exhibit 31.1
CERTIFICATION

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Section 10: EX-31.2 (EX-31.2)
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Exhibit 31.2
CERTIFICATION
I, R. Stewart Ewing, Jr., Executive Vice President, Chief Financial Officer and Assistant Secretary, certify that:
1.

I have reviewed this annual report on Form 10-K of CenturyLink, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d-15(f)) for the registrant and have:

5.

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and

d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors:
a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 27, 2012

/s/ R. Stewart Ewing, Jr.
R. Stewart Ewing, Jr.

Executive Vice President, Chief
Financial Officer and Assistant
Secretary

QuickLinks
Exhibit 31.2
CERTIFICATION

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Section 11: EX-32 (EX-32)
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Exhibit 32

Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Each of the undersigned, acting in his capacity as the Chief Executive Officer or Chief Financial Officer of CenturyLink, Inc. ("CenturyLink"),
certifies that, to his knowledge, the Annual Report on Form 10-K for the year ended December 31, 2011 of CenturyLink fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of CenturyLink as of the dates and for the periods covered by such report.
A signed original of this statement has been provided to CenturyLink and will be retained by CenturyLink and furnished to the Securities and
Exchange Commission or its staff upon request.
Dated: February 27, 2012

/s/ Glen F. Post, III

/s/ R. Stewart Ewing, Jr.

Glen F. Post, III

R. Stewart Ewing, Jr.

Chief Executive Officer and
President

Executive Vice President, Chief
Financial Officer and Assistant
Secretary

QuickLinks
Exhibit 32
Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

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CTL 10-K 12/31/2012

Section 1: 10-K (10-K)
Use these links to rapidly review the document
TABLE OF CONTENTS
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2012
or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from

to

Commission File No. 001-7784

CENTURYLINK, INC.
(Exact name of registrant as specified in its charter)

Louisiana
(State or other jurisdiction of
incorporation or organization)

72-0651161
(I.R.S. Employer
Identification No.)

100 CenturyLink Drive, Monroe,
Louisiana
(Address of principal executive offices)

71203
(Zip Code)

(318) 388-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, par value $1.00

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Stock Options
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý

No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o

No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes ý
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ý
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a
smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o

No ý

On February 15, 2013, 625,822,780 shares of common stock were outstanding. The aggregate market value of the voting stock held by non-affiliates
as of June 30, 2012 was $24.5 billion.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be furnished in connection with the 2013 annual meeting of shareholders are incorporated by
reference in Part III of this Annual Report.

Table of Contents

TABLE OF CONTENTS
PART I
Item 1. Business

3

Item 1A. Risk Factors

21

Item 1B. Unresolved Staff Comments

38

Item 2. Properties

39

Item 3. Legal Proceedings

40

Item 4. Mine Safety Disclosures

42
PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities

43

Item 6. Selected Financial Data

45

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

47

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

81

Item 8. Consolidated Financial Statements and Supplementary Data

82

Consolidated Statements of Operations

85

Consolidated Statements of Comprehensive Income (Loss)

86

Consolidated Balance Sheets

87

Consolidated Statements of Cash Flows

88

Consolidated Statements of Stockholders' Equity

89

Notes to Consolidated Financial Statements

90

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

153

Item 9A. Controls and Procedures

153

Item 9B. Other Information

153
PART III

Item 10. Directors, Executive Officers and Corporate Governance

153

Item 11. Executive Compensation

153

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

154

Item 13. Certain Relationships and Related Transactions and Director Independence

154

Item 14. Principal Accountant Fees and Services

154

PART IV
Item 15. Exhibits and Financial Statement Schedules

155

Signatures

169
2

Table of Contents
Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its
consolidated subsidiaries, including SAVVIS, Inc. and its consolidated subsidiaries (referred to as "Savvis") for periods on or after July 15,
2011 and Qwest Communications International Inc. and its consolidated subsidiaries (referred to as "Qwest") for periods on or after April 1,
2011.

PART I
ITEM 1. BUSINESS
Overview
We are an integrated communications company engaged primarily in providing an array of communications services to our residential,
business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line
(including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless and video services. In
certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers ("CLECs") and
security monitoring. 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.
Based on our 13.7 million of total access lines at December 31, 2012, we were the third largest telecommunications company in the United
States. We operate almost 75% of our total access lines in portions of Colorado, Washington, Arizona, Minnesota, Florida, North Carolina, Oregon,
Iowa, Utah, New Mexico, Missouri and Nevada. We also provide local service in portions of Idaho, Ohio, Wisconsin, Virginia, Texas, Pennsylvania,
Montana, Alabama, Nebraska, Indiana, Arkansas, Tennessee, Wyoming, New Jersey, North Dakota, South Dakota, Kansas, Michigan, Louisiana,
South Carolina, Illinois, Georgia, Mississippi, Oklahoma and California. In the portion of these 37 states where we have access lines, which we refer
to as our local service area, we are the incumbent local telephone company. We also operate 54 data centers throughout North America, Europe and
Asia. We define a data center as any facility where we market, sell and deliver either colocation services or multi-tenant managed services, or both.
We were incorporated under the laws of the State of Louisiana in 1968. Our principal executive offices are located at 100 CenturyLink Drive,
Monroe, Louisiana 71203 and our telephone number is (318) 388-9000.
For a discussion of certain risks applicable to our business, financial condition and results of operations, see "Risk Factors" in Item 1A of this
report. The summary financial information in this section should be read in conjunction with, and is qualified by reference to, our consolidated
financial statements and notes thereto in Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this report.

Acquisitions
Acquisition of Savvis
On July 15, 2011, we acquired all of the outstanding common stock of Savvis, a provider of cloud hosting, managed hosting, colocation and
network services in domestic and international markets. We believe this acquisition enhanced our ability to provide information technology
services to our existing business customers and strengthened our ability to attract new business customers. Each share of Savvis common stock
outstanding immediately prior to the acquisition converted into the right to receive $30 per share in cash and 0.2479 shares of CenturyLink common
stock. The aggregate consideration of $2.382 billion was based on:
•

cash payments of $1.732 billion;
3

Table of Contents
•

the 14.313 million shares of CenturyLink common stock issued to consummate the acquisition;

•

the closing stock price of CenturyLink common stock at July 14, 2011 of $38.54; and

•

the estimated net value of the pre-combination portion of certain share-based compensation awards assumed by CenturyLink of
$98 million, of which $33 million was paid in cash.

Upon completing the acquisition, we also paid $547 million to retire certain pre-existing Savvis debt and accrued interest.
Acquisition of Qwest
On April 1, 2011, we acquired all of the outstanding common stock of Qwest, a provider of data, broadband, video and voice services
nationwide and globally. We entered into this acquisition, among other things, to realize certain strategic benefits, including enhanced financial and
operational scale, market diversification and leveraged combined networks. As of the acquisition date, Qwest served approximately 9.0 million
access lines and approximately 3.0 million broadband subscribers across 14 states. Each share of Qwest 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

•

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

We assumed approximately $12.7 billion of long-term debt in connection with our acquisition of Qwest.
Effect of Recent Acquisitions
Our acquisitions in 2011 resulted in several important changes to our operations, including:
•

providing services to an expanded number of densely-populated markets, which tend to afford consumers access to a greater range
of competitive communications products than less dense markets;

•

reducing the percentage of our total revenue derived from governmental support programs, which typically focus on disbursing
payments to companies operating in less densely-populated areas;

•

expanding and reconfiguring our operating regions to incorporate the Qwest service areas in order to provide day-to-day decision
making at the regional level as opposed to the more centralized structures formerly used by Qwest; and

•

offering certain services, such as cloud hosting, that CenturyLink did not historically provide.

Other Acquisitions
On July 1, 2009, we acquired all of the outstanding common stock of Embarq Corporation ("Embarq"), a provider of data, Internet, video and
voice services for stock valued at approximately $6.1 billion on the acquisition date. As of the acquisition date, Embarq served approximately
5.4 million access lines and approximately 1.5 million broadband subscribers across 18 states. We assumed approximately $4.9 billion of long-term
debt in connection with our acquisition of Embarq.
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Table of Contents
We regularly evaluate the possibility of acquiring additional assets in exchange for cash, securities or other properties, and at any given time
may be engaged in discussions or negotiations regarding additional acquisitions. We generally do not announce our acquisitions or dispositions
until we have entered into a preliminary or definitive agreement.
References to Acquired Businesses
In the discussion that follows, we refer to the incremental business activities that we now operate as a result of the Savvis acquisition and the
Qwest acquisition as "Legacy Savvis" and "Legacy Qwest", respectively. References to "Legacy CenturyLink", when used in comparison of our
consolidated results for the years ended December 31, 2012 and 2011, mean the business we operated prior to the Qwest and Savvis acquisitions.

Financial and Operational Highlights
The following table summarizes the results of our consolidated operations. Our operating results include the operations of Savvis for periods
after July 15, 2011 and Qwest for periods after April 1, 2011.
Years Ended December 31,
2011
(Dollars in millions)
18,376
15,351
15,663
13,326
2,713
2,025

2012
Operating revenues
Operating expenses
Operating income

$

Net income

$

$

777

2010
7,042
4,982
2,060

573

948

December 31,
2012
2011
(Dollars in millions)
Balance sheet data:
Total assets
Total long-term debt(1)
Total stockholders' equity

(1)

$

54,020
20,605
19,289

56,044
21,836
20,827

Total long-term debt is the sum of current maturities of long-term debt and long-term debt on our consolidated balance sheets. For total obligations, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Future Contractual Obligations" in Item 7 of this report.

The following table summarizes certain of our operational metrics:

2012
Operational metrics:
Total broadband subscribers(1)
Total access lines(2)

(1)

5,848
13,748

As of December 31,
2011
(in thousands)
5,652
14,584

2010

2,349
6,489

Broadband subscribers are customers that purchase high-speed Internet connection service through their existing telephone lines and fiber-optic cables.

5

Table of Contents
(2)

Access lines are telephone lines reaching from the customers' premises to a connection with the public switched telephone network, or PSTN.

During the second quarter of 2012, we updated our methodology for counting broadband subscribers to include residential, business and
wholesale subscribers instead of only residential and small business subscribers. We have restated our previously reported amounts to reflect this
change.
Substantially all of our long-lived assets are located in the United States and substantially all of our revenues are from customers located in the
United States. We estimate that less than 2% of our consolidated revenue is derived from providing telecommunications and data hosting services
outside the United States.

Operations
Segments
Since acquiring Qwest and Savvis in 2011, we have reorganized our operations and associated reporting segments on three occasions,
including in 2012 and early 2013.
During the second quarter of 2012, in order to more effectively deploy the strategic assets acquired from Qwest and Savvis and to better serve
our business and government customers, we internally restructured our business into the following operating segments:
•

Regional markets. Consists primarily of providing strategic and legacy products and services to residential consumers, state and
local governments, small to medium-sized businesses and enterprise customers that in each case are located mainly within one of our
six regions. Our strategic products and services offered to these customers include our private line, broadband, MPLS, hosting,
video services and wireless services. Our legacy services offered to these customers consist primarily of local and long-distance
service;

•

Wholesale markets. Consists primarily of providing strategic and legacy products and services to other domestic and international
communications providers. Our strategic products and services offered to these customers are mainly private line (including special
access) and MPLS. Our legacy services offered to these customers include UNEs which allow our wholesale customers the use of
our network or a combination of our network and their own networks to provide voice and data services to their customers, longdistance and switched access services;

•

Enterprise markets—network. Consists primarily of providing strategic and legacy network communications products and services
to national and international enterprise and government customers. Our strategic products and services offered to these customers
include our private line, broadband, MPLS and hosting services. Our legacy services offered to these customers consist primarily of
local and long-distance services; and

•

Enterprise markets—data hosting. Consists primarily of providing colocation, managed hosting and cloud hosting services to
national and international enterprise and government customers.
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Table of Contents
The following table shows the composition of our revenues by segment for 2012 and 2011 under our segment categorization as of December 31,
2012.
Years Ended December 31,
2012
2011
Percentage of revenue:
Regional markets
Wholesale markets
Enterprise markets—network
Enterprise markets—data hosting
Other operating revenues
Total

54%
20%
14%
6%
6%
100%

57%
22%
13%
3%
5%
100%

Change
(3%)
(2%)
1%
3%
1%

For additional information on our segment data, including our 2010 segment results and information on certain centrally-managed assets and
expenses not reflected in our segment reports, see Note 13—Segment Information to the consolidated financial statements in Item 8 of this report
and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report.
On January 3, 2013, we announced a reorganization of our operating segments. Beginning with the first quarter of 2013, we will report the
following four segments in our consolidated financial statements: consumer, business, wholesale and data hosting. For additional information on
this change, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report.
Products and Services
Our products and services include a variety of voice, broadband, data, information technology ("IT"), video and other communications
services. In 2011, we expanded our IT services to include cloud hosting, managed hosting, colocation and network services.
We offer our customers the ability to bundle together several products and services. For example, we offer integrated and unlimited local and
long-distance services. Our customers can also bundle two or more services such as broadband, video (including DIRECTV through our strategic
partnership), voice and Verizon Wireless (through our strategic partnership) services. We believe our customers value the convenience and price
discounts associated with receiving multiple services through a single company.
Most of our products and services are provided using our telecommunications network, which consists of voice and data switches, copper
cables, fiber-optic cables and other equipment. Our network serves approximately 13.7 million access lines and forms a portion of the public
switched telephone network, or PSTN.
Described below are our key products and services.
Strategic Services
Our customers use our strategic services to access the Internet, connect to private networks and transmit data. We also provide value-added
services and integrated solutions that make communications more secure, reliable and efficient for our customers. We focus our marketing and sales
efforts on these services:
•

Private line. Private line (including special access) is a direct circuit or channel specifically dedicated for the purpose of directly
connecting two or more sites. Private line offers a
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Table of Contents
high-speed, secure solution for frequent transmission of large amounts of data between sites. We also provide private line
transmission services to wireless service providers that use our fiber-optic cables connected to their towers, commonly referred to as
fiber to the tower or wireless backhaul services, to support their next generation wireless networks;
•

Broadband. Our broadband services allow customers to connect to the Internet through their existing telephone lines and fiber-optic
cables at high speeds. Substantially all of our broadband subscribers are located within our local service area;

•

MPLS. Multi-Protocol Label Switching is standards-approved data networking technology, compatible with existing asynchronous
transfer mode, or ATM, and frame relay networks we provide to support real-time voice and video. This technology allows network
operators flexibility to divert and route traffic around link failures, congestion and bottlenecks;

•

Managed Hosting. Managed hosting includes provision of centralized IT infrastructure and a variety of managed services including
cloud and traditional computing, application management, back-up, storage, and advanced services including planning, design,
implementation and support services;

•

Colocation. Colocation services enable our customers to install their own IT equipment in our state-of-the art facilities through our
centralized IT infrastructure;

•

Ethernet. Ethernet services include point-to-point and multi-point configurations that facilitate data transmissions across
metropolitan areas and wide area networks;

•

Video. Our video services include our facilities-based video, marketed as CenturyLink™ Prism™, which is a premium entertainment
service that allows our customers to watch hundreds of television or cable channels and record up to four shows on one home
digital video recorder. We also offer satellite digital television under an arrangement with DIRECTV that allows us to market, sell and
bill for its services under its brand name;

•

VoIP. Voice over Internet Protocol, or VoIP, is a real-time, two-way voice communication service (similar to our traditional voice
services) that originates over a broadband connection and often terminates on the PSTN; and

•

Wireless services. Our wireless services are offered under an agency arrangement with Verizon Wireless that allows us to market, sell
and bill for its services under its brand name, primarily to customers who buy these services as part of a bundle with one or more of
our other products and services. This arrangement allows us to sell the full complement of Verizon Wireless services. Our current
five-year arrangement with Verizon Wireless runs through 2015 and is terminable by either party thereafter.

Legacy Services
Our legacy services represent our traditional voice, data and network services, which include the following:
•

Local. We offer local calling services for our regional markets customers within our local service area, generally for a fixed monthly
charge. These services include a number of enhanced calling features and other services, such as call forwarding, caller
identification, conference calling, voicemail, selective call ringing and call waiting, for which we generally charge an additional
monthly fee. We also generate revenues from non-recurring services, such as inside wire installation, maintenance services, service
activation and reactivation.
For our wholesale customers, local calling services include primarily resale and UNEs, which allow our wholesale customers to use
our network or a combination of our network and their own networks to provide voice and data services to their customers. Local
calling services also
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include network transport, billing services and access to our network by other telecommunications providers and wireless carriers.
Local calling services provided to our wholesale customers allow other telecommunications companies the ability to originate or
terminate telecommunications services on our network;
•

Long-distance. We offer our residential and business customers domestic and international long-distance services and toll-free
services. Our international long-distance services include voice calls that either terminate or originate with our customers in the
United States;

•

ISDN. We offer integrated services digital network ("ISDN") services, which uses regular telephone lines to support voice, video
and data applications;

•

WAN. We offer wide area network ("WAN") services, which allow a local communications network to link to networks in remote
locations; and

•

Switched access services. We provide various forms of switched access services to wireline and wireless service providers for the
use of our facilities to originate and terminate their interstate and intrastate voice transmissions.

Data Integration
Data integration involves our sale of telecommunications equipment to customers for use on their premises and related professional services.
These services include network management, installation and maintenance of telecommunication and data equipment and the building of
proprietary fiber-optic networks for our governmental and other business customers.
Other Revenues
We also generate other operating revenues from Universal Service Fund ("USF") revenues and surcharges and the leasing and subleasing of
space in our office buildings, warehouses and other properties. The majority of our real estate properties are located in our local service area.
Additional Information
During 2008, we paid an aggregate of approximately $149 million for 69 licenses in the FCC's auction of 700 megahertz wireless spectrum. During
the second quarter of 2012, we committed to a plan to sell our Advanced Wireless Services A Block and 700 MHz wireless spectrum in the A, B, and
C Blocks, which in the aggregate had a basis of $154 million. We sold $58 million of our wireless spectrum assets during the fourth quarter of 2012,
and we sold another $43 million of our wireless spectrum assets in January 2013. In the aggregate, these transactions resulted in a gain of
$32 million. We expect to reach agreements with various other purchasers for the remaining spectrum, and the consummation of which will be
subject to regulatory approval.
From time to time, we also make investments in other communications companies.
For further information on regulatory, technological and competitive changes that could impact our revenues, see "Regulation" and
"Competition" under this Item 1 below and "Risk Factors" under Item 1A below. For more information on the financial contributions of our various
services, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report.
Patents, Trade Names, Trademarks and Copyrights
Either directly or through our subsidiaries, we have rights in various patents, trade names, trademarks, copyrights and other intellectual
property necessary to conduct our business, such as our
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Table of Contents
CenturyLink™ and Prism™ brand names. Our services often use the intellectual property of others, including licensed software. We also
occasionally license our intellectual property to others.
Sales and Marketing
We maintain local offices in most of the larger population centers within our local service area. These offices provide sales and customer
support services in the community. We also rely on our call center personnel to promote sales of services that meet the needs of our customers. Our
strategy is to enhance our communications services by offering a comprehensive bundle of services and deploying new technologies to further
enhance customer loyalty.
We conduct most of our operations under the brand name "CenturyLink." Our satellite television service is offered on a co-branded basis
under the "DIRECTV" name. Our switched digital television service offering is branded under the name "Prism™." The wireless service that we
offer under our agency agreement with Verizon Wireless is marketed under the "Verizon Wireless" brand name. Currently, certain data hosting, IT
and other services furnished through our Savvis operations are marketed under the "SAVVIS" or "savvisdirect" brand names.
Our approach to our regional markets' residential customers emphasizes customer-oriented sales, marketing and service with a local presence.
We market our products and services primarily through direct sales representatives, inbound call centers, local retail stores, telemarketing and third
parties. We support our distribution with direct mail, bill inserts, newspaper advertising, website promotions, public relations activities and
sponsorship of community events and sports venues.
Our approach to our regional markets' business and government customers includes a commitment to deliver communications products and
services that meet existing and future business needs through bundles of services and integrated service offerings. Our focus is to be a
comprehensive communications solution for our small office, mid-sized and select enterprise business and government customers.
Our approach to our wholesale markets' customers includes a commitment to deliver communications solutions that meet existing and future
needs of national network telecommunications providers through bandwidth growth and quality of services.
Our approach to our enterprise market—network customers includes a commitment to deliver network products and services that meet existing
and future customer needs by offering private line, broadband, MPLS and hosting services and well as local and long-distance services.
Our enterprise market—data hosting operations utilize a solution-based selling approach. By working directly with potential and existing
clients, we are able to understand our clients' IT infrastructure and long-term goals. We also market through indirect channels, including
collaborations with existing clients and technology providers, telecommunications companies and system integrators.
Network Architecture
Most of our products and services are provided using our telecommunications network, which consists of voice and data switches, copper
cables, fiber-optic cables and other equipment. Our local exchange carrier networks also include central offices and remote sites, all with advanced
digital switches and operating with licensed software. Our fiber-optic cable is the primary transport technology between our central offices and
interconnection points with other incumbent carriers. As of December 31, 2012, we maintained over 1.03 million miles of copper plant and
approximately 157 thousand miles of fiber-optic plant in our local exchange networks. We also maintain separate networks in connection with
providing fiber transport and CLEC services.
Most of our long distance service is provided through reselling arrangements with other long distance carriers, with the balance being
provided directly through CenturyLink's own switches and
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network equipment. All of our satellite television and wireless voice service is provided by other carriers under agency agreements.
We continue to enhance and expand our network by deploying broadband-enabled technologies to provide additional capacity to our
customers. Rapid and significant changes in technology are expected to continue in the telecommunications industry. Our future success will
depend, in part, on our ability to anticipate and adapt to changes in customer demands and technology. In particular, we anticipate that continued
increases in broadband usage by our customers will require us to make significant capital expenditures to increase network capacity or to implement
network management practices to alleviate network capacity shortages, either of which could adversely impact our results of operation and financial
condition. For additional information, see "Risk Factors", generally, in Item 1A of this report, and, in particular, "Risk Factors—Risks Affecting Our
Business—Increases in broadband usage may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower
transmission speeds for our customers."
For more information, see Item 2 of this report.
Regulation
We are subject to significant regulation by the Federal Communications Commission ("FCC"), which regulates interstate communications, and
state utility commissions, which regulate intrastate communications in our local service area. These agencies issue rules to protect consumers and
promote competition; they set the rates that telecommunication companies charge each other for exchanging traffic; and they have established USF
to support the provision of services to high-cost areas. In most states, local voice service, switched and special access services and
interconnection services are subject to price regulation, although the extent of regulation varies by type of service and geographic region. In
addition, we are required to maintain licenses with the FCC and with the utility commissions of most of the states in our local service area. Laws and
regulations in many states restrict the manner in which a licensed entity can interact with affiliates, transfer assets, issue debt and engage in other
business activities, and many mergers and acquisitions require approval by the FCC and some state commissions.
Historically, incumbent local exchange carriers ("ILECs") operated as regulated monopolies having the exclusive right and responsibility to
provide local telephone services in their franchised service territories. As we discuss in greater detail below, passage of the Telecommunications
Act of 1996, coupled with state legislative and regulatory initiatives and technological change, fundamentally altered the telephone industry by
generally reducing the regulation of ILECs and creating a substantial increase in the number of competitors. We are considered an ILEC. The
following description discusses some of the major industry regulations that affect our traditional telephone operations, but numerous other
regulations not discussed below could also impact us. Some legislation and regulations are currently the subject of judicial, legislative and
administrative proceedings which could substantially change the manner in which the telecommunications industry operates and the amount of
revenues we receive for our services. Neither the outcome of these proceedings, nor their potential impact on us, can be predicted at this time. For
additional information, see Item 1A of this annual report below.
State Regulation
In recent years, most states have substantially reduced their regulation of ILECs. Nonetheless, state regulatory commissions generally
continue to regulate local service rates, intrastate access charges, state universal service funds and in some cases service quality, as they continue
to grant and revoke certifications authorizing companies to provide communications services. State commissions traditionally regulated pricing
through "rate of return" regulation that focused on authorized levels of earnings by ILECs. Several states continue to regulate us in this manner. In
most of our states, we are generally regulated under various forms of alternative regulation that typically limit our ability to increase rates for basic
local voice service, but relieve us from the requirement to meet certain earnings tests. In a
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few states, we have recently gained pricing freedom for the majority of retail services except for the most basic of services, such as stand-alone
basic residential voice service. In most of the states in which we operate, we have gained pricing flexibility for certain enhanced calling services,
such as caller identification and for bundled services that also include local voice service. State commissions periodically conduct proceedings to
review the rates that we charge other telecommunications providers for using our network or for reselling our service pursuant to the
Telecommunications Act of 1996.
We are currently responding to carrier complaints, legislation or generic investigations regarding our intrastate switched access rates in several
of our states. In particular, certain long-distance providers have disputed existing intercarrier compensation rates payable to us and other ILECs
with respect to VoIP traffic or refused to pay access charges, based on the contention that tariffed switched access charges should not apply to
VoIP traffic. On October 27, 2011, the FCC adopted an order comprehensively reforming federal intercarrier compensation and universal service
policies and rules, as discussed further below under the heading "Federal Regulation." Among other things, this order preempted state regulatory
commissions' jurisdiction over all terminating access charges, including intrastate access charges that have historically been subject to exclusive
state jurisdiction. Furthermore, the FCC decreed that, on a prospective basis, intercarrier compensation rates for VoIP traffic will be established at
interstate access rates in the event intrastate switched access rates exceed interstate rates.
The FCC order requires all terminating access rates including intrastate, interstate and reciprocal compensation rates to be reduced and unified
over time. Excluding the rate implications contemplated on a prospective basis by the recent FCC order, we will continue to vigorously defend and
seek to collect our intrastate switched access revenue subject to outstanding disputes. These historical disputes are primarily over access charge
compensation for VoIP traffic terminating on the public switched telephone network. The outcomes of these disputes cannot be determined at this
time. If we are required to reduce our intrastate switched access rates as a result of any of these disputes or state initiatives, we will seek to recover
displaced switched access revenues from state universal service funds or other services. However, the amount of such recovery, particularly from
residential customers, is not assured.
Under state law, our telephone operating subsidiaries are typically governed by laws and regulations that (i) regulate the purchase and sale of
ILECs, (ii) prescribe certain reporting requirements, (iii) require ILECs to provide service under publicly-filed tariffs setting forth the terms,
conditions and prices of regulated services, (iv) limit ILECs' ability to borrow and pledge their assets, (v) regulate transactions between ILECs and
their affiliates, and (vi) impose various other service standards.
Unlike many of our competitors, as an ILEC we generally face "carrier of last resort" obligations which include an ongoing requirement to
provide service to all prospective and current customers in our service area who request service and are willing to pay rates prescribed in our tariffs.
In competitively-bid situations, such as newly-constructed housing developments or multi-tenant dwellings, this may constitute a competitive
disadvantage to us if competitors can choose to focus on low-risk profitable customers and withhold service from high-risk unprofitable customers.
In addition, strict adherence to carrier of last resort requirements may force us to construct facilities with a low likelihood of positive economic
return.
We operate in states where traditional cost recovery mechanisms, including rate structures, are under evaluation or have been modified. There
can be no assurance that these states will continue to provide for cost recovery at current levels.
Federal Regulation
We are required to comply with the Communications Act of 1934, which requires us to offer services at just and reasonable rates and on nondiscriminatory terms, as well as the
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Telecommunications Act of 1996, which amended the Communications Act of 1934 primarily to promote competition.
The FCC regulates interstate services provided by us, including the special access charges we bill for wholesale network transmission and the
interstate access charges that we bill to long-distance companies and other communications companies in connection with the origination and
termination of interstate voice and data transmissions. Additionally, the FCC regulates a number of aspects of our business related to privacy,
homeland security and network infrastructure, including access to and use of local telephone numbers. The FCC has responsibility for maintaining
and administering the federal USF, which provides substantial support for maintaining networks in high-cost areas, as well as supporting service to
low-income households, schools and libraries, and rural health care providers. Like other communications network operators, ILECs must obtain
FCC approval to use certain radio frequencies, or to transfer control of any such licenses. The FCC retains the right to revoke these licenses if a
carrier materially violates relevant legal requirements.
We, like other large and mid-sized ILECs, operate under price-cap regulation of interstate access rates. Under price-cap regulation, limits
imposed on a company's interstate rates are adjusted periodically to reflect inflation, productivity improvement and changes in certain noncontrollable costs.
In recent years, our operations and those of other telecommunications carriers have been further impacted by legislation and regulation
imposing additional obligations on us, particularly with regards to providing broadband service, bolstering homeland security, increasing disaster
recovery requirements, minimizing environmental impacts and enhancing privacy. These laws include the Communications Assistance for Law
Enforcement Act, and laws governing local telephone number portability and customer proprietary network information requirements. These laws
and regulations may cause us to incur additional costs and could impact our ability to compete effectively.
In December 2012, the FCC initiated a special access proceeding and has requested data, information and documents to allow it to conduct a
comprehensive evaluation of competition in the special access market. The ultimate impact of this proceeding on the Company is currently
unknown. However, if the FCC were to adopt significant changes in regulations affecting special access services, this could adversely impact our
operations or financial results.
Universal Service Fund and Other Related Matters
For decades, the FCC has regularly considered various intercarrier compensation reforms, generally with a goal to create a uniform mechanism
to be used by the entire telecommunications industry for payments between carriers originating, terminating, or carrying telecommunications traffic.
In connection therewith, the FCC solicited public comments on a variety of topics related to access charges and intercarrier compensation.
The American Recovery and Reinvestment Act of 2009 (the "Recovery Act") includes certain broadband initiatives that are intended to
accelerate broadband deployment across the United States. The Recovery Act approved $7.2 billion in funding for broadband stimulus projects
across the United States to be administered by two governmental agencies. The programs provide grants and loans to applicants for construction
of certain broadband infrastructure, provision of certain broadband services, and support of certain broadband adoption initiatives. This program
has attracted a wide range of applicants including states, municipalities, start-up companies and consortiums. The participation of other parties in
these programs has increased competition in selected areas, which may increase our marketing costs and decrease our revenues in those areas. This
trend may intensify if program participation increases.
On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order ("CAF order"), intended to reform the
existing regulatory regime to recognize ongoing shifts to new technologies, including VoIP, and gradually re-direct universal service funding to
foster
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nationwide broadband coverage. This initial ruling provides for a multi-year transition over the next decade as terminating intercarrier compensation
charges are reduced, universal service funding is explicitly targeted to broadband deployment, and line charges paid by end user customers are
gradually increased. We anticipate that these changes will substantially increase the pace of reductions in the amount of switched access revenues
in our wholesale segment, while creating opportunities for increases in federal USF and retail revenue streams.
On December 29, 2011, the CAF order went into effect. At the same time, numerous parties filed a petition for reconsideration with the FCC
seeking numerous revisions to the order. In January 2012, we joined more than two dozen parties in challenging certain aspects of the order by filing
a separate appeal that is expected to be heard by the United States Tenth Circuit Court of Appeals in late 2013. Future judicial challenges to the
CAF order are possible, which could alter or delay the FCC's proposed changes. In addition, based on the outcome of the FCC proceedings, various
state commissions may consider changes to their universal service funds or intrastate access rates. Moreover, rulemaking designed to implement
the order is not complete, and several FCC proceedings relating to the order remain pending. For these and other reasons, we cannot predict the
ultimate impact of these proceedings at this time.
On January 31, 2012, the FCC adopted an order modernizing the program that provides assistance to qualifying low-income individuals for local
voice service. These changes also affect state-specific programs that provide assistance to qualifying individuals. The impact of these changes on
us and our low-income customers cannot be quantified at this time, but we may face increased administrative costs, additional audit requirements
and potential customer disconnections as a result of this FCC order and its implementation.
We received approximately $543 million, $510 million and $431 million of revenue from federal and state universal service programs for the years
ended December 31, 2012, 2011 and 2010, respectively. Such amounts represented approximately 3.0%, 3.3% and 6.1% of our 2012, 2011 and 2010
total operating revenues, respectively.
Other Regulations
Certain of our telecommunications and data hosting services conducted in foreign countries are or may become subject to various foreign laws,
including those regulating the protection and retention of data.
Competition
General
We compete in a rapidly evolving and highly competitive market and we expect intense competition to continue. We compete with cable and
satellite companies, wireless providers, national telecommunications providers (such as AT&T, Inc. and Verizon Communications Inc.) and a variety
of other competitors. Technological advances, regulatory and legislative changes have increased opportunities for alternative communications
service providers, which in turn have increased competitive pressures on our business. These alternate providers often face fewer regulations and
have lower cost structures than we do. In addition, the telecommunications industry has experienced substantial consolidation over the past
decade and some of our competitors in one or more lines of our business are generally larger, have stronger brand names, have more financial and
business resources and have broader service offerings than we currently do.
Over the past decade, fundamental technological, regulatory and legislative changes have significantly impacted the communications industry,
and we expect these changes will continue. Primarily as a result of regulatory and technological changes, competition has been introduced and
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encouraged in each sector of the communications industry in recent years. As a result, we increasingly face competition from other communication
service providers, as further described below.
Wireless telephone services increasingly constitute a significant source of competition with our ILEC services. As a result, some customers
have chosen to completely forego use of traditional wireline phone service and instead rely solely on wireless service for voice services. We
anticipate this trend will continue, particularly if wireless service providers continue to expand their coverage areas, reduce their rates, improve the
quality of their services and offer enhanced new services. Substantially all of our access line customers are currently capable of receiving wireless
services from at least one competitive service provider. Technological and regulatory developments in wireless services, personal communications
services, digital microwave, satellite, coaxial cable, fiber-optics, local multipoint distribution services, WiFi, and other wired and wireless
technologies are expected to further permit the development of alternatives to traditional landline services. Moreover, the growing prevalence of
electronic mail, text messaging, social networking and similar digital communications continues to reduce the demand for traditional landline voice
services.
The Telecommunications Act of 1996, which obligates ILECs to permit competitors to interconnect their facilities to the ILEC's network and to
take various other steps that are designed to promote competition, imposes several duties on an ILEC if it receives a specific request from another
entity which seeks to connect with or provide services using the ILEC's network. In addition, each ILEC is obligated to (i) negotiate interconnection
agreements in good faith, (ii) provide nondiscriminatory "unbundled" access to all aspects of the ILEC's network, (iii) offer resale of its
telecommunications services at wholesale rates and (iv) permit competitors, on terms and conditions (including rates) that are just, reasonable and
nondiscriminatory, to colocate their physical plant on the ILEC's property, or provide virtual colocation if physical colocation is not practicable.
Current FCC rules require ILECs to lease a network element only in those situations where competing carriers genuinely would be impaired without
access to such network elements, and where the unbundling would not interfere with the development of facilities-based competition.
As a result of these regulatory, consumer and technological developments, ILECs also face competition from competitive local exchange
carriers, or CLECs, particularly in densely populated areas. CLECs provide competing services through reselling the ILECs' local services, through
use of the ILECs' unbundled network elements or through their own facilities.
Technological developments have led to the development of new services that compete with traditional ILEC services. Technological
improvements have enabled cable television companies to provide traditional circuit-switched telephone service over their cable networks, and
several national cable companies have aggressively pursued this opportunity. Similarly, companies providing VoIP services provide voice
communication services over the Internet which compete with our traditional telephone service and our own VoIP services.
Similar to us, many cable, technology or other communications companies that previously offered a limited range of services are now offering
diversified bundles of services, either through their own networks, reselling arrangements or joint ventures. As such, a growing number of
companies are competing to serve the communications needs of the same customer base. Such activities will continue to place downward pressure
on the demand for our access lines and the pricing of our services.
As both consumers and business customers increasingly demand high-speed connections for entertainment, communications and
productivity, we expect the demands on our network will continue to increase over the next several years. To succeed, we and other network-based
providers must ensure that our networks can deliver services that meet these increasing bandwidth requirements. We plan to continue to invest in
our network to be able to meet this future demand. In addition, network reliability and security are increasingly important competitive factors in the
enterprise business.
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In addition to facing direct competition from those providers described above, ILECs increasingly face competition from alternate
communication systems constructed by long distance carriers, large customers or alternative access vendors. These systems are capable of
originating or terminating calls without use of the ILECs' networks or switching services. Other potential sources of competition include non-carrier
systems that are capable of bypassing ILECs' local networks, either partially or completely, through various means, including the provision of
special access or independent switching services and the concentration of telecommunications traffic on a few of the ILECs' access lines. We
anticipate that all these trends will continue and lead to decreased use of our networks.
Additional information about competitive pressures is located (i) under the heading "Risk Factors—Risks Affecting Our Business" in Item 1A
of this report and (ii) in the discussion immediately below, which contains more specific information on how these trends in competition have
impacted our segments.
Regional Markets
Strategic Services
With respect to our strategic services, competition is based on price, bandwidth, service, promotions and bundled offerings. Wireless carriers'
fourth generation, or 4G, services are allowing them to more directly compete with our strategic services. In reselling DIRECTV video services, we
compete primarily with cable and other satellite companies as well as other sales agents and resellers. We also compete with interexchange carriers
and other broadband service providers. Our Prism™ residential video service faces substantial competition from a variety of competitors, including
well-established cable companies and companies that deliver content over the Internet and on mobile devices at little or no cost to their customers.
Many of our competitors for these strategic services are not subject to the same regulatory requirements as we are and therefore they are able to
avoid significant regulatory costs and obligations
Our strategy is based on pricing, packaging of services and features, quality of service and meeting customer care needs and on maintaining
our focus on increasing the subscribers of our broadband services. In order to remain competitive, we believe continually increasing connection
speeds is important. As a result, we continue to invest in our network, which allows for the delivery of higher speed broadband services. While
traditional ATM-based broadband services are declining, they have been more than offset by growth in fiber-based broadband services. We also
continue to expand our product offerings including facilities-based video services and enhance our marketing efforts as we compete in a maturing
market in which a significant portion of consumers already have broadband services.
Legacy Services
Although our status as an ILEC continues to provide us advantages in providing local services in our local service area, as noted above we
increasingly face significant competition as an increasing number of consumers are willing to substitute cable, wireless and electronic
communications for traditional voice telecommunications services. This has led to an increase in the number and type of competitors within our
industry and a decrease in our market share. As a result of this product substitution, we face greater competition in providing local and long
distance services from wireless providers, resellers and sales agents (including ourselves), social media hosts and broadband service providers,
including cable companies. We also continue to compete with traditional telecommunications providers, such as national carriers, smaller regional
providers, CLECs and independent telephone companies.
Our strategy to reduce access line loss is based primarily on our pricing, packaging of services and features, quality of service and meeting
customer care needs. While bundle price discounts have
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resulted in lower average revenues for our individual services, we believe service bundles continue to positively impact our customer retention. In
addition to our bundle discounts, we also offer limited time promotions on our broadband service for prospective customers who want our
broadband service in their bundle, which further aids our ability to attract and retain customers and increase usage of our services.
Data Integration
In providing data integration to our customers, we compete primarily with large integrators, equipment providers and national
telecommunication providers. Competition is based on package offerings and as such we focus on providing these customers individualized and
customizable packages. Our strategy is to provide our data integration through packages that include other strategic and legacy services. As such,
in providing data integration we often face many of the same competitive pressures as we face in providing strategic and legacy services, as
discussed above.
Wholesale Markets
Strategic Services
In providing private line (including special access) services to our wholesale markets customers, we compete with large cable companies, as
well as other regional and national carriers, other fiber providers and CLECs. Demand for our private line services continues to increase, despite our
customers' optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue to
impact our wholesale markets segment, we believe the growth in fiber-based special access provided to wireless carriers for backhaul will, over time,
ultimately offset the decline in copper-based special access provided to wireless carriers as they migrate to Ethernet services, although the timing
and magnitude of this technological migration is uncertain.
Legacy Services
The provision of our legacy services to other communications providers is highly competitive, and has been and will continue to be adversely
affected by product substitution, technological migration, industry consolidation and rate reductions. We face significant competition for access
services from CLECs, cable companies, resellers and wireless service providers as well as some of our own wholesale markets customers, which are
deploying their own networks to provide customers with local services. By doing so, these competitors reduce traffic on our network. In addition,
our long-distance revenues continue to decline as a result of customer migration to more technologically advanced services, price compression, and
declining demand for traditional voice services.
Enterprise Markets—Network
Strategic Services
Our competitors for integrated data, Internet, voice services and other IT services range from mid-sized businesses to large enterprises. Due to
the size and capacity of some of these companies, they may be able to offer more inexpensive solutions to our customers. To compete, we focus on
providing complex, secure and performance-driven services to our business customers through our global infrastructure. Our network services
continue to see pricing pressures on virtual private network and bandwidth services offset by increases in network services that support our
colocation and managed hosting service offerings. Our keys to growth include targeting the right clients, offering targeted business solutions to
solve specific client needs and delivering compelling and comprehensive technical capabilities.
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Legacy Services
We face intense competition with respect to our legacy services and continue to see customers migrating away from these services and into
strategic services. In addition, our legacy services revenues have been, and we expect they will continue to be, adversely affected by access line
losses and price competition.
Data Integration
We expect data integration to continue to fluctuate from quarter to quarter as this offering tends to be more sensitive than others to changes in
the economy and in spending trends of our federal government customers. In addition, changes to our compensation programs, which focus on
higher margin strategic services, could negatively impact data integration revenues.
Enterprise Markets—Data Hosting
Strategic Services
Our competitors for hosting, colocation and other IT services include telecommunications companies, hardware manufacturers and system
integrators that support the in-house IT operations for a business or offer outsourcing solutions. Due to the size and capacity of some of these
companies, they may be able to offer more inexpensive solutions to our customers. To compete, we focus on providing complex, secure and
performance-driven services to our business customers through our global infrastructure on the same terms outlined under the heading
"Business—Enterprise Markets—Network—Strategic Services" in Item I of this report.
For our colocation services, we continue to see pricing pressures with respect to these services as low-cost wholesale colocation providers
continue to enter our market, and we expect this trend to continue. Our services can be purchased individually or as part of a total outsourcing
arrangement.
Environmental Compliance
Several decades ago one of our subsidiaries acquired entities that may have owned or operated seven former "manufactured gas" plant sites
that may require environmental remediation. From time to time we may incur other environmental compliance and remediation expenses, mainly
resulting from the ownership of other prior industrial sites or the operation of vehicle fleets or power supplies for our communications equipment.
Although we cannot assess with certainty the impact of any future compliance and remediation obligations or provide you with any assurances
regarding the ultimate impact thereof, we do not believe that future environmental compliance and remediation expenditures will have a material
adverse effect on our financial condition or results of operations.
Seasonality
Overall, our business is not significantly impacted by seasonality. From time to time weather related problems have resulted in increased costs
to repair our network and respond to service calls in some of our markets. The amount and timing of these costs are subject to the weather patterns
of any given year, but have generally been highest during the third quarter and have been related to damage from severe storms, including
hurricanes, tropical storms and tornadoes in our markets along the lower Atlantic and Gulf of Mexico coastlines.
Employees
At December 31, 2012, we had approximately 47,000 employees, of which approximately 18,000 are members of either the International
Brotherhood of Electrical Workers ("IBEW") or the Communications Workers of America ("CWA"). Approximately 12,000 of these employees are
subject
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to collective bargaining agreements that expired October 6, 2012. We are currently negotiating the terms of new agreements. In the meantime, the
predecessor agreements have been extended, and the unions have agreed to provide at least twenty-four hour advance notice before terminating
those predecessor agreements. See the discussion of risks relating to our labor relations in "Risk Factors—Risks Affecting Our Business" in
Item 1A of this report.
Over the past several years, we have reduced our workforce primarily due to (i) integration efforts from our recent acquisitions; (ii) increased
competitive pressures; and (iii) the loss of access lines.
Website Access and Important Investor Information
Our website is www.centurylink.com. The information contained on, or that may be accessed through, our website is not part of this annual
report. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports in the "Investor Relations" section of our website (ir.centurylink.com) under the heading "SEC Filings." These
reports are available on our website as soon as reasonably practicable after we electronically file them with the Securities and Exchange
Commission, or SEC.
We have adopted written codes of conduct that serve as the code of ethics applicable to our directors, officers and employees, including our
principal executive officer and senior financial officers, in accordance with applicable laws and rules promulgated by the SEC and the New York
Stock Exchange. In the event that we make any changes (other than by a technical, administrative or non-substantive amendment) to, or provide
any waivers from, the provisions of our code of conduct applicable to our directors or executive officers, we intend to disclose these events on our
website or in a report on Form 8-K filed with the SEC. These codes of conduct, as well as copies of our guidelines on significant governance issues
and the charters of our audit committee, compensation committee, nominating and corporate governance committee and risk evaluation committee,
are also available in the "Corporate Governance" section of our website at www.centurylink.com/Pages/AboutUs/Governance/ or in print to any
shareholder who requests them by sending a written request to our Corporate Secretary at CenturyLink, Inc., 100 CenturyLink Drive, Monroe,
Louisiana, 71203.
Investors may also read and copy any materials filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. For information on the operation of the Public Reference Room, you are encouraged to call the SEC at 1-800-SEC-0330. For all of our
electronic filings, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
In connection with filing this annual report, our chief executive officer and chief financial officer made the certifications regarding our financial
disclosures required under the Sarbanes-Oxley Act of 2002, and its related regulations. In addition, during 2012, our chief executive officer certified
to the New York Stock Exchange that he was unaware of any violations by us of the New York Stock Exchange's corporate governance listing
standards.

Special Note Regarding Forward-Looking Statements and Related Matters
This report and other documents filed by us under the federal securities law include, and future oral or written statements or press releases by
us and our management may include, forward-looking statements about our financial condition, operating results and business. These statements
include, among others:
•

statements concerning the benefits that we expect will result from our business activities and certain transactions we have
completed, such as increased revenue and decreased capital or operating expenditures;
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•

statements about our anticipated future operating and financial performance, financial position and liquidity, tax position, contingent
liabilities, growth opportunities and growth rates, acquisition and divestiture opportunities, business prospects, regulatory and
competitive outlook, investment and expenditure plans, investment results, financing alternatives and sources and pricing plans; and

•

other similar statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are
not historical facts, many of which are highlighted by words such as "may," "would," "could," "should," "plan," "believes,"
"expects," "anticipates," "estimates," "projects," "intends," "likely," "seeks," "hopes," or variations or similar expressions.

These forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future
developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions upon which they are
based, are inherently speculative and are subject to a number of risks and uncertainties. Actual events and results may differ materially from those
anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if our underlying
assumptions prove incorrect. Factors that could affect actual results include but are not limited to:
•

the timing, success and overall effects of competition from a wide variety of competitive providers;

•

the risks inherent in rapid technological change;

•

the effects of ongoing changes in the regulation of the communications industry, including the outcome or regulatory or judicial
proceedings relating to intercarrier compensation, access charges, universal service, broadband deployment and net neutrality;

•

our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages;

•

our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and
product mix caused by our recent acquisitions;

•

our ability to successfully integrate recently-acquired operations into our incumbent operations, including the possibility that the
anticipated benefits from our recent acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired
operations will be more difficult, disruptive or costly than anticipated;

•

our ability to use net operating loss carryovers of Qwest in projected amounts;

•

our ability to effectively manage our expansion opportunities, including retaining and hiring key personnel;

•

possible changes in the demand for, or pricing of, our products and services, including our ability to effectively respond to increased
demands for high-speed broadband service;

•

our ability to successfully introduce new product or service offerings on a timely and cost-effective basis;

•

our continued access to credit markets on favorable terms;

•

our ability to collect our receivables from financially troubled communications companies;

•

any adverse developments in legal or regulatory proceedings involving us;
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•

our ability to continue to pay common share dividends in accordance with past practices, which may be affected by changes in our
cash requirements, capital spending plans, cash flows or financial position;

•

unanticipated increases or other changes in our future cash requirements, whether caused by unanticipated increases in capital
expenditures, increases in pension funding requirements or otherwise;

•

the effects of adverse weather;

•

other risks referenced in this report or other of our filings with the SEC; and

•

the effects of more general factors such as changes in interest rates, in tax rates, in accounting policies or practices, in operating,
medical, pension or administrative costs, in general market, labor or economic conditions, or in legislation, regulation or public
policy.

These and other uncertainties related to our business and our recent acquisitions are described in greater detail in Item 1A of this report, which
is subject to updating and supplementing by our subsequent SEC reports.
These risk factors should be considered in connection with any written or oral forward-looking statements that we or persons acting on our
behalf may issue. Anticipated events may not occur and our actual results or performance may differ materially from those anticipated, estimated or
projected if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Additional risks that we currently
deem immaterial or that are not presently known to us could also cause our actual results to differ materially from our expected results. Given these
uncertainties, we caution investors not to unduly rely on our forward-looking statements. We undertake no obligation to update or revise any
forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or
otherwise. Further, the information about our intentions contained in this document is a statement of our intentions as of the date of this document
and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in
general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such
factors, in our assumptions or otherwise.
Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to
them selectively any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with
any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Unless otherwise indicated, information contained in this report and other documents filed by us under the federal securities laws concerning
our views and expectations regarding the communications industry are based on estimates made by us using data from industry sources, and on
assumptions made by us based on our management's knowledge and experience in the markets in which we operate and the communications
industry generally. You should be aware that we have not independently verified data from industry or other third-party sources and cannot
guarantee its accuracy or completeness. Our estimates and assumptions involve risks and uncertainties and are subject to change based on various
factors, including those discussed below in Item 1A of this report.

ITEM 1A. RISK FACTORS
Any of the following risks could materially and adversely affect our business, financial condition, results of operations, liquidity or prospects.
The risks described below are not the only risks facing us.
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Please be aware that additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also materially
and adversely affect our business operations.

Risks Affecting Our Business
Increasing competition, including product substitution, continues to cause access line losses, which has adversely affected and could continue
to adversely affect our operating results and financial condition.
We compete in a rapidly evolving and highly competitive market, and we expect competition to continue to intensify. In addition to competition
from larger national telecommunications providers, we are facing increasing competition from a variety of other sources, including cable and satellite
companies, wireless providers, broadband companies, resellers, sales agents and facilities-based providers using their own networks as well as
those leasing parts of our network. In addition, regulatory developments over the past several years have generally increased competitive pressures
on our business. Due to some of these and other factors, we continue to lose access lines.
Some of our current and potential competitors (i) offer a more comprehensive range of communications products and services, (ii) have market
presence, engineering and technical capabilities, and financial and other resources greater than ours, (iii) own larger or more diverse networks with
greater transmission capacity or other advantages, (iv) conduct operations or raise capital at a lower cost than us, (v) are subject to less regulation,
(vi) offer greater online content or (vii) have substantially stronger brand names. Consequently, these competitors may be better equipped to
provide more attractive offerings, to charge lower prices for their products and services, to develop and expand their communications and network
infrastructures more quickly, to adapt more swiftly to new or emerging technologies and changes in customer requirements, and to devote greater
resources to the marketing and sale of their products and services.
Competition could adversely impact us in several ways, including (i) the loss of customers and market share, (ii) the possibility of customers
reducing their usage of our services or shifting to less profitable services, (iii) reduced traffic on our networks, (iv) our need to expend substantial
time or money on new capital improvement projects, (v) our need to lower prices or increase marketing expenses to remain competitive and (vi) our
inability to diversify by successfully offering new products or services.
We are continually taking steps to respond to these competitive pressures, but these efforts may not be successful. Our operating results and
financial condition would be adversely affected if these initiatives are unsuccessful or insufficient and if we otherwise are unable to sufficiently
stem or offset our continuing access line losses and our revenue declines significantly without corresponding cost reductions. If this occurred, our
ability to service debt and pay other obligations would also be adversely affected.
Rapid changes in technology and markets could require substantial expenditure of financial and other resources in excess of contemplated
levels, and any inability to respond to those changes could reduce our market share and adversely affect our operating results and financial
condition.
The communications industry is experiencing significant technological changes, many of which are reducing demand for our traditional voice
services or are enabling our current customers to reduce or bypass use of our networks. Similarly, the information technology services industry is
experiencing rapid changes in technologies. Further technological change could require us to expend capital or other resources in excess of
currently contemplated levels, or to forgo the development or provision of products or services that others can provide more efficiently. If we are
not able to develop new products and services to keep pace with technological advances, or if those products and services are not widely accepted
by customers, our ability to compete could be adversely affected and our market share could decline. Any inability to effectively respond to
changes in technology and markets could
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also adversely affect our operating results and financial condition, as well as our ability to service debt and pay other obligations.
For additional information on the risks of increased expenditures, see "Risk Factors—Risks Affecting our Liquidity and Capital Resources—
Our business requires us to incur substantial capital and operating expenses, which reduces our available free cash flow."
Our legacy services continue to experience declining revenues, and our efforts to offset these declines may not be successful.
The telephone industry has experienced a decline in access lines and network access revenues, which, coupled with the other changes
resulting from competitive, technological and regulatory developments, continue to place downward pressure on the revenues we generate from our
legacy services.
We have taken a variety of steps to counter these declines, including:
•

an increased focus on selling a broader range of higher-growth strategic services, which are described in detail in Item 1 and 7 of this
report;

•

an increased focus on serving a broader range of business, governmental and wholesale customers;

•

greater use of service bundles; and

•

acquisitions to increase our scale and strengthen our product offerings, including new products and services provided by our
Savvis operations.

However, some of these strategic services generate lower profit margins than our traditional services, and some can be expected to experience
slowing growth as increasing numbers of our existing or potential customers subscribe to these newer products. Moreover, we cannot assure you
that the revenues generated from our new offerings will offset revenue losses associated from reduced sales of our legacy products. Similarly, we
cannot assure you that our new service offerings will be as successful as anticipated, or that we will be able to continue to grow through
acquisitions. In addition, our reliance on third parties to provide certain of these strategic services could constrain our flexibility, as described
further below.
If we fail to extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, or if our
unionized employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.
Over 38% of our employees are members of various bargaining units represented by the Communications Workers of America and the
International Brotherhood of Electrical Workers. Approximately 12,000, or 26%, of our employees are subject to collective bargaining agreements
that expired October 6, 2012. We are currently negotiating the terms of new agreements. In the meantime, the predecessor agreements have been
extended, and the applicable unions have agreed to provide us with at least twenty-four hour advance notice before terminating those predecessor
agreements.
We may be unable to reach new agreements, and union employees may engage in strikes, work slowdowns or other labor actions, which could
materially disrupt our ability to provide services and result in increased cost to us. In addition, new labor agreements may impose significant new
costs on us, which could impair our financial condition or results of operations in the future. To the extent they contain benefit provisions, these
agreements may also limit our flexibility to change benefits in response to industry or competitive changes. In particular, the post-employment
benefits provided under these agreements could cause us to incur costs not faced by many of our competitors, which could ultimately hinder our
competitive position.
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Our future results will suffer if we do not effectively adjust to changes in our business, and will further suffer if we do not effectively manage our
expanded operations.
The above-described changes in our industry have placed a higher premium on marketing, technological, engineering and provisioning skills.
Our recent acquisitions also significantly changed the composition of our markets and product mix. Our future success depends, in part, on our
ability to retrain our staff to acquire or strengthen skills necessary to address these changes, and, where necessary, to attract and retain new
personnel that possess these skills.
Unfavorable general economic conditions could negatively impact our operating results and financial condition.
Unfavorable general economic conditions, including the unstable economy and credit market, could negatively affect our business. Worldwide
economic growth has been sluggish since 2008, and many experts believe that a confluence of factors in the United States, Europe, Asia and
developing countries may result in a prolonged period of economic downturn, slow growth or economic uncertainty. While it is difficult to predict
the ultimate impact of these general economic conditions, they could adversely affect the affordability of and consumer demand for some of our
products and services and could cause customers to shift to lower priced products and services or to delay or forgo purchases of our products and
services. These conditions impact, in particular, our ability to sell discretionary products or services to business customers that are under pressure
to reduce costs or to governmental customers that have suffered recent budget cuts. Any one or more of these circumstances could cause our
revenues to continue declining. Also, our customers may encounter financial hardships or may not be able to obtain adequate access to credit,
which could negatively impact their ability to make timely payments to us. In addition, as discussed further below, unstable economic and credit
markets may preclude us from refinancing maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are
acceptable to us or at all. For these reasons, among others, if the current economic conditions persist or decline, this could adversely affect our
operating results and financial condition, as well as our ability to raise capital.
We could be harmed by security breaches, damages or other significant disruptions or failures of our networks, IT infrastructure or related
systems, or of those we operate for certain of our customers.
To be successful, we will need to continue providing our customers with a high-capacity, reliable and secure network. We face the risk, as does
any company, of a security breach or significant disruption of our IT infrastructure and related systems (including our billing systems). As a
communications and IT company, we face an added risk that a security breach or other significant disruption of our public networks or IT
infrastructure and related systems that we develop, install, operate and maintain for certain of our business and governmental customers could lead
to material interruptions or curtailments of service. Moreover, due to the nature of our customers and services, we face a heightened risk that a
security breach or disruption could result in unauthorized access to our customers' proprietary or classified information on our public networks or
internal systems or the systems that we operate and maintain for certain of our customers.
We make significant efforts to maintain the security and integrity of these types of information and systems and maintain contingency plans in
the event of security breaches or other system disruptions. Nonetheless, we cannot assure you that our security efforts and measures will prevent
unauthorized access to our systems, loss or destruction of data (including confidential client information), account takeovers, unavailability of
service, computer viruses, malware, or other forms of cyber attacks or similar events. These threats may derive from human error, fraud, malice or
sabotage on the part of employees, third parties or other nations, or could result from accidental technological failure. Similar to other large
telecommunications companies, we have been subject to a variety of security breaches and cyber attacks, although to date none of these have
resulted in a material adverse effect on our
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operating results or financial condition. We cannot assure you, however, that future security breaches or disruptions would not be successful or
damaging, especially in light of the growing frequency and sophistication of cyber attacks and intrusions. We may be unable to anticipate all
potential types of attacks or intrusions or to implement adequate security barriers or other preventative measures, and any resulting damages could
be material.
Additional risks to our network and infrastructure include:
•

power losses or physical damage, whether caused by fire, adverse weather conditions, terrorism or otherwise;

•

capacity limitations;

•

software and hardware defects or malfunctions;

•

programming, processing and other human error; and

•

other disruptions that are beyond our control.

Network disruptions, security breaches and other significant failures of the above-described systems could:
•

disrupt the proper functioning of these networks and systems and therefore our operations or those of certain of our customers;

•

result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or
otherwise valuable information of ours, our customers or our customers' end-users, including trade secrets, which others could use
for competitive, disruptive, destructive or otherwise harmful purposes and outcomes;

•

require significant management attention or financial resources to remedy the damages that result or to change our systems,
including expenses to repair systems, add new personnel or develop additional protective systems;

•

subject us to claims for contract breach, damages, credits, fines, penalties, termination or other remedies, particularly with respect to
service standards set by state regulatory commissions; or

•

result in a loss of business, damage our reputation among our customers and the public generally, subject us to additional regulatory
scrutiny or expose us to litigation.

Likewise, our ability to expand and update our information technology infrastructure in response to our growth and changing needs is
important to the continued implementation of our new service offering initiatives. Our inability to expand or upgrade our technology infrastructure
could have adverse consequences, which could include the delayed implementation of new service offerings, increased acquisition integration
costs, service or billing interruptions, and the diversion of development resources.
Any or all of the foregoing developments could have a negative impact on our results of operations, financial condition and cash flows.
Increases in broadband usage may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower
transmission speeds for our customers.
Video streaming services and peer-to-peer file sharing applications use significantly more bandwidth than traditional Internet activity such as
web browsing and email. As utilization rates and availability of these services continue to grow, our high-speed Internet customers may use much
more bandwidth than in the past. If this occurs, we could be required to make significant capital expenditures to increase network capacity in order
to avoid service disruptions, reduced capacity or slower
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transmission speeds for our customers. Alternatively, we could choose to implement network management practices to reduce the network capacity
available to bandwidth-intensive activities during certain times in market areas experiencing congestion, which could negatively affect our ability to
retain and attract customers in affected markets. While we believe demand for these services may drive high-speed Internet customers to pay for
faster broadband speeds, we may not be able to recover the costs of the necessary network investments. This could result in an adverse impact to
our operating margins, results of operations and financial condition.
We may need to defend ourselves against claims that we infringe upon others' intellectual property rights, or we may need to seek third-party
licenses to expand our product offerings.
From time to time, we receive notices from third parties or are named in lawsuits filed by third parties claiming we have infringed or are
infringing upon their intellectual property rights. We may receive similar notices or be involved in similar lawsuits in the future. Responding to these
claims may require us to expend significant time and money defending our use of affected technology, may require us to enter into licensing
agreements requiring royalty payments that we would not otherwise have to pay or may require us to pay damages. If we are required to take one or
more of these actions, our profit margins may decline. In addition, in responding to these claims, we may be required to stop selling or redesign one
or more of our products or services, which could significantly and adversely affect the way we conduct business.
Similarly, from time to time, we may need to obtain the right to use certain patents or other intellectual property from third parties to be able to
offer new products and services. If we cannot license or otherwise obtain rights to use any required technology from a third party on reasonable
terms, our ability to offer new products and services may be restricted, made more costly or delayed.
Our reseller and sales agency arrangements expose us to a number of risks, one or more of which may adversely affect our business and
operating results.
We rely on reseller and sales agency arrangements with other companies to provide some of the services that we sell to our customers,
including video services and wireless products and services. If we fail to extend or renegotiate these arrangements as they expire from time to time
or if these other companies fail to fulfill their contractual obligations to us or our customers, we may have difficulty finding alternative arrangements
and our customers may experience disruptions to their services. In addition, as a reseller or sales agent, we do not control the availability, retail
price, design, function, quality, reliability, customer service or branding of these products and services, nor do we directly control all of the
marketing and promotion of these products and services. To the extent that these other companies make decisions that negatively impact our ability
to market and sell their products and services, our business plans and goals and our reputation could be negatively impacted. If these reseller and
sales agency arrangements are unsuccessful due to one or more of these risks, our business and operating results may be adversely affected.
Consolidation among other participants in the telecommunications industry may allow our competitors to compete more effectively against us,
which could adversely affect our operating results and financial condition.
The telecommunications industry has experienced substantial consolidation over the last couple of decades, and some of our competitors have
combined with other telecommunications providers, resulting in larger competitors that have greater financial and business resources and broader
service offerings. Further consolidation could increase competitive pressures, and could adversely affect our operating results and financial
condition, as well as our ability to service debt and pay other obligations.
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We have a significant amount of goodwill and other intangible assets on our balance sheet. If our goodwill or other intangible assets become
impaired, we may be required to record a significant charge to earnings and reduce our stockholders' equity.
Under generally accepted accounting principles, intangible assets are tested for impairment on an annual basis or more frequently whenever
events or circumstances indicate that its carrying value may not be recoverable. If our intangible assets are determined to be impaired in the future,
we may be required to record a significant, non-cash charge to earnings during the period in which the impairment is determined.
We cannot assure you that we will be able to continue paying dividends at the current rate.
Decisions on whether, when and in which amounts to make any future dividend distributions will remain at all times entirely at the discretion of
our Board of Directors, which reserves the right to change or terminate our dividend practices at any time and for any reason. Based on current
circumstances, we plan to continue our current dividend practices. However, you should be aware that these practices are reviewed periodically and
are subject to change for reasons that may include any of the following factors:
•

we may not have enough cash to pay such dividends due to changes in our cash requirements, capital spending plans, stock
purchase plans, cash flows or financial position;

•

the effects of regulatory reform, including any changes to intercarrier compensation, Universal Service Fund or special access rules;

•

our desire to maintain or improve the credit ratings on our debt;

•

the amount of dividends that we may distribute to our shareholders is subject to restrictions under Louisiana law and is limited by
restricted payment and leverage covenants in our credit facilities and, potentially, the terms of any future indebtedness that we may
incur; and

•

the amount of dividends that our subsidiaries may distribute to us is subject to restrictions imposed by state law, restrictions that
have been or may be imposed by state regulators in connection with obtaining necessary approvals for our acquisitions, and
restrictions imposed by the terms of credit facilities applicable to certain subsidiaries and, potentially, the terms of any future
indebtedness that these subsidiaries may incur.

Our Board of Directors is free to change or suspend our dividend practices at any time. Our common shareholders should be aware that they
have no contractual or other legal right to dividends.
Our current dividend practices could limit our ability to pursue growth opportunities, repurchase stock or retire debt.
The current practice of our Board of Directors to continue to pay common share dividends in accordance with past practices reflects an
intention to distribute to our shareholders a substantial portion of our cash flow. As a result, we may not retain a sufficient amount of cash to apply
to other transactions that could be beneficial to our shareholders or debtholders, including stock buybacks, debt prepayments or capital
expenditures that strengthen our business. In addition, our ability to pursue any material expansion of our business through acquisitions or
increased capital spending will depend more than it otherwise would on our ability to obtain third party financing. We cannot assure you that such
financing will be available to us at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at
all.
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We rely on a limited number of key suppliers, vendors, landlords and other third parties to operate our business, as well as a limited number of
financial institutions to fund our revolving credit requirements.
We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure. Our local exchange
carrier networks consist of central office and remote sites, all with advanced digital switches. If any of these suppliers experience interruptions or
other problems delivering or servicing these network components on a timely basis, our operations could suffer significantly. To the extent that
proprietary technology of a supplier is an integral component of our network, we may have limited flexibility to purchase key network components
from alternative suppliers. Similarly, our data center operations are materially reliant on leasing significant amounts of space from landlords and
substantial amounts of power from utility companies, and being able to renew these arrangements from time to time on favorable terms. In addition,
we rely on a limited number of software vendors to support our business management systems. In the event it becomes necessary to seek
alternative suppliers and vendors, we may be unable to obtain satisfactory replacement supplies, services, space or utilities on economically
attractive terms, on a timely basis, or at all, which could increase costs or cause disruptions in our services.
We rely on eighteen financial institutions to provide us with access to revolving credit under our credit facility. If one or more of these lenders
default on their funding commitments, our access to revolving credit could be adversely affected.
Portions of our property, plant and equipment are located on property owned by third parties.
Over the past few years, certain utilities, cooperatives and municipalities in certain of the states in which we operate have requested significant
rate increases for attaching our plant to their facilities. To the extent that these entities are successful in increasing the amount we pay for these
attachments, our future operating costs will increase.
In addition, we rely on rights-of-way, colocation agreements and other authorizations granted by governmental bodies and other third parties
to locate our cable, conduit and other network equipment on their respective properties. If any of these authorizations terminate or lapse, our
operations could be adversely affected.
We depend on key members of our senior management team.
Our success depends largely on the skills, experience and performance of a limited number of senior officers. Competition for senior
management in our industry is intense and we may have difficulty retaining our current senior officers or attracting new ones in the event of
terminations or resignations. For a discussion of similar retention concerns relating to our recent mergers, please see the risks described below
under the heading "Risk Factors—Risks Relating to our Recent Acquisitions."
As a holding company, we rely on payments from our operating companies to meet our obligations.
As a holding company, substantially all of our income and operating cash flow is dependent upon the earnings of our subsidiaries and their
distribution of those earnings to us in the form of dividends, loans or other payments. As a result, we rely upon our subsidiaries to generate the
funds necessary to meet our obligations, including the payment of amounts owed under our long-term debt. Our subsidiaries are separate and
distinct legal entities and have no obligation to pay any amounts owed by us or, subject to limited exceptions for tax-sharing or cash management
purposes, to make any funds available to us to repay our obligations, whether by dividends, loans or other payments. All of our subsidiaries are
subject to state law restrictions that limit the amount of dividends they can pay to us. In addition, certain of our subsidiaries may be restricted under
loan agreements or regulatory orders from transferring funds to us, including certain restrictions on the amount of dividends that may be
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paid to us. Moreover, our rights to receive assets of any subsidiary upon its liquidation or reorganization will be effectively subordinated to the
claims of creditors of that subsidiary, including trade creditors. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources" in Item 7 of this report, for further discussion on these matters.

Risks Relating to our Recent Acquisitions
We expect to incur substantial expenses related to the integration of Qwest and Savvis.
We have incurred, and expect to continue to incur, substantial expenses in connection with the integration of Qwest's and Savvis' business,
operations, networks, systems, technologies, policies and procedures with our own. There are a large number of systems that need to be integrated,
including billing, management information, purchasing, accounting and finance, sales, payroll and benefits, fixed asset, lease administration and
regulatory compliance. While we have assumed that a certain level of transaction and integration expenses will be incurred, there are a number of
factors beyond our control that could affect the total amount or the timing of our integration expenses. Many of the expenses that will be incurred,
by their nature, are difficult to estimate accurately at the present time.
We may be unable to integrate successfully into Legacy CenturyLink our recently-acquired operations and realize the anticipated benefits of
our recent acquisitions.
Our recent acquisitions involved the combination of companies which previously operated as independent public companies. We have
devoted, and will continue to devote, significant management attention and resources to integrating the business practices and operations of
Legacy CenturyLink, Qwest and Savvis. We may encounter difficulties in the integration process, including the following:
•

the inability to successfully combine our businesses in a manner that permits the combined company to achieve the cost savings
and operating synergies anticipated to result from the acquisitions, either due to technological challenges, personnel shortages,
strikes or otherwise, any of which would result in the anticipated benefits of the acquisitions not being realized partly or wholly in
the time frame anticipated or at all;

•

lost sales as a result of customers deciding not to do business with the combined company;

•

the complexities associated with managing the combined businesses out of several different locations and integrating personnel
from multiple companies, while at the same time attempting to provide consistent, high-quality products and services under a unified
culture;

•

the additional complexities of combining companies with different histories, regulatory restrictions, sales forces, marketing strategies,
product markets and customer bases;

•

the failure to retain key employees, some of whom could be critical to integrating or expanding the companies;

•

potential unknown liabilities and unforeseen increased expenses or regulatory conditions associated with the acquisitions; and

•

performance shortfalls at one or all of the companies as a result of the diversion of management's attention caused by integrating the
companies' operations.

For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of our management, the
disruption of our ongoing business or inconsistencies in our products, services, standards, controls, procedures and policies, any of which could
adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the
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anticipated benefits of our recent acquisitions, or could otherwise adversely affect our business and financial results.
The Qwest and Embarq acquisitions changed the profile of our local exchange markets to include more large urban areas, with which we have
limited operating experience.
Prior to our acquisition of Embarq Corporation ("Embarq"), we provided local exchange telephone services to predominantly rural areas and
small to mid-size cities. Embarq's local exchange markets included Las Vegas, Nevada and suburbs of Orlando and several other large U.S. cities,
and we have operated these more dense markets only since mid-2009. Qwest's markets included Phoenix, Arizona, Denver, Colorado, Minneapolis—
St. Paul, Minnesota, Seattle, Washington, Salt Lake City, Utah, and Portland, Oregon. Compared to our legacy markets, these urban markets, on
average, are substantially denser and experienced greater access line losses prior to being acquired by us. While we believe our strategies and
operating models developed serving rural and smaller markets can successfully be applied to larger markets, we cannot assure you of this. Our
business, financial performance and prospects could be harmed if our current strategies or operating models cannot be successfully applied to
larger markets, or are required to be changed or abandoned to adjust to differences in these larger markets.
We cannot assure you whether, when or in what amounts we will be able to use Qwest's net operating losses.
At December 31, 2012, we had approximately $4.7 billion of federal net operating losses, or NOLs, which relate primarily to pre-acquisition
losses of Qwest. These NOLs can be used to offset our future federal and certain taxable income.
The acquisition of Qwest caused an "ownership change" under federal tax laws relating to the use of NOLs. As a result, these laws could limit
our ability to use their NOLs and certain other deferred tax attributes. Further limitations could apply if we are deemed to undergo an ownership
change in the future. Despite this, we expect to use substantially all of these NOLs and certain other deferred tax attributes as an offset to our
federal future taxable income by 2015, although the timing of that use will depend upon the consolidated group's future earnings and future tax
circumstances.
Our acquisitions have increased our exposure to the risks of fluctuations in energy costs, power outages and availability of electrical resources.
Through the acquisitions of Qwest and Savvis, we have added a significant number of data center facilities, which are susceptible to regional
costs and supply of power and electrical power outages. We attempt to limit exposure to system downtime by using backup generators and power
supplies. However, we may not be able to limit our exposure entirely even with these protections in place. In addition, our energy costs can
fluctuate significantly or increase for a variety of reasons, including changes in legislation and regulation. Several pending proposals designed to
reduce greenhouse emissions could substantially increase our energy costs. As energy costs increase, we may not always be able to pass on the
increased costs of energy to our clients, which could harm our business. Power and cooling requirements at our data centers are also increasing as
a result of the increasing power demands of today's servers. Since we rely on third parties to provide our data centers with power sufficient to meet
our clients' power needs, our data centers could have a limited or inadequate amount of electrical resources. Our clients' demand for power may also
exceed the power capacity in older data centers, which may limit our ability to fully utilize these data centers. This could adversely affect our
relationships with our clients and hinder our ability to run our data centers, which could harm our business.
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Our inability to renew data center leases, or renew on favorable terms, could have a negative impact on our financial results.
A significant majority of the data centers we acquired in the Qwest and Savvis acquisitions are leased and have lease terms that expire between
2013 and 2031. The majority of these leases provide us with the opportunity to renew the lease at our option for periods generally ranging from five
to ten years. Many of these renewal options, however, provide that rent for the renewal period will be equal to the fair market rental rate at the time
of renewal. If the fair market rental rates are significantly higher than our current rental rates, we may be unable to offset these costs by charging
more for our services, which could have a negative impact on our financial results. Also, it is possible that a landlord may insist on other financially
unfavorable renewal terms or, where no further option to renew exists, elect not to renew altogether.
Our acquisitions of Qwest and Savvis have increased our exposure to the risks of operating internationally.
Prior to acquiring Qwest on April 1, 2011, substantially all of our operations were historically conducted within the continental United States.
Although Qwest has historically conducted some operations overseas, the acquisition of Savvis on July 15, 2011, increased the importance of
international operations to our future operations, growth and prospects.
As a result of our recent acquisitions, our foreign operations are subject to varying degrees of regulation in each of the foreign jurisdictions in
which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions, and
can change significantly over time. Future regulatory, judicial and legislative changes or interpretations may have a material adverse effect on our
ability to deliver services within various foreign jurisdictions. Many of these foreign laws and regulations relating to communications services are
more restrictive than U.S. laws and regulations, particularly those relating to content distributed over the Internet. For example, the European Union
has enacted a data retention system that, once implemented by individual member states, will involve requirements to retain certain Internet
protocol, or IP, data that could have an impact on our operations in Europe. Moreover, national regulatory frameworks that are consistent with the
policies and requirements of the World Trade Organization have only recently been, or are still being, enacted in many countries. Accordingly,
many countries are still in the early stages of providing for and adapting to a liberalized telecommunications market. As a result, in these markets we
may encounter more protracted and difficult procedures to obtain licenses necessary to provide the full set of products we offer.
In addition to these international regulatory risks, some of the other risks inherent in conducting business internationally include:
•

tax, licensing, currency, political or other business restrictions or requirements;

•

import and export restrictions;

•

longer payment cycles and problems collecting accounts receivable;

•

additional U.S. and other regulation of non-domestic operations, including regulation under the Foreign Corrupt Practices Act, or
FCPA, as well as other anti-corruption laws;

•

fluctuations in currency exchange rates;

•

the ability to secure and maintain the necessary physical and telecommunications infrastructure; and

•

challenges in staffing and managing foreign operations.

Any one or more of these factors could adversely affect our international operations.
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Moreover, in order to effectively compete in certain foreign jurisdictions, it is frequently necessary or required to establish joint ventures,
strategic alliances or marketing arrangements with local operators, partners or agents. Reliance on local operators, partners or agents could expose
us to the risk of being unable to control the scope or quality of our overseas services or products, or being held liable under the FCPA or other anticorruption laws for actions taken by our strategic or local partners or agents even though these partners or agents may not themselves be subject
to the FCPA or other applicable anti-corruption laws. Any determination that we have violated the FCPA or other anti-corruption laws could have a
material adverse effect on our business, results of operations, reputation or prospects.
Any additional future acquisitions by us would subject us to additional business, operating and financial risks, the impact of which cannot
presently be evaluated, and could adversely impact our capital structure or financial position.
From time to time in the future we may pursue other acquisition opportunities. To the extent we acquire a business that is highly leveraged or is
otherwise subject to a high level of risk, we may be affected by the currently unascertainable risks of that business. Accordingly, there is no current
basis for you to evaluate the possible merits or risks of any particular business or assets that we may acquire. In addition, the financing of any
future acquisition completed by us could adversely impact our capital structure or financial position, as any such financing would likely include the
issuance of additional securities or the borrowing of additional funds. Except as required by law or applicable securities exchange listing standards,
we do not expect to ask our shareholders to vote on any proposed acquisition. Moreover, we generally do not announce our acquisitions until we
have entered into a preliminary or definitive agreement.

Risks Relating to Legal and Regulatory Matters
Any adverse outcome of the KPNQwest litigation, or other material litigation of Qwest, Savvis or CenturyLink could have a material adverse
impact on our financial condition and operating results, on the trading price of our securities and on our ability to access the capital markets.
As described in Note 15—Commitments and Contingencies to the consolidated financial statements in Item 8 of this report, the KPNQwest
matters present material and significant risks to us. In the aggregate, the plaintiffs in the KPNQwest matters seek billions of dollars in damages. We
continue to defend against these matters vigorously and are currently unable to provide any estimate as to the timing of their resolution.
We can give no assurance as to the impacts on our financial results or financial condition that may ultimately result from these matters. The
ultimate outcomes of these matters are still uncertain, and substantial settlements or judgments in these matters could have a significant impact on
us. The magnitude of such settlements or judgments resulting from these matters could materially and adversely affect our financial condition and
ability to meet our debt obligations, potentially impacting our credit ratings, our ability to access capital markets and our compliance with debt
covenants. In addition, the magnitude of any such settlements or judgments may cause us to draw down significantly on our cash balances, which
might force us to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional debt
securities or selling assets.
There are other material proceedings pending against us, as described in the above-referenced Note 15. Depending on their outcome, any of
these matters could have a material adverse effect on our financial position or operating results. We can give you no assurances as to the impact of
these matters on our operating results or financial condition.
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We operate in a highly regulated industry and are therefore exposed to restrictions on our manner of doing business and a variety of claims
relating to such regulation.
General. We are subject to significant regulation by the Federal Communications Commission ("FCC"), which regulates interstate
communications, and state utility commissions, which regulate intrastate communications. Generally, we must obtain and maintain certificates of
authority from the FCC and regulatory bodies in most states where we offer regulated services, and we are subject to numerous, and often quite
detailed, requirements and interpretations under federal, state and local laws, rules and regulations. Accordingly, we cannot ensure that we are
always considered to be in compliance with all these requirements at any single point in time. The agencies responsible for the enforcement of these
laws, rules and regulations may initiate inquiries or actions based on customer complaints or on their own initiative.
Regulation of the telecommunications industry continues to change rapidly, and the regulatory environment varies substantially from
jurisdiction to jurisdiction. Notwithstanding a recent movement towards alternative regulation, a substantial portion of our local voice services
revenue remains subject to FCC and state utility commission pricing regulation, which periodically exposes us to pricing or earnings disputes and
could expose us to unanticipated price declines. Interexchange carriers have filed complaints in various forums requesting reductions in our access
rates. In addition, several long distance providers are disputing amounts owed to us for carrying VoIP traffic, or traffic they claim to be VoIP traffic,
and are refusing to pay such amounts. There can be no assurance that future regulatory, judicial or legislative activities will not have a material
adverse effect on our operations, or that regulators or third parties will not raise material issues with regard to our compliance or noncompliance
with applicable regulations.
Risks associated with recent changes in federal regulation. On October 27, 2011, the FCC adopted the Connect America and Intercarrier
Compensation Reform order ("CAF order") intended to reform the existing regulatory regime to recognize ongoing shifts to new technologies,
including VoIP, and gradually re-direct universal service funding to foster nationwide broadband coverage. This initial ruling provides for a multiyear transition over the next decade as intercarrier compensation charges are reduced, universal service funding is explicitly targeted to broadband
deployment, and subscriber line charges paid by end user customers are gradually increased. We expect these changes will substantially increase
the pace of reductions in the amount of switched access revenues we receive in our wholesale markets segment, while creating opportunities for
increases in federal USF and retail revenue streams. Several judicial challenges to the CAF order are pending and additional future challenges are
possible, any of which could alter or delay the FCC's proposed changes. In addition, based on the outcome of the FCC proceedings, various state
commissions may consider changes to their universal service funds or intrastate access rates. Moreover, rulemaking designed to implement the
order is not complete, and several FCC proceedings relating to the order remain pending. For these and other reasons, we cannot predict the
ultimate impact of these proceedings at this time.
In addition, during the last few years Congress or the FCC has initiated various other changes, including (i) broadband stimulus projects,
support funds and similar plans and (ii) new "network neutrality" rules. The FCC is also considering changes in the regulation of special access
services. Any of these recent or pending initiatives could adversely affect our operations or financial results.
Risks posed by costs of regulatory compliance. Regulations continue to create significant compliance costs for us. Challenges to our tariffs by
regulators or third parties or delays in obtaining certifications and regulatory approvals could cause us to incur substantial legal and administrative
expenses, and, if successful, such challenges could adversely affect the rates that we are able to charge our customers. Our business also may be
impacted by legislation and regulation imposing new or greater obligations related to regulations or laws related to broadband deployment,
bolstering homeland security, increasing disaster recovery requirements, minimizing environmental impacts,
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enhancing privacy, or addressing other issues that impact our business, including the Communications Assistance for Law Enforcement Act (which
requires communications carriers to ensure that their equipment, facilities, and services are able to facilitate authorized electronic surveillance), and
laws governing local number portability and customer proprietary network information requirements. We expect our compliance costs to increase if
future laws or regulations continue to increase our obligations to assist other governmental agencies.
Risks posed by other regulations. All of our operations are also subject to a variety of environmental, safety, health and other governmental
regulations. We monitor our compliance with federal, state and local regulations governing the management, discharge and disposal of hazardous
and environmentally sensitive materials. Although we believe that we are in compliance with these regulations, our management, discharge or
disposal of hazardous and environmentally sensitive materials might expose us to claims or actions that could have a material adverse effect on our
business, financial condition and operating results.
Regulatory changes in the communications industry could adversely affect our business by facilitating greater competition against us.
For over 15 years, Congress and the FCC have taken several steps that have resulted in increased competition among communications service
providers. Many of the FCC's regulations remain subject to judicial review and additional rulemakings, thus making it difficult to determine the
ultimate impact of these changes on us and our competitors.
"Net neutrality" legislation or regulation could limit our ability to operate our high-speed data business profitably and to manage our
broadband facilities efficiently.
In order to continue to provide quality high-speed data service at attractive prices, we believe we need the continued flexibility to respond to
changing consumer demands, to manage bandwidth usage efficiently and to invest in our networks. The FCC's "net neutrality" regulations could
adversely impact our ability to operate our high-speed data network profitably and to undertake the upgrades and implement network management
practices that may be needed to continue to provide high quality high-speed data services, and could therefore negatively impact our ability to
compete effectively.
We may be liable for the material that content providers distribute over our network.
The law relating to the liability of private network operators for information carried on, stored or disseminated through their networks is still
unsettled. As such, we could be exposed to legal claims relating to content disseminated on our networks. Claims could challenge the accuracy of
materials on our network, or could involve matters such as defamation, invasion of privacy or copyright infringement. If we need to take costly
measures to reduce our exposure to these risks, or are required to defend ourselves against such claims, our financial results could be negatively
affected.
We are subject to significant regulations that limit our flexibility.
As a diversified full service ILEC in most of our key markets, we have traditionally been subject to significant regulation that does not apply to
many of our competitors. This regulation imposes substantial compliance costs on us and restricts our ability to change rates, to compete and to
respond rapidly to changing industry conditions. As our business becomes increasingly competitive, regulatory disparities between us and our
competitors could impede our ability to compete.
We are subject to franchising requirements that could impede our expansion opportunities.
We may be required to obtain from municipal authorities operating franchises to install or expand facilities. Some of these franchises may
require us to pay franchise fees. These franchising requirements
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generally apply to our fiber transport and CLEC operations, and to our facilities-based video services. These requirements could delay us in
expanding our operations or increase the costs of providing these services.
We are exposed to risks arising out of recent legislation affecting U.S. public companies.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the
Dodd-Frank Wall Street Reform and Consumer Protection Act, and related regulations implemented thereunder, are increasing legal and financial
compliance costs and making some activities more time consuming. Any failure to successfully or timely complete annual assessments of our
internal controls required by Section 404 of the Sarbanes-Oxley Act could subject us to sanctions or investigation by regulatory authorities. Any
such action could adversely affect our financial results or investors' confidence in us.
For a more thorough discussion of the regulatory issues that may affect our business, see "Regulation" in Item 1of this report.

Risks Affecting our Liquidity and Capital Resources
Our high debt levels pose risks to our viability and may make us more vulnerable to adverse economic and competitive conditions, as well as
other adverse developments.
We continue to carry significant debt. As of December 31, 2012, our consolidated debt was approximately $20.6 billion. Approximately
$2.1 billion of our debt securities come due over the next thirty-six months. While we currently believe that we will have the financial resources to
meet or refinance our obligations when they come due, we cannot fully anticipate our future financial condition or the condition of the credit
markets or the economy. We may incur unexpected expenses or liabilities, and we may have limited access to financing.
Our significant levels of debt can adversely affect us in several other respects, including (i) limiting our ability to access the capital markets,
(ii) exposing us to the risk of credit rating downgrades, which would raise our borrowing costs and could further limit our access to capital,
(iii) hindering our flexibility to plan for or react to changing market, industry or economic conditions, (iv) limiting the amount of cash flow available
for future operations, acquisitions, dividends, stock repurchases or other uses, (v) making us more vulnerable to economic or industry downturns,
including interest rate increases, and (vi) placing us at a competitive disadvantage compared to less leveraged competitors.
The effects of each of these factors could be intensified if we borrow more cash. We expect to periodically require financing to meet our debt
obligations as they come due. Due to the unstable economy and credit market, we may not be able to refinance maturing debt at terms that are as
favorable as those from which we previously benefited, at terms that are acceptable to us or at all. We may also need to obtain additional financing
or investigate other methods to generate cash (such as further cost reductions or the sale of assets) under a variety of circumstances, including if
revenues and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase, if regulatory requirements
change, if we are required to contribute a material amount of cash to our pension plans, if we are required to begin to pay other post-retirement
benefits significantly earlier than anticipated, if our payments for federal taxes increase faster or in greater amounts than currently anticipated, if we
become subject to significant judgments or settlements in one or more of the matters discussed in Note 15—Commitments and Contingencies to the
consolidated financial statements in Item 8 of this report, if we engage in any acquisitions or if we undertake substantial capital projects or other
initiatives that increase our cash requirements. We can give no assurance that this additional financing will be available on terms that are acceptable
to us or at all. If we are able to obtain additional financing, our credit ratings could be adversely affected, which could further raise our
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borrowing costs and further limit our future access to capital and our ability to satisfy our debt obligations.
Certain of our debt instruments have cross payment default or cross acceleration provisions. When present, these provisions could have a
wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. Any such event could adversely
affect our ability to conduct business or access the capital markets and could adversely impact our credit ratings. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" in Item 7 of this report for additional information
about our credit facility.
Our debt agreements and the debt agreements of our subsidiaries allow us to incur significantly more debt, which could exacerbate the other
risks described in this report.
The terms of our debt instruments and the debt instruments of our subsidiaries permit additional indebtedness. Additional debt may be
necessary for many reasons, including those discussed immediately above. Incremental borrowings on terms that impose additional financial risks
could exacerbate the other risks described in this report.
Our business requires us to incur substantial capital and operating expenses, which reduce our available free cash flow.
Our business is capital intensive, and we anticipate that our capital requirements will continue to be significant in the coming years. As
discussed further under "Risk Factors—Risks Affecting Our Business—Increases in broadband usage may cause network capacity limitations,
resulting in service disruptions, reduced capacity or slower transmission speeds for our customers," increased bandwidth consumption by
consumers and businesses have placed increased demands on the transmission capacity of our networks. If we determine that our networks must
be expanded to handle these increased demands, we may be required to make substantial capital expenditures, even though there is no assurance
that the return on our investment will be satisfactory. In addition, many of our growth initiatives are capital intensive and changes in technology
could require further spending. In addition to investing in expanded networks, new products or new technologies, we must from time to time replace
some of the equipment that supports our traditional services as that equipment ages, even though the revenue base from those services is not
growing. While we believe that our planned level of capital expenditures will meet both our maintenance and core growth requirements, this may not
be the case if demands on our network continue to accelerate or other circumstances underlying our expectations change. Increased spending
could, among other things, adversely affect our operating margins, cash flows, results of operations and financial position.
Similarly, we continue to anticipate incurring substantial operating expenses to support our incumbent services and growth initiatives.
Although we have successfully reduced our operating expenses over the past few years, we may be unable to further reduce these costs, even if
revenues in some of our lines of business are decreasing. If so, our operating margins will be adversely impacted.
Adverse changes in the value of assets or obligations associated with our qualified pension plans could negatively impact our liquidity.
The funded status of our qualified pension plans is the difference between the value of plan assets and the benefit obligation. The accounting
unfunded status of our qualified pension plans was $2.5 billion as of December 31, 2012. Adverse changes in interest rates or market conditions,
among other assumptions and factors, could cause a significant increase in our benefit obligation or a significant decrease in the value of plan
assets. These adverse changes could require us to contribute a material amount of cash to our pension plans or could accelerate the timing of
required cash payments. For information on the amount of cash we propose to contribute to our plans in the near term, please
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see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Pension and
Post-retirement Benefit Obligations" in Item 7 of this report. The actual amount of required contributions to our plans in 2014 and beyond will
depend on a variety of factors, including earnings on plan investments, prevailing interest and discount rates, demographic experience, changes in
plans benefits and changes in funding laws and regulations. Any future material cash contributions could have a negative impact on our liquidity
by reducing our cash flows.
We plan to access the public debt markets, and we cannot assure you that these markets will remain free of disruptions.
We have a significant amount of indebtedness that we intend to refinance over the next several years, principally through the issuance of debt
securities of CenturyLink, Qwest Corporation or both. Our ability to arrange additional financing will depend on, among other factors, our financial
position, performance, and credit ratings, as well as prevailing market conditions and other factors beyond our control. Prevailing market conditions
could be adversely affected by the ongoing disruptions in the European sovereign debt markets, the failure of the United States to reduce its deficit
in amounts deemed to be sufficient, possible further downgrades in the credit ratings of the U.S. debt, contractions or limited growth in the
economy or other similar adverse economic developments in the U.S. or abroad. Instability in the global financial markets has from time to time
resulted in periodic volatility in the capital markets. This volatility could limit our access to the credit markets, leading to higher borrowing costs or,
in some cases, the inability to obtain financing on terms that are acceptable to us, or at all. Any such failure to obtain additional financing could
jeopardize our ability to repay, refinance or reduce debt obligations.

Other Risks
If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies, the accuracy of our
consolidated financial statements and related disclosures could be affected.
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires
management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and
accompanying notes. Our critical accounting policies, which are described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Critical Accounting Policies and Estimates" in Item 7 of this report, describe those significant accounting policies and
methods used in the preparation of our consolidated financial statements that are considered "critical" because they require judgments,
assumptions and estimates that materially impact our consolidated financial statements and related disclosures. As a result, if future events or
assumptions differ significantly from the judgments, assumptions and estimates in our critical accounting policies, these events or assumptions
could have a material impact on our consolidated financial statements and related disclosures.
We face hurricane and other natural disaster risks, which can disrupt our operations and cause us to incur substantial additional capital and
operating costs.
A substantial number of our facilities are located in Florida, Alabama, Louisiana, Texas, North Carolina, South Carolina and other coastal states,
which subjects them to the risks associated with severe tropical storms, hurricanes and tornadoes, including downed telephone lines, flooded
facilities, power outages, fuel shortages, damaged or destroyed property and equipment, and work interruptions. Although we maintain property
and casualty insurance on our plant (excluding our outside plant) and may under certain circumstances be able to seek recovery of some additional
costs through increased rates, only a portion of our additional costs directly related to such hurricanes and natural disasters
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have historically been recoverable. We cannot predict whether we will continue to be able to obtain insurance for hazard-related damages or, if
obtainable and carried, whether this insurance will be adequate to cover our losses. In addition, we expect any insurance of this nature to be subject
to substantial deductibles and to provide for premium adjustments based on claims. Any future hazard-related costs and work interruptions could
adversely affect our operations and our financial condition.
Tax audits or changes in tax laws could adversely affect us.
Like all large businesses, we are subject to frequent and regular audits by the Internal Revenue Service as well as state and local tax authorities.
These audits could subject us to tax liabilities if adverse positions are taken by these tax authorities.
We believe that we have adequately provided for tax contingencies. However, our tax audits and examinations may result in tax liabilities that
differ materially from those that we have recognized in our consolidated financial statements. Because the ultimate outcomes of all of these matters
are uncertain, we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our financial results.
Dividends received by certain investors may be subject to a new 3.8% Medicare tax on unearned income beginning on January 1, 2013, and
certain tax reform plans under consideration by the U.S. Congress could increase the dividend tax rate. Any significant increase in the U.S. tax rate
on dividends could reduce demand for our stock, which could potentially depress its trading price.
Our agreements and organizational documents and applicable law could limit another party's ability to acquire us.
A number of provisions in our agreements and organizational documents and various provisions of applicable law may delay, defer or prevent
a future takeover of CenturyLink unless the takeover is approved by our Board of Directors. For additional information, please see our Registration
Statement on Form 8-A/A filed with the SEC July 1, 2009. This could deprive our shareholders of any related takeover premium.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our property, plant and equipment consists principally of telephone lines, central office equipment, land and buildings related to our telephone
operations. Our gross property, plant and equipment consisted of the following components as of the following dates:
December 31,
2012
2011
2%
2%
40%
41%
36%
33%
19%
21%
3%
3%
100%
100%

Land
Fiber, conduit and other outside plant(1)
Central office and other network electronics(2)
Support assets (3)
Construction in progress(4)
Gross property, plant and equipment

(1)

Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.

(2)

Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.

(3)

Support assets consist of buildings, computers and other administrative and support equipment.

(4)

Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still under
construction.

We own substantially all of our telecommunications equipment required for our business. However, we lease certain facilities, plant, equipment
and software under various capital lease arrangements when the leasing arrangements are more favorable to us than purchasing the assets.
We also own and lease administrative offices in major metropolitan locations both in the United States and internationally. Substantially all of
our network electronics equipment is located in buildings or on land that we own or lease within our local service area. Outside of our local service
area, our assets are generally located on real property pursuant to an agreement with the property owner or another person with rights to the
property. It is possible that we may lose our rights under one or more of these agreements, due to their termination or their expiration.
With the acquisitions of Qwest in April 2011 and Savvis in July 2011, we expanded our property to include data center assets, and the related
facilities and communications equipment. The facilities that house Savvis' warehouses, network equipment and data centers are leased.
During 2012, we reclassified certain amounts reported in prior periods of inventory held for construction to conform to the current period
presentation. This reclassification increased construction in progress at December 31, 2011 by $55 million with an offsetting decrease to fiber,
conduit and other outside plant and central office and other network electronics by $8 million and $47 million, respectively.
Some of our property, plant and equipment is pledged to secure the long-term debt of subsidiaries. Our net property, plant and equipment was
$19.0 billion and $19.4 billion at December 31, 2012 and 2011, respectively.
Several putative class actions have been filed against us disputing our use of certain rights-of-way as described in "Legal Proceedings—
Litigation Matters Relating to Qwest" in Item 3 of this report. If we lose any of these rights-of-way or are unable to renew them, we may find it
necessary to move or replace the affected portions of our network. However, we do not expect any material adverse impacts as a result of the loss of
any of these rights.
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ITEM 3. LEGAL PROCEEDINGS
In this section, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter. Until and
unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to
represent.
We have established accrued liabilities for the matters described below where losses are deemed probable and reasonably estimable.
We are vigorously defending against all of the matters described below. As a matter of course, we are prepared both to litigate the matters to
judgment, as well as to evaluate and consider all settlement opportunities.

Litigation Matters Relating to CenturyLink and Embarq
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 $34 million. The lawsuits allege that Sprint
Nextel has breached contracts, violated tariffs, and violated the Federal Communications Act by failing to pay these charges. One lawsuit, filed on
behalf of all legacy Embarq operating entities, was tried in federal court in Virginia in August 2010 and, in March 2011, a ruling was issued in our
favor and against Sprint Nextel. In the first quarter of 2012, Sprint Nextel filed an appeal of this decision. The other lawsuit, filed on behalf of all
Legacy CenturyLink operating entities, is pending in federal court in Louisiana. In that case, in early 2011 the Court dismissed certain of
CenturyLink's claims, referred other claims to the FCC, and stayed the litigation. In April 2012, Sprint Nextel filed a petition with the FCC, seeking a
declaratory ruling that CenturyLink's access charges do not apply to VoIP originated calls. We have not deferred revenue related to these matters
as an adverse outcome is not probable based upon current circumstances.
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, a group of retirees filed a putative class action lawsuit challenging the decision to make certain modifications in retiree benefits
programs relating to life insurance, medical insurance and prescription drug benefits, generally effective January 1, 2006 and January 1, 2008 (which,
at the time of the modifications, was expected to reduce estimated future expenses for the subject benefits by more than $300 million). 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. The Court certified a class on certain of plaintiffs' claims, but rejected
class certification as to other claims. Embarq and other defendants continue to vigorously contest these claims and charges. On October 14, 2011,
the Fulghum lawyers filed a new, related lawsuit, Abbott et al. v. Sprint Nextel et al. CenturyLink/Embarq is not named a defendant in the lawsuit.
In Abbott, approximately 1,500 plaintiffs allege breach of fiduciary duty in connection with the changes in retiree benefits that also are at issue in the
Fulghum case. The Abbott plaintiffs are all members of the class that was certified in Fulghum on claims for allegedly vested benefits (Counts I and
III), and the Abbott claims are similar to the Fulghum breach of fiduciary duty claim (Count II), on which the Fulghum court denied class
certification. The Court has stayed proceedings in Abbott indefinitely. On February 14, 2013, the Fulghum court dismissed the majority of the
plaintiffs' claims in that case. Embarq and the other defendants will continue to vigorously contest any remaining claims in Fulghum and seek to
have the claims in the Abbott case dismissed on similar grounds. We have not accrued a liability for these matters as it is premature (i) to determine
whether an accrual is warranted and (ii) if so, to determine a reasonable estimate of probable liability.
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Litigation Matters Relating to Qwest
The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate Qwest to
indemnify its former directors, officers or employees with respect to certain of the matters described below and Qwest has been advancing legal fees
and costs to certain former directors, officers or employees in connection with certain matters described below.
On September 29, 2010, the trustees in the Dutch bankruptcy proceeding for KPNQwest, N.V. (of which Qwest was a major shareholder) filed a
lawsuit in the District Court of Haarlem, the Netherlands, alleging tort and mismanagement claims under Dutch law. Qwest and Koninklijke KPN N.V.
("KPN") are defendants in this lawsuit along with a number of former KPNQwest supervisory board members and a former officer of KPNQwest,
some of whom were formerly affiliated with Qwest. Plaintiffs allege, among other things, that defendants' actions were a cause of the bankruptcy of
KPNQwest, and they seek damages for the bankruptcy deficit of KPNQwest, which is claimed to be approximately €4.2 billion (or approximately
$5.6 billion based on the exchange rate on December 31, 2012), plus statutory interest. Two lawsuits asserting similar claims were previously filed
against Qwest and others in federal courts in New Jersey in 2004 and Colorado in 2009; those courts dismissed the lawsuits without prejudice on
the grounds that the claims should not be litigated in the United States.
On September 13, 2006, Cargill Financial Markets, Plc and Citibank, N.A. filed a lawsuit in the District Court of Amsterdam, the Netherlands,
against Qwest, KPN, KPN Telecom B.V., and other former officers, employees or supervisory board members of KPNQwest, some of whom were
formerly affiliated with Qwest. The lawsuit alleges that defendants misrepresented KPNQwest's financial and business condition in connection with
the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of approximately
€219 million (or approximately $289 million based on the exchange rate on December 31, 2012). On April 25, 2012, the court issued its judgment
denying the claims asserted by Cargill and Citibank in their lawsuit. Cargill and Citibank are appealing that decision.
We have not accrued a liability for the above matters. Regarding the 2010 proceeding, we believe it is premature to determine whether an
accrual is warranted and, if so, a reasonable estimate of our probable liability. Regarding the 2006 suit, we do not believe that liability is probable.
We will continue to defend against both KPNQwest litigation matters vigorously.
Several putative class actions relating to the installation of fiber optic cable in certain rights-of-way were filed against Qwest on behalf of
landowners on various dates and in courts located in 34 states in which Qwest has such cable (Alabama, Arizona, California, Colorado, Delaware,
Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska,
Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah,
Virginia, and Wisconsin.) For the most part, the complaints challenge our right to install our fiber optic cable in railroad rights-of-way. The
complaints allege that the railroads own the right-of-way as an easement that did not include the right to permit us to install our cable in the right-ofway without the Plaintiffs' consent. Most of the currently pending actions purport to be brought on behalf of state-wide classes in the named
Plaintiffs' respective states, although one action pending before the Illinois Court of Appeals purports to be brought on behalf of landowners in
Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin. In general, the complaints seek damages on theories of trespass
and unjust enrichment, as well as punitive damages. After previous attempts to enter into a single nationwide settlement in a single court proved
unsuccessful, the parties proceeded to seek court approval of settlements on a state-by-state basis. To date, the parties have received final
approval of such settlements in 22 states (Alabama, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan,
Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Oklahoma, Tennessee, Virginia and Wisconsin), have received
preliminary approval of the settlements in eight
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states (California, Kentucky, Nevada, Ohio, Oregon, Pennsylvania, South Carolina and Utah), and have not yet received either preliminary or final
approval in four states (Arizona, Massachusetts, New Mexico and Texas). We have accrued an amount that we believe is probable for these
matters; however, the amount is not material to our consolidated financial statements.

Other Matters
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative
hearings of state public utility commissions relating primarily to rate making, actions relating to employee claims, various tax issues, environmental
law issues, 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 defenses and insurance coverage, will have a material adverse effect on our financial position, results of operations or cash
flows.
The information included in Note 15—Commitments and Contingencies to the consolidated financial statements included in Item 8 of this
report is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock is listed on the New York Stock Exchange ("NYSE") and the Berlin Stock Exchange and is traded under the symbol CTL and
CYT, respectively. The following table sets forth the high and low reported sales prices on the NYSE along with the quarterly dividends, for each of
the quarters indicated.

Sales Prices
High
Low
2012
First quarter
Second quarter
Third quarter
Fourth quarter
2011
First quarter
Second quarter
Third quarter
Fourth quarter

Dividend per
Common Share

$

40.54
39.89
43.43
40.49

36.25
36.91
38.96
36.52

.725
.725
.725
.725

$

46.78
43.49
41.32
38.01

39.45
38.66
31.75
31.16

.725
.725
.725
.725

Common stock dividends during 2012 and 2011 were paid each quarter. On February 26, 2013, our Board of Directors declared a common stock
dividend of $.54 per share.
As described in greater detail in Item 1A of this Annual Report on Form 10-K, the declaration and payment of dividends is at the discretion of
our Board of Directors, and will depend upon our financial results, cash requirements, future prospects and other factors deemed relevant by our
Board of Directors.
At February 15, 2013, there were approximately 168,000 stockholders of record although there were significantly more beneficial holders of our
common stock. At February 15, 2013, the closing stock price of our common stock was $33.02.
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Issuer Purchases of Equity Securities
The following table contains information about shares of our common stock that we withheld from employees to satisfy tax obligations related
to the vesting of stock-based awards during the fourth quarter of 2012:

Total Number
of Shares
Purchased
Period
October 2012
November 2012
December 2012
Total

91,527
—
302,915
394,442

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Average Price
Paid Per
Share
$

39.32
—
39.12

N/A
N/A
N/A

N/A—not applicable

44

Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans or
Programs
N/A
N/A
N/A

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ITEM 6. SELECTED FINANCIAL DATA
The following table of selected consolidated financial data should be read in conjunction with and are qualified by reference to the
consolidated financial statements and notes thereto in Item 8 of this report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 of this report.
The table of selected financial data shown below is derived from our audited consolidated financial statements. These historical results are not
necessarily indicative of results that you can expect for any future period.
The results of operations include Savvis for periods after July 15, 2011, Qwest for periods after April 1, 2011 and Embarq for periods after July 1,
2009.
Selected financial information from the consolidated statements of operations data is as follows:

Operating revenues
Operating expenses
Operating income

$
$

Income before income tax
expense
Net income
Basic earnings per
common share
Diluted earnings per
common share
Dividends declared per
common share
Weighted average basic
common shares
outstanding
Weighted average
diluted common shares
outstanding

(1)

Years Ended December 31,(1)
2012
2011
2010
2009
(Dollars in millions, except per share amounts
and shares in thousands)
18,376
15,351
7,042
4,974
15,663
13,326
4,982
3,741
2,713
2,025
2,060
1,233

2008

2,600
1,878
721

1,250
777

948
573

1,531
948

813
647

561
366

1.25

1.07

3.13

3.23

3.53

1.25

1.07

3.13

3.23

3.52

2.90

2.90

2.90

2.80

2.1675

620,205

532,780

300,619

198,813

102,268

622,285

534,121

301,297

199,057

102,560

See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" in Item 7 of this report for a discussion of
unusual items affecting the results for the years ended December 31, 2012, 2011 and 2010.

Selected financial information from the consolidated balance sheets is as follows:

2012
Net property, plant and
equipment
Goodwill
Total assets
Total long-term debt(1)
Total stockholders'
equity

(1)

$

2011

December 31,
2010
(Dollars in millions)

2009

2008

19,032
21,732
54,020
20,605

19,444
21,732
56,044
21,836

8,754
10,261
22,038
7,328

9,097
10,252
22,563
7,754

2,896
4,016
8,254
3,315

19,289

20,827

9,647

9,467

3,168

Total long-term debt is the sum of current maturities of long-term debt and long-term debt on our consolidated balance sheets. For total obligations, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Future Contractual Obligations" in Item 7 of this report.

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Selected financial information from the consolidated statements of cash flows is as follows:

2012
Net cash provided by
operating activities
Net cash used in
investing activities
Net cash used in
financing activities
Payments for property,
plant and equipment
and capitalized
software

$

Years Ended December 31,
2011
2010
2009
(Dollars in millions)
2,045

2008

6,065

4,201

1,574

853

(2,690)

(3,647)

(859)

(679)

(389)

(3,295)

(577)

(1,175)

(976)

(255)

(2,919)

(2,411)

(864)

(755)

(287)

The following table presents certain selected consolidated operating data as of the following dates:
December 31,
2012
Broadband subscribers(3)
Access lines

5,848
13,748

2011 (1)

2010
(in thousands)
5,652
2,349
14,584
6,489

2009 (2)
2,186
7,025

2008
626
2,025

(1)

In connection with our Qwest acquisition on April 1, 2011, we acquired approximately 9.0 million telephone access lines and approximately 3.0 million broadband
subscribers.

(2)

In connection with our Embarq acquisition on July 1, 2009, we acquired approximately 5.4 million telephone access lines and approximately 1.5 million broadband
subscribers.

(3)

Broadband subscribers are customers that purchase high-speed Internet connection service through their existing telephone lines and fiber-optic cables. During the
second quarter of 2012, we updated our methodology for counting broadband subscribers to include residential, business and wholesale subscribers instead of only
residential and small business subscribers. We have restated our previously reported amounts to reflect this change.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to "Notes" in this Item 7 refer to the Notes to Consolidated Financial Statements included in Item 8 of this report. Certain
statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" in Item 1 of this
report for factors relating to these statements and "Risk Factors" in Item 1A of this report for a discussion of certain risk factors applicable to
our business, financial condition and results of operations.

Overview
We are an integrated communications company engaged primarily in providing an array of communications services to our residential,
business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line
(including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless and video services. In
certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security
monitoring. 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.
At December 31, 2012, we operated approximately 13.7 million access lines in 37 states, served approximately 5.8 million broadband subscribers,
and operated 54 data centers throughout North America, Europe and Asia. During 2012, we updated our methodology for counting broadband
subscribers to include residential, business and wholesale subscribers instead of only residential and small business subscribers. We have restated
our previously reported amounts to reflect this change. For purposes of counting our access lines, we include only those access lines that we use
to provide services to external customers and exclude lines used solely by us and our affiliates. Our counting methodology also excludes
unbundled loops and includes stand-alone broadband subscribers. Our methodology for counting access lines may not be comparable to those of
other companies.
Our consolidated financial statements include the accounts of CenturyLink, Inc. ("CenturyLink") and its majority-owned subsidiaries. These
subsidiaries include SAVVIS, Inc. ("Savvis") as of July 15, 2011 and Qwest Communications International Inc. ("Qwest") as of April 1, 2011. See
Note 2—Acquisitions to the consolidated financial statements in Item 8 of this report. Due to the significant size of these acquisitions, direct
comparisons of our results of operations for the years ended December 31, 2012, 2011 and 2010 to prior periods are less meaningful than usual. We
discuss below, under "Results of Operations—Segment Results", certain trends that we believe are significant, even if they are not necessarily
material to the combined company.
In the discussion that follows, we refer to the incremental business activities that we now operate as a result of the Savvis acquisition and the
Qwest acquisition as "Legacy Savvis" and "Legacy Qwest", respectively. References to "Legacy CenturyLink", when used in reference to a
comparison of our consolidated results for the years ended December 31, 2012 and 2011, mean the business we operated prior to the Qwest and
Savvis acquisitions. Due to the magnitude of our recent acquisitions in relation to Legacy CenturyLink operations, in the combined company
variance discussions below we have separately reflected the impacts of both the Legacy Qwest and Legacy Savvis operations for enhanced
visibility, although we actively manage the combined company through our four segments, as discussed further below.
We have incurred operating expenses related to our acquisitions of Savvis in July 2011, Qwest in April 2011 and Embarq in July 2009. These
expenses are reflected in cost of services and products and
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selling, general and administrative expenses in our consolidated statements of operations as summarized below.

2012
Cost of services and products:
Integration and other expenses associated
with acquisitions
Severance expenses, accelerated recognition
of share-based awards and retention
compensation associated with
acquisitions
Total
Selling, general and administrative:
Expenses incurred to effect acquisitions
Integration and other expenses associated
with acquisitions
Severance expenses, accelerated recognition
of share-based awards and retention
compensation associated with
acquisitions
Total

Years Ended December 31,
2011
(Dollars in millions)

2010

$

22

43

37

$

—
22

24
67

12
49

$

—

79

13

25

172

64

36
61

149
400

19
96

$

This table does not include costs incurred by Qwest or Savvis prior to being acquired by us. Based on current plans and information, we
estimate, in relation to our Qwest acquisition, total integration, severance and retention expenses to be between $600 million to $700 million (which
includes approximately $464 million of cumulative expenses incurred through December 31, 2012) and our capital expenditures associated with
integration activities will approximate $200 million (which includes approximately $63 million of cumulative capital expenditures incurred through
December 31, 2012). We anticipate that the amount of our integration costs in future years will vary substantially based on integration activities
conducted during those periods and could in certain cases be significantly higher than those incurred by us during the year ended December 31,
2012.
For several years prior to 2011, we reported our operations as a single segment. However, in 2011, in connection with our acquisitions of Qwest
on April 1, 2011 and Savvis on July 15, 2011, we reorganized our business into the following operating segments:
•

Regional markets. Consisted primarily of providing products and services to residential consumers, small to medium-sized
businesses and regional enterprise customers;

•

Business markets. Consisted primarily of providing products and services to enterprise and government customers;

•

Wholesale markets. Consisted primarily of providing products and services to other communications providers; and

•

Savvis operations. Consisted primarily of providing hosting and network services primarily to business customers provided by
Legacy Savvis.
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In the second quarter of 2012, in order to more effectively deploy the strategic assets acquired from Qwest and Savvis and to better serve our
business and government customers, we restructured our business into the following operating segments:
•

Regional markets. Consists primarily of providing strategic and legacy products and services to residential consumers, state and
local governments, small to medium-sized businesses and enterprise customers that in each case are located mainly within one of our
six regions. Our strategic products and services offered to these customers include our private line, broadband, MPLS, hosting,
video services, and wireless services. Our legacy services offered to these customers consist primarily of local and long-distance
service;

•

Wholesale markets. Consists primarily of providing strategic and legacy products and services to other domestic and international
communications providers. Our strategic products and services offered to these customers are mainly private line (including special
access) and MPLS. Our legacy services offered to these customers include UNEs which allow our wholesale customers the use of
our network or a combination of our network and their own networks to provide voice and data services to their customers, longdistance and switched access services;

•

Enterprise markets—network. Consists primarily of providing strategic and legacy network communications products and services
to national and international enterprise and government customers. Our strategic products and services offered to these customers
include our private line, broadband, MPLS and hosting services. Our legacy services offered to these customers consist primarily of
local and long-distance services; and

•

Enterprise markets—data hosting. Consists primarily of providing colocation, managed hosting and cloud hosting services to
national and international enterprise and government customers.

Due to system limitations, we have determined that it is impracticable to report 2010 segment information using our segment structure described
above. As such, only 2011 financial data has been revised under our segment structure described above.
We now report financial information separately for each of these segments; however, our segment information does not include capital
expenditures, total assets, or certain revenues and expenses that we manage on a centralized basis and are only reviewed by our chief operating
decision maker ("CODM") on a consolidated basis. Our segment results are not necessarily indicative of the results of operations that our segments
would have achieved had they operated as stand-alone entities during the periods presented. For additional information about our segments, see
Note 13—Segment Information to the consolidated financial statements in Item 8 of this report and "Results of Operations—Segment Results"
below.
On January 3, 2013, we announced a reorganization of our operating segments. Consequently, beginning with the first quarter of 2013, we will
report the following four segments in our consolidated financial statements: consumer, business, wholesale and data hosting. The primary purpose
of the reorganization is to strengthen our focus on the enterprise business market while continuing our commitment to our hosting and consumer
customers. The reorganization combines business sales and operations functions that resided in the enterprise markets—network segment and the
regional markets segment into the new business segment. The remaining customers serviced by the regional markets segment will become the new
consumer segment. Our wholesale markets and enterprises markets—data hosting segments will not be impacted by the organizational realignment.
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Table of Contents

Results of Operations
The following table summarizes the results of our consolidated operations for the years ended December 31, 2012, 2011 and 2010. Our operating
results include operations of Savvis for periods after July 15, 2011 and Qwest for periods after April 1, 2011.
Years Ended December 31,
2011
(Dollars in millions except
per share amounts)
18,376
15,351
15,663
13,326
2,713
2,025
(1,463)
(1,077)
473
375
777
573

2012

Operating revenues
Operating expenses
Operating income
Other income (expense)
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share

$

$
$
$

1.25
1.25

1.07
1.07

2010

7,042
4,982
2,060
(529)
583
948
3.13
3.13

Due to our acquisitions of Qwest on April 1, 2011 and Savvis on July 15, 2011, our 2012 operating results reflect a full year of Qwest's and
Savvis' results, as compared to our 2011 operating results, which reflect only nine months of Qwest's operating results and five and a half months of
Savvis' operating results.
The increase in net income in 2012 was primarily due to the 2012 period containing a full year of Qwest's operating results compared to the 2011
period only containing nine months and a significant decrease from 2011 in the amount of acquisition, severance and integration expenses resulting
from our recent acquisitions, as presented in the table under the "Overview" section above. The lower levels of net income in 2011 as compared to
2010 were primarily due to increased acquisition, severance and integration expenses attributable to the April 1, 2011 acquisition of Qwest. The
post-acquisition operations of Legacy Savvis and Legacy Qwest, which included substantial severance and integration expenses and significant
acquisition accounting adjustments to depreciation and amortization expense based on valuation estimates, did not contribute significantly to our
consolidated net income in 2011. See Note 2—Acquisitions and Note 3—Goodwill, Customer Relationships and Other Intangible Assets to the
consolidated financial statements in Item 8 of this report. Within our Legacy CenturyLink business, growth in strategic services revenues (which we
describe further below) did not fully offset lower revenues from other services and products, further contributing to decreases in consolidated net
income.
Diluted earnings per common share in 2012 was higher than 2011 as a result of increased net income for 2012. Diluted earnings per common
share in 2011 was substantially lower than the amounts for the corresponding period of 2010 due to decreases in net income, as well as increases in
the weighted average number of outstanding common shares. The increase in the weighted average number of outstanding common shares during
2012 and 2011 was primarily attributable to the issuance of approximately 294 million shares in connection with the Qwest acquisition on April 1,
2011 and the issuance of approximately 14.3 million shares in connection with the Savvis acquisition on July 15, 2011.
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The following table summarizes our broadband subscribers, access lines and number of employees:
As of December 31,
2011
(in thousands)

2012
Operational metrics:
Broadband subscribers
Access lines
Employees

5,848
13,748
47.0

2010

5,652
14,584
49.2

2,349
6,489
20.3

During the second quarter of 2012, we updated our methodology for counting broadband subscribers to include residential, business and
wholesale subscribers instead of only residential and small business subscribers. We have restated our previously reported amounts to reflect this
change.
During the last several years, we have experienced revenue declines primarily due to declines in access lines, intrastate access rates and
minutes of use. Prior to our acquisition, Qwest had experienced similar declines in its revenues. To mitigate these declines, we remain focused on
efforts to, among other things:
•

promote long-term relationships with our customers through bundling of integrated services;

•

provide new services, such as video, cloud hosting, managed hosting, colocation and other additional services that may become
available in the future due to, among other things, advances in technology or improvements in our infrastructure;

•

provide our broadband and premium services to a higher percentage of our customers;

•

pursue acquisitions of additional assets if available at attractive prices;

•

increase usage of our networks; and

•

market our products and services to new customers.

Operating Revenues
We currently categorize our products, services and revenues among the following four categories:
•

Strategic services, which include primarily broadband, private line (including special access which we market to wholesale and
business customers who require dedicated equipment to transmit large amounts of data between sites), MPLS (which is a data
networking technology that can deliver the quality of service required to support real-time voice and video), hosting (including
cloud hosting and managed hosting), colocation, Ethernet, video (including resold satellite and our facilities-based video services),
VoIP and Verizon Wireless services;

•

Legacy services, which include primarily local, long-distance, switched access, public access, ISDN (which uses regular telephone
lines to support voice, video and data applications), and WAN services (which allows a local communications network to link to
networks in remote locations);

•

Data integration, which includes the sale of telecommunications equipment to customers for use on their premises and related
professional services, such as network management, installation and maintenance of data equipment and building of proprietary
fiber-optic networks for our government and business customers; and

•

Other revenues, which consists primarily of USF revenue and surcharges. Unlike the first three revenue categories, other revenues
are not included in our segment revenues.
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The following table summarizes our operating revenues under our current revenue categorization which is presented in a manner that we
believe will be useful for understanding the relevant trends affecting our business:
Years Ended
December 31,
2012
2011
Strategic
services
Legacy
services
Data
integration
Other
Total
operating
revenues

$

$

Increase (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

Total

8,361

6,262

307

1,207

585

2,099

8,287

7,672

(633)

1,248

—

615

672
1,056

537
880

116
132

—
—

135
176

18,376

15,351

2,703

585

3,025

19
44

(263)

During 2012, operating revenues attributable to certain products and services were reclassified from legacy services to strategic services. Due
to system limitations, we have determined that is impracticable to restate 2010's operating revenues to conform to our current revenue
categorization. For comparability purposes, we have included our operating revenues for the years ended December 31, 2011 and 2010 under our
prior revenue categorization:
Years Ended
December 31,
2011
2010
Strategic
services
Legacy
services
Data
integration
Other
Total
operating
revenues

$

$

Increase (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

Total

6,254

2,049

150

3,572

483

4,205

7,680

4,288

(483)

3,875

—

3,392

537
880

158
547

(23)
(24)

402
357

—
—

379
333

15,351

7,042

(380)

8,206

483

8,309

Our operating revenues increased substantially in both 2012 and 2011 as compared to 2011 and 2010, respectively, due to our acquisitions of
Qwest on April 1, 2011 and Savvis on July 15, 2011. Total operating revenues increased $3.025 billion in 2012 as compared to 2011 and increased
$8.309 billion in 2011 as compared to 2010. As reflected in the chart above, our acquisitions of Qwest and Savvis contributed incremental operating
revenues (net of intercompany eliminations) of $2.7 billion and $585 million, respectively, to our 2012 revenues. Legacy CenturyLink operating
revenues decreased $263 million, or 1.7%, in 2012 and $380 million, or 5.4%, in 2011 as compared to the prior year period. These decreases were
primarily attributable to declines in legacy services revenues, which reflected the continuing loss of access lines in our markets. At December 31,
2012, we had 13.748 million access lines, of which 8.055 million were in Legacy Qwest's markets. Access lines in our Legacy CenturyLink markets
declined to 5.693 million at December 31, 2012 from 6.051 million at December 31, 2011, a decrease of 5.93% during 2012, and were 6.489 million at
December 31, 2010, a decrease of 6.75% during 2011. We believe the decline in the number of access lines was primarily due to the displacement of
traditional wireline telephone services by other competitive products and services. We estimate that our access lines loss will be between 5.4% and
5.9% in 2013. Our legacy services revenues were also negatively impacted in 2012 by the continued reduction in access revenues and continued
migration of customers to bundled service offerings at lower effective rates. The decreases in our legacy services revenues were partially offset by
higher revenues from strategic services revenues. Ethernet,
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MPLS, Internet Protocol Television ("IPTV"), VoIP and broadband services accounted for a majority of the growth in strategic services revenues.
We are aggressively marketing our strategic services (including our data hosting services) and data integration to offset the continuing
declines in our legacy services revenues. We believe our recent acquisitions of Savvis and Qwest will strengthen our ability to achieve this goal.
Further analysis of our operating revenues by segment is provided below in "Segment Results."
Operating Expenses
Our current definitions of operating expenses are as follows:
•

Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and
services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our
network (such as salaries, wages, benefits and professional fees); facilities expenses (which include third-party telecommunications
expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment
sales expenses (such as data integration and modem expenses); costs for universal service funds ("USF") (which are federal and
state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and
affordable rates, among other things, and to which we are often required to contribute); and other expenses directly related to our
network and hosting operations.

•

Selling, general and administrative expenses are corporate overhead and other operating expenses. These expenses include:
employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to
selling products or services and employee-related expenses for administrative functions; marketing and advertising; taxes (such as
property and other taxes) and fees; external commissions; bad debt expense; and other selling, general and administrative expenses.

These expense classifications may not be comparable to those of other companies.
During 2012 and 2011, our operating expenses increased substantially in comparison to 2011 and 2010 primarily due to our acquisitions of
Qwest and Savvis.
The following tables summarize our operating expenses:
Years Ended
December 31,
2012
2011
Cost of
services
and
products
(exclusive
of
depreciation
and
amortization) $
Selling,
general and
administrative
Depreciation
and
amortization
Total
operating
expenses
$

Increase (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

Total

7,639

6,325

(73)

1,082

305

1,314

3,244

2,975

(367)

483

153

269

4,780

4,026

(149)

741

162

754

15,663

13,326

(589)

2,306

620

2,337

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Years Ended
December 31,
2011
2010
Cost of
services
and
products
(exclusive
of
depreciation
and
amortization) $
Selling,
general and
administrative
Depreciation
and
amortization
Total
operating
expenses
$

Increase (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

Total

6,325

2,544

(4)

3,523

262

3,781

2,975

1,004

60

1,791

120

1,971

4,026

1,434

72

2,394

126

2,592

13,326

4,982

128

7,708

508

8,344

The acquisitions of Qwest and Savvis largely contributed to the increase in total operating expenses of $2.337 billion in 2012. Excluding the
effects of Legacy Qwest and Legacy Savvis expenses, total operating expenses in 2012 decreased $589 million, or 4.4%, due primarily to decreases
in employee-related expenses, severance and integration expenses relating to our recent acquisitions and depreciation and amortization expense.
The increase in total operating expenses of $8.344 billion in 2011 was largely attributable to the inclusion of $7.7 billion in post-acquisition Legacy
Qwest operating expenses (net of intercompany eliminations) in our consolidated operating expenses. In addition, the acquisition of Savvis on
July 15, 2011 increased our consolidated operating expenses for 2011 by $508 million. As discussed in the "Overview" section, our operating
expenses for 2012, 2011, and 2010 included substantial severance and integration costs related to the Qwest, Savvis and Embarq acquisitions as well
as significant acquisition accounting adjustments to depreciation and amortization expense. See Note 2—Acquisitions and Note 3—Goodwill,
Customer Relationships and Other Intangible Assets to the consolidated financial statements in Item 8 of this report. Excluding the effects of
Legacy Qwest and Legacy Savvis expenses, total operating expenses in 2011 increased $128 million, or 2.6%, due primarily to integration costs
associated with the Qwest acquisition and increased costs of providing our facilities-based video services to more customers.
For the year ended December 31, 2012, Legacy CenturyLink cost of services and products (exclusive of depreciation and amortization) were
slightly lower as compared to 2011. During the year, we experienced decreases in severance, salaries and wages and related benefits, which were
partially offset by increases in customer premise equipment and maintenance costs, network expense, and contractor costs. Cost of services and
products for Legacy CenturyLink operations was relatively unchanged in 2011. For 2011, $55 million of higher costs of services and products
associated with providing our facilities-based video service were substantially offset by a $28 million decrease in salaries and benefits and a
$20 million decrease in facilities costs associated with the migration of legacy Embarq long-distance traffic to our internal networks.
Legacy CenturyLink selling, general and administrative expenses decreased $367 million, or 2.8%, for 2012 as compared to 2011, while selling,
general and administrative expenses increased $60 million, or 6.0%, for 2011 as compared to 2010. The decrease in 2012 primarily was due to a
decrease in severance and integration expenses relating to our recent acquisitions, as well as a decrease in salaries, wages, and employee benefits
due to a reduction in headcount. For all periods presented, our expenses include significant transaction, severance and integration expenses related
to the Qwest, Savvis and Embarq acquisitions (see table in "Overview" above). Changes in the timing and amount of Qwest and Savvis integration
expenses resulted in a net increase in Legacy CenturyLink's 2011 selling, general and administrative expenses compared to 2010. This increase was
partially offset by a decrease of $33 million in 2011 in operating taxes, which were primarily due to favorable property tax and transaction tax
settlements. In addition, in 2011 we had a decrease of $20 million in compensation expenses, which were primarily due to workforce reductions and
lower pension expense.
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Effective January 1, 2012, we changed our rates of capitalized labor as we transitioned certain of Qwest's legacy systems to our historical
company systems. This transition resulted in an estimated $40 million to $55 million increase in the amount of labor capitalized as an asset compared
to the amount that would have been capitalized if Qwest had continued to use its legacy systems and a corresponding estimated $40 million to
$55 million decrease in operating expenses for the year ended December 31, 2012. The reduction in expenses described above, net of tax, increased
net income approximately $25 million to $34 million, or $0.04 to $0.05 per basic and diluted common share, for the year ended December 31, 2012.
Excluding the effects of the acquisitions of Qwest and Savvis, depreciation and amortization expense for Legacy CenturyLink decreased
$149 million, or 3.7%, due to annual updates of our depreciation rates for capitalized assets and an out-of-period accounting adjustment, partially
offset by net growth in capital assets. Depreciation and amortization for Legacy CenturyLink increased $72 million, or 5.0%, in 2011 primarily due to
higher levels of property, plant and equipment and an out-of-period accounting adjustment corrected in 2012.
Further analysis of our operating expenses by segment is provided below in "Segment Results."
Other Consolidated Results
The following tables summarize our total other income (expense) and income tax expense:
Years Ended
December 31,
2012
2011
Interest
expense $
Net loss
on
early
retirement
of debt
Other
income
(expense)
Total
other
income
(expense) $
Income
tax
expense $

Increase (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

(1,319)

(1,072)

62

(179)

(8)

179

35

3

32

(1,463)

(1,077)

473

375

Years Ended
December 31,
2011
2010
Interest
expense $
Net loss
on
early
retirement
of debt
Other
income
(expense)
Total
other
income
(expense) $
Income
tax
expense $

(1,072)

169

Total

16

247

(8)

—

171

(1)

1

32

273

160

17

386

nm

nm

nm

98

Increase (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

Total

(544)

34

486

8

528

(8)

—

—

8

—

8

3

15

17

(2)

(3)

12

(529)

51

492

5

548

583

nm

nm

nm

(1,077)

375

(208)

nm—Attributing changes in income tax expense to the acquisitions of Savvis and Qwest is
considered not meaningful.

55

Table of Contents
Interest Expense
Interest expense for the year ended December 31, 2012 increased by $247 million compared to 2011. This increase is primarily due to the 2012
period containing a full year of Qwest interest expense compared to the 2011 period containing only nine months. Interest expense increased
$528 million in 2011 primarily due to higher debt balances associated principally with debt assumed in the Qwest acquisition and incurred to finance
the Savvis acquisition. See Note 4—Long-term Debt and Credit Facilities to the consolidated financial statements in Item 8 of this report and
"Liquidity and Capital Resources" below for additional information about those transactions.
Interest expense for Legacy CenturyLink increased $62 million, or 5.8%, in 2012 compared to 2011 and increased $34 million, or 6.3%, in 2011
compared to 2010. The increase in both years is substantially due to interest on our $2 billion aggregate principal amount of senior notes issued in
June 2011 to finance the Savvis acquisition. The 2012 increase is due to those notes being outstanding for a full year versus a partial year in 2011.
The 2011 increase was due to those notes being outstanding for a partial year versus not at all in 2010.
Net Loss on Early Retirement of Debt
In the fourth quarter of 2012, QCII redeemed certain of its outstanding debt securities, which resulted in a gain of $15 million.
In the second quarter of 2012, our subsidiaries Embarq and QC completed premium-priced cash tender offers for the purchase of certain of their
respective outstanding debt securities, resulting in an aggregate loss of $190 million. Also in the second quarter of 2012, our subsidiaries Embarq
and QCII redeemed certain of their respective outstanding debt securities which resulted in a net loss of $9 million.
During 2012, QCII and QC redeemed certain of their outstanding debt securities, which resulted in a gain of $5 million.
In the fourth quarter and second quarter of 2011, QC redeemed certain of its outstanding debt securities which resulted in a total net loss of
$8 million.
Other Income (Expense)
Other income (expense) reflects certain items not directly related to our core operations, including our share of income from our 49% interest in
a cellular partnership, interest income, gains and losses from non-operating asset dispositions and impairments and foreign currency gains and
losses. Other income for Legacy CenturyLink was greater for the year ended December 31, 2012 as compared to 2011 due to gains on the sales of
our auction rate securities and the recognition in 2011 of $16 million in transaction expenses incurred in connection with terminating an unused
bridge loan financing commitment related to the Savvis acquisition. See Note 2—Acquisitions to the consolidated financial statements in Item 8 of
this report. Other income for Legacy CenturyLink decreased $17 million in 2011, as compared to 2010 primarily due to the $16 million in transaction
expenses discussed above.
Income Tax Expense
Our income tax expense for the years ended December 31, 2012 and 2011increased $98 million and decreased $208 million, respectively, from the
amounts for the comparable prior year. Our increase in 2012 was primarily due to a $302 million, or 32%, increase in income before income tax
expense as compared to 2011. Our decrease in 2011 was primarily due to a decrease in income before income tax expense, which was attributable to a
decline in operating income and increased interest expense directly related to the acquisition of Qwest. For the years ended December 31, 2012, 2011
and 2010, our effective income tax rate was 37.8%, 39.6% and 38.1%, respectively. The 2012 effective tax rate reflects the $16 million reversal of a
valuation allowance related to the auction rate securities we sold in 2012,
56

Table of Contents
a $12 million benefit related to state NOLs net of valuation allowance, and a $6 million expense associated with reversing a receivable related to
periods that have been effectively settled with the IRS. The 2011 rate increase was due in part to $24 million of non-deductible transaction costs and
an $8 million valuation allowance recorded on deferred tax assets that require future income of a special character to realize the benefits. Such
increase was partially offset by a $16 million reduction in our valuation allowance related to state NOLs due primarily to the effects of a tax law
change in one of the states in which we operate. Certain merger-related costs incurred during 2010 are also non-deductible for income tax purposes
and similarly increased our effective income tax rate. See Note 12—Income Taxes to the consolidated financial statements in Item 8 of this report and
"Income Taxes" below for additional information.
Segment Results
As described further above under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations—
Overview," we revised our segment structure in 2012 and restated previously reported segment results for the year ended December 31, 2011 to
conform to our 2012 segment presentation. The following table summarizes our segment results for 2012 and 2011 under our segment categorization
at December 31, 2012.

Total segment revenues
Total segment expenses
Total segment income

$
$

Total margin percentage
Regional markets:
Revenues
Expenses
Income

$
$

Margin percentage
Wholesale markets:
Revenues
Expenses
Income

$
$

Margin percentage
Enterprise markets—network:
Revenues
Expenses
Income

$
$

Margin percentage
Enterprise markets—data hosting:
Revenues
Expenses
Income

$
$

Margin percentage
57

Years Ended December 31,
2012
2011
(Dollars in millions)
17,320
14,471
8,094
6,513
9,226
7,958
53%

55%

9,876
4,218
5,658

8,743
3,673
5,070

57%

58%

3,721
1,117
2,604

3,305
1,021
2,284

70%

69%

2,609
1,891
718

1,933
1,450
483

28%

25%

1,114
868
246

490
369
121

22%

25%

Table of Contents
Due to system limitations, we have determined that it is impracticable to restate 2010's reported segments to conform to our current segment
categorization at December 31, 2012. For comparability purposes, we have included our segment information for the years ended December 31, 2011
and 2010 based on the segment categorization we were operating under at the end of 2011.

Total segment revenues
Total segment expenses
Total segment income

$
$

Total margin percentage
Regional markets:
Revenues
Expenses
Income

$
$

Margin percentage
Business markets:
Revenues
Expenses
Income

$
$

Margin percentage
Wholesale markets:
Revenues
Expenses
Income

$
$

Margin percentage
Savvis operations:
Revenues
Expenses
Income

$
$

Margin percentage

Years Ended December 31,
2011
2010
(Dollars in millions)
14,471
6,495
6,535
2,403
7,936
4,092
55%

63%

7,832
3,398
4,434

4,640
1,783
2,857

57%

62%

2,861
1,736
1,125

266
120
146

39%

55%

3,295
1,021
2,274

1,589
500
1,089

69%

69%

483
380
103

—
—
—

21%

—

The lower levels of margin percentage for regional markets and business markets in 2011 were primarily attributable to the inclusion of Qwest's
results beginning April 1, 2011.
58

Table of Contents
The following table reconciles our total segment revenues and total segment income presented above to operating revenues and operating
income reported in our consolidated statements of operations.
Years Ended December 31,
2011
(Dollars in millions)
17,320
14,471
1,056
880

2012

2010

Total segment revenues
Other operating revenues
Operating revenues reported in our
consolidated statements of operations

$

6,495
547

$

18,376

15,351

7,042

Total segment income
Other operating revenues
Depreciation and amortization
Other unassigned operating expenses
Operating income reported in our consolidated
statement of operations

$

9,226
1,056
(4,780)
(2,789)

7,958
880
(4,026)
(2,787)

4,092
547
(1,434)
(1,145)

$

2,713

2,025

2,060

Our segment revenues include all revenues from our strategic and legacy services and data integration as described in more detail above.
Segment revenues are based upon each customer's classification to an individual segment. We report our segment revenues based upon all
services provided to that segment's customers. We report our segment expenses for our four segments as follows:
•

Direct expenses, which primarily are specific expenses incurred as a direct result of providing services and products to segment
customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or
activities; and

•

Allocated expenses, which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses.

During the first quarter of 2012, as we transitioned certain of Qwest's legacy systems to our historical company systems, we updated our
methodologies for reporting our direct expenses and for allocating our expenses to our segments. Specifically, we no longer include certain fleet
expenses for our regional markets segment in direct expenses; they are now expenses allocated to our segments, with the exception of enterprise
markets—data hosting. In addition, we now more fully allocate network building rent and power expenses to our regional markets, wholesale
markets and enterprise markets—network segments. We determined that it was impracticable to recast our segment results for prior periods to
reflect these changes in methodology.
During the second quarter of 2012, as we reorganized our business into our four segments as indicated above, we further revised our
methodology for how we allocate our expenses to our segments to better align segment expenses with related revenues. Under our revised
methodology, we no longer allocate certain product development costs to our segments, but we do now allocate certain expenses from our
enterprise markets—data hosting segment to our other three segments. We restated our segment results for 2011 to reflect these changes in our
methodology. We determined that it was impracticable to recast our segment results for 2010 under our revised methodology.
We do not assign depreciation and amortization expense to our segments, as the related assets and capital expenditures are centrally managed.
Similarly, severance expenses, restructuring expenses and, subject to an exception for our enterprise markets—data hosting segment, certain
centrally managed administrative functions (such as finance, information technology, legal and human resources) are not
59

Table of Contents
assigned to our segments. Interest expense is also excluded from segment results because we manage our financing on a total company basis and
have not allocated assets or debt to specific segments. In addition, other income (expense) does not relate to our segment operations and is
therefore excluded from our segment results.
As discussed under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview",
beginning in the first quarter of 2013, we plan to report our operations under the following four segments: consumer, business, wholesale and data
hosting.
Regional Markets
The operations of our regional markets segment have been impacted by several significant trends, including those described below.
•

Strategic services. We continue to focus on increasing subscribers of our broadband services in our regional markets segment. In
order to remain competitive, we believe continually increasing connection speeds is important. As a result, we continue to invest in
our (broadband) network, which allows for the delivery of higher speed broadband services. While traditional broadband services
are declining, they have been more than offset by growth in fiber-based broadband services. We also continue to expand our
product offerings including facilities-based video services, Ethernet, MPLS and other managed services and we continue to refine
our marketing efforts as we compete in a maturing market in which most consumers already have broadband services. We expect
these efforts will improve our ability to compete and increase our strategic revenues;

•

Facilities-based video expenses. As we continue to expand our facilities-based video service infrastructure, we are incurring start-up
expenses in advance of the revenue that this service is expected to generate. Although, over time, we expect that our revenue for
facilities-based video services will offset the expenses incurred, the timing of this revenue growth is uncertain;

•

Access lines. Our voice revenues have been, and we expect they will continue to be, adversely affected by access line losses.
Intense competition and product substitution continue to drive our access line losses. For example, many consumers are
substituting cable and wireless voice and electronic mail, texting and social networking services for traditional voice
telecommunications services. We expect that these factors will continue to negatively impact our business. As a result of the
expected loss of revenues associated with access lines, we continue to offer service bundling and other product promotions to help
mitigate this trend, as described below;

•

Service bundling and product promotions. We offer our customers the ability to bundle multiple products and services. These
customers can bundle local services with other services such as broadband, video, long-distance and wireless;

•

Data integration. We expect both data integration revenue and the related costs will fluctuate from quarter to quarter as this offering
tends to be more sensitive than others to changes in the economy and in spending trends of our state and local government
customers, many of whom have recently experienced budget cuts; and

•

Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our segment workforce
in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and
regulatory conditions.
60

Table of Contents
The following table summarizes the results of operations from our regional markets segment:
Regional Markets Segment
Years Ended
December 31,
2012
2011
Segment revenues:
Strategic
services
Legacy services
Data integration
Total revenues
Segment expenses:
Direct
Allocated
Total expenses
Segment income
Segment margin
percentage

$

$

Increase / (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

Total

3,607
5,996
273
9,876

2,890
5,593
260
8,743

168
(399)
(19)
(250)

546
802
32
1,380

3
—
—
3

717
403
13
1,133

3,939
279
4,218
5,658

3,469
204
3,673
5,070

(44)
52
8
(258)

514
20
534
846

—
3
3
—

470
75
545
588

57%

58%

Segment Income
The acquisition of Qwest on April 1, 2011 largely contributed to an increase in our regional markets segment income of $588 million for the year
ended December 31, 2012 as compared to 2011. Our consolidated segment margin percentage remained relatively unchanged from 2011 to 2012.
Segment income for our Legacy CenturyLink operations decreased $258 million as compared to 2011 reflecting declines in revenues while expenses
remained relatively flat.
Segment Revenues
Excluding revenues attributable to the Legacy Qwest and Legacy Savvis acquisitions, regional markets revenues decreased $250 million, or
2.9%, for the year ended December 31, 2012 as compared to 2011 due to declines in legacy services revenues and the implementation of the CAF
order, partially offset by growth in strategic services revenues. Legacy services revenues decreased primarily due to declines in local and longdistance services associated principally with access line losses resulting from the competitive pressures and product substitution described
previously. Growth in strategic services revenues was principally due to increases in the number of broadband subscribers as well as volume
increases in our facilities-based video, Ethernet, and MPLS services.
Segment Expenses
Regional markets total expenses, exclusive of Legacy Qwest and Legacy Savvis expenses, increased $8 million for the year ended December 31,
2012 as compared to 2011, due to an increase in allocated expenses. Allocated expenses increased primarily due to our updated methodology more
fully allocating to our segments network and building rent and related power expenses. Direct expenses decreased due to decreases in employee
related expenses, fleet expenses and marketing costs, which were partially offset by increases in customer premise equipment costs and network
service costs.
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Table of Contents
Wholesale Markets
The operations of our wholesale markets segment have been impacted by several significant trends, including those described below:
•

Private line services (including special access). Demand for our private line services continues to increase, despite our customers'
optimization of their networks, industry consolidation and technological migration. While we expect that these factors could
negatively impact our wholesale markets segment, we ultimately believe the bandwidth consumption growth in our fiber-based
special access services provided to wireless carriers for backhaul will, over time, offset the decline in copper-based special access
services provided to wireless carriers as they migrate to Ethernet services, although the timing and magnitude of this technological
migration is uncertain;

•

Access and local services revenues. Our access and local services revenues have been and we expect will continue to be, adversely
affected by technological migration, industry consolidation, regulation and rate reductions. For example, wholesale consumers are
substituting cable, wireless and VoIP services for traditional voice telecommunications services, resulting in continued access
revenue loss. We expect these factors will continue to adversely impact our wholesale markets segment;

•

Switched access revenues. We believe that changes related to the Connect America and Intercarrier Compensation Reform order
("CAF order") adopted by the Federal Communications Commission ("FCC") on October 27, 2011 will substantially increase the pace
of reductions in the amount of switched access revenues we receive in our wholesale markets segment;

•

Long-distance services revenues. Wholesale long-distance revenues continue to decline as a result of customer migration to more
technologically advanced services, price compression, declining demand for traditional voice services and industry consolidation;
and

•

Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our segment workforce
in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and
regulatory conditions. We also expect our wholesale markets segment to benefit indirectly from enhanced efficiencies in our
company-wide network operations.
62

Table of Contents
The following table summarizes the results of operations from our wholesale markets segment:
Wholesale Markets Segment
Years Ended
December 31,
2012
2011
Segment revenues:
Strategic
services
Legacy services
Data integration
Total revenues
Segment expenses:
Direct
Allocated
Total expenses
Segment income
Segment margin
percentage

$

$

Increase / (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

Total

2,296
1,424
1
3,721

1,915
1,389
1
3,305

33
(213)
—
(180)

339
248
—
587

9
—
—
9

381
35
—
416

169
948
1,117
2,604

174
847
1,021
2,284

(18)
(60)
(78)
(102)

13
155
168
419

—
6
6
3

(5)
101
96
320

70%

69%

Segment Income
The acquisition of Qwest on April 1, 2011 largely contributed to an increase in our wholesale markets segment income of $320 million for the
year ended December 31, 2012 as compared to 2011. Segment income for our Legacy CenturyLink operations decreased $102 million for the year
ended December 31, 2012 as compared to 2011, primarily reflecting declines in revenues, as discussed further below.
Segment Revenues
Excluding revenues attributable to the Legacy Qwest and Legacy Savvis acquisitions, wholesale markets revenues decreased $180 million, or
5.5%, for the year ended December 31, 2012 as compared to 2011. This decrease reflects substantially lower revenues from legacy services, partially
offset by growth in revenues from strategic services. Strategic services revenues increased primarily due to growth in Ethernet and broadband
services. The decrease in legacy services revenues was driven by continuing declines in access, long-distance and local services volumes, and the
implementation of the CAF order, as well as the substitution of cable, wireless, VoIP and other services for traditional voice telecommunications
services.
Segment Expenses
Wholesale markets expenses, exclusive of Legacy Qwest and Legacy Savvis expenses, decreased $78 million, or 7.6%, for the year ended
December 31, 2012 as compared to 2011. The decrease in Legacy CenturyLink wholesale markets expenses was primarily due to a lower allocation of
fleet and network real estate expenses due to the above-described updated expense allocation methodology and to reductions in employee related
expenses.
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Table of Contents
Enterprise Markets—Network
The operations of our enterprise markets—network segment have been impacted by several significant trends, including those described
below.
•

Strategic services. Our mix of total segment revenues continues to migrate from legacy services to strategic services as our
enterprise and government customers increasingly demand customized and integrated data, Internet and voice services. We offer to
our enterprise customers diverse combinations of products and services such as private line, MPLS and VoIP services. We believe
these services afford our customers more flexibility in managing their communications needs and enable us to improve the
effectiveness and efficiency of their operations. Although we are experiencing price compression on our strategic services due to
competition, we expect overall revenues from these services to grow;

•

Legacy services. We face intense competition with respect to our legacy services and continue to see customers migrating away
from these services into strategic services. In addition, our legacy services revenues have been, and we expect they will continue to
be, adversely affected by access line losses and price compression;

•

Data integration. We expect both data integration revenue and the related costs will fluctuate from quarter to quarter as this offering
tends to be more sensitive than others to changes in the economy and in spending trends of our federal government customers. In
addition, changes to our compensation programs, which focus on higher margin strategic services, could negatively impact data
integration revenues; and

•

Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our segment workforce
in response to our productivity improvements while achieving operational efficiencies and improving our processes through
automation. We also expect our enterprise markets—network segment to benefit indirectly from enhanced efficiencies in our
company-wide network operations.

The following table summarizes the results of operations from our enterprise markets—network segment:
Enterprise Markets—Network Segment
Years Ended
December 31,
2012
2011
Segment revenues:
Strategic
services
Legacy services
Data integration
Total
revenues
Segment expenses:
Direct
Allocated
Total expenses
Segment income
Segment margin
percentage

$

$

1,344
867
398

967
690
276

2,609

Increase / (Decrease)
CenturyLink
Qwest
Savvis
(Dollars in millions)

Total

56
(21)
38

314
198
84

7
—
—

377
177
122

1,933

73

596

7

676

781
1,110
1,891
718

568
882
1,450
483

33
(40)
(7)
80

180
261
441
155

—
7
7
—

213
228
441
235

28%

25%
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Table of Contents
Segment Income
The acquisition of Qwest on April 1, 2011 substantially increased the scale of our enterprise markets—network segment, resulting in an
increase of $235 million in segment income for the year ended December 31, 2012 as compared to 2011. Segment income for our Legacy CenturyLink
operations increased $80 million for the year ended December 31, 2012 as compared to 2011, primarily reflecting an increase in revenues.
Segment Revenues
Excluding revenues attributable to the Legacy Qwest and Legacy Savvis acquisitions, enterprise markets—network segment revenues
increased by $73 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The increase was primarily due to
growth in strategic services revenues from increased volumes of MPLS services and increased data integration revenues from maintenance and
installation of customer premise equipment. Lower revenues from legacy services were driven by access line losses and price compression partially
offset the increases in strategic services revenues and data integration revenues.
Segment Expenses
Enterprise markets—network segment expenses, exclusive of Legacy Qwest and Legacy Savvis expenses, decreased by $7 million for the year
ended December 31, 2012 as compared to the year ended December 31, 2011 primarily due to decreased allocated expenses partially offset by
increased direct expenses. Allocated expenses decreased for the year ended December 31, 2012 due to lower allocation of fleet and network real
estate expenses due to the above-described updated expense allocation methodology. The increase in direct expenses was primarily due to
increased maintenance and installation costs associated with customer premise equipment, partially offset by decreases in employee related
expenses.
Enterprise Markets—Data Hosting
The operations of our enterprise markets—data hosting segment is largely comprised of the operations of our Legacy Savvis services for
periods after the July 15, 2011 acquisition date, which have been impacted by significant trends, including those described below.
•

Colocation. Colocation is designed for clients seeking data center space and power for their server and networking equipment
needs. Our data centers provide our domestic and international clients with a secure, high-powered, purpose-built location for their
IT equipment. We anticipate continued pricing pressure for these services as wholesale vendors enter the enterprise colocation
market; however, we believe that our combination of global data center assets, operational expertise and broad range of services
strengthens our competitive position;

•

Managed hosting. Our managed hosting services provide a fully managed solution for a customer's IT infrastructure and network
needs, and include dedicated and cloud hosting services, utility and computing storage, consulting and managed security services.
We expect increasing pricing pressure on the managed hosting business from competing cloud hosting offerings. However, we
remain focused on expanding our managed hosting business, specifically in our cloud hosting offerings, which we believe is a key to
growth. We believe that we have continued to strengthen our position in the cloud hosting market by adding differentiating features
to our cloud hosting products; and

•

Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our segment workforce
in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and
regulatory conditions.
65

Table of Contents
The following table summarizes the results of operations from our enterprise markets—data hosting segment:
Enterprise Markets—Data Hosting Segment
Years Ended
December 31,
Increase / (Decrease)
2012
2011
CenturyLink
Qwest
Savvis
(Dollars in millions)
Segment revenues:
Strategic
services
Total revenues
Segment expenses:
Direct
Allocated
Total expenses
Segment income
Segment margin
percentage

$

$

1,114
1,114
940
(72)
868
246
22%

Total

490
490

50
50

8
8

566
566

624
624

415
(46)
369
121

56
1
57
(7)

11
(10)
1
7

458
(17)
441
125

525
(26)
499
125

25%

Segment Income
The acquisition of Savvis on July 15, 2011 substantially increased the scale of our enterprise markets—data hosting segment, resulting in an
increase of $125 million in our segment income for the year ended December 31, 2012 as compared to the year ended December 31, 2011.
Segment Revenues
Savvis operations accounted for 97% of our enterprise markets—data hosting segment revenues for the year ended December 31, 2012. Growth
in strategic services is driven by roughly equivalent increases in both colocation and managed hosting.
Segment Expenses
Excluding the expenses attributable to the Legacy Qwest and Legacy Savvis acquisitions, enterprise markets—data hosting segment direct
expenses increased for the year ended December 31, 2012 as compared to the year ended December 31, 2011 primarily due to increases in salaries
and benefits caused by a higher headcount and an increase in facility costs.
Due to the continuing use of Legacy Savvis accounting systems, the direct expenses of our enterprise markets—data hosting segment
includes certain data communication, operational, and selling, general, and administrative costs that are allocated to our other three segments and
are offset by corporate allocated expenses which resulted in a negative net allocation impact.

Other Operational Matters
Approximately 26% of our employees are subject to collective bargaining agreements that expired on October 6, 2012. We are currently
negotiating the terms of new agreements. In the meantime, the predecessor agreements have been extended, and the applicable unions have agreed
to provide us with at least 24 hour advance notice before terminating those predecessor agreements. If we fail to extend or renegotiate our collective
bargaining agreements with our labor unions, or if our unionized employees were to engage in a strike or other work stoppage, our business and
operating results could
66

Table of Contents
be materially harmed. See "Risk Factors—Other Risks Affecting Our Business" in Item 1A of this report. To help mitigate this potential risk, we have
established contingency plans in which we would assign trained, non-represented employees to cover jobs for represented employees in the event
of a work stoppage to provide continuity for our customers.

Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles that are generally accepted in the United States.
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. We have identified certain policies and estimates as critical to our business operations and
the understanding of our past or present results of operations related to (i) business combinations; (ii) goodwill, customer relationships and other
intangible assets; (iii) property, plant and equipment; (iv) pension and post-retirement benefits; (v) loss contingencies and litigation reserves; and
(vi) income taxes. These policies and estimates are considered critical because they had a material impact, or they have the potential to have a
material impact, on our consolidated financial statements and because they require significant judgments, assumptions or estimates. We believe
that the estimates, judgments and assumptions made when accounting for the items described below are reasonable, based on information available
at the time they are made. However, there can be no assurance that actual results will not differ from those estimates.
Business Combinations
We have accounted for our acquisitions of Qwest on April 1, 2011 and Savvis on July 15, 2011 under the acquisition method of accounting,
whereby the tangible and separately identifiable intangible assets acquired and liabilities assumed are recognized at their estimated fair values at the
acquisition date. The portion of the purchase price in excess of the estimated fair value of the net tangible and separately identifiable intangible
assets acquired represents goodwill. The estimates of fair value and resulting allocation of the purchase price related to our acquisitions of Qwest
and Savvis involved significant estimates and judgments by our management. In arriving at the fair values of assets acquired and liabilities
assumed, we considered the following generally accepted valuation approaches: the cost approach, income approach and market approach. Our
estimates also included assumptions about projected growth rates, cost of capital, effective tax rates, tax amortization periods, technology life
cycles, the regulatory and legal environment and industry and economic trends. Small changes in the underlying assumptions could impact the
estimates of fair value by material amounts, which could in turn materially impact our results of operations.
Goodwill, Customer Relationships and Other Intangible Assets
We amortize customer relationships over primarily over an estimated life of 10 years to 12.5 years, using either the sum-of-the-years-digits or
straight-line methods, depending on the type of customer. We amortize capitalized software, which consists primarily of assets obtained from the
Qwest acquisition, using the straight-line method over estimated lives ranging up to seven years. Approximately $237 million of our capitalized
software represents costs to develop an integrated billing and customer care system and is being amortized over a 20 year period that began in 2004.
We amortize trade names and patent assets predominantly using the sum-of-the-years digits over an estimated life of four years. Other intangible
assets not arising from business combinations are initially recorded at cost. Where there are no legal, regulatory, contractual or other factors that
would reasonably limit the useful life of an intangible asset, we classify the intangible asset as indefinite-lived and such intangible assets are not
amortized. We periodically review the estimated lives and methods used to amortize our other intangible assets. The amount of future amortization
expense may differ materially from current amounts, depending on the results of our periodic reviews.
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Our long-lived intangible assets with indefinite lives are tested for impairment annually, or, under certain circumstances, more frequently, such
as when events or circumstances indicate there may be an impairment. These assets are carried at historical cost if their estimated fair value is
greater than their carrying amounts. However, if their estimated fair value is less than the carrying amount, other indefinite-lived intangible assets
are reduced to their estimated fair value through an impairment charge to our consolidated statements of operations. We early adopted the
provisions of Accounting Standards Update ("ASU") 2012-2, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment, during the fourth quarter of 2012, which allows us the option to first review qualitative factors to determine the likelihood of
whether the indefinite-lived intangible asset is impaired before performing a qualitative impairment test. Under this approach, if we determine that it
is more likely than not that the indefinite-lived intangible asset is impaired, we will be required to compute and compare the fair value of the
indefinite-lived intangible asset to its carrying amount to determine and measure the impairment loss, if any. We completed our qualitative
assessment as of December 31, 2012 and concluded it is not more likely than not that our indefinite-lived intangible assets are impaired; thus, no
impairment charge was recorded in 2012.
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired. For more
information on our recent acquisitions and resulting fair values, see Note 2—Acquisitions to the consolidated financial statements in Item 8 of this
report.
We are required to reassign goodwill to reporting units each time we reorganize our internal reporting structure which causes a change in our
operating segments. Goodwill is reassigned to the reporting units using a relative fair value allocation approach. We utilize the earnings before
interest, tax and depreciation as our allocation methodology as it represents a reasonable proxy for the fair value of the operations being
reorganized.
We have attributed our goodwill balance to our segments at December 31, 2012 as follows:
(Dollars in millions)
15,170
3,283
1,788
1,491
$
21,732

Regional markets
Wholesale markets
Enterprise markets—network
Enterprise markets—data hosting
Total goodwill

$

For additional information on the April 1, 2012 reorganization of our segments, see Note 13—Segment Information to the consolidated financial
statements in Item 8 of this report.
We are required to test goodwill for impairment at least annually, or more frequently if events or a change in circumstances indicate that an
impairment may have occurred. We are required to write-down the value of goodwill in periods in which the recorded amount of goodwill exceeds
the fair value. Our reporting units, which we refer to as our segments, are not discrete legal entities with discrete financial statements. Our assets
and liabilities are employed in and relate to the operations of multiple reporting units. Therefore, each time we perform goodwill impairment analysis
on a reporting unit, we estimate the equity carrying value and future cash flows of each of our segments using allocation methodologies. Certain
estimates, judgments and assumptions are required to perform these allocations. We believe these estimates, judgments and assumptions to be
reasonable, but slight changes in many of these can significantly affect each reporting unit's equity carrying value and future cash flows utilized for
our goodwill impairment test. Our annual measurement date for testing goodwill impairment is September 30. As of September 30, 2012, we tested for
goodwill impairment on our reporting units, which were our four operating segments (regional markets, wholesale markets,
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enterprise markets—network and enterprise markets—data hosting) that we recognized following our internal reorganization earlier in 2012.
In the third quarter of 2011, we adopted the provisions of ASU 2011-08, Testing Goodwill for Impairment, which permits us to make a qualitative
assessment of whether it is more likely than not that a reporting unit's estimated fair value is less than its carrying amount before applying the twostep goodwill impairment test, which requires us (i) in step one, to identify potential impairments by comparing the estimated fair value of a
reporting unit against its carrying value and (ii) in step two, to quantify any impairment identified in step one. At September 30, 2012, as a result of
the April 1, 2012 internal reorganization of our four segments we did not have a baseline valuation to perform a qualitative assessment. We
estimated the fair value of our four segments using an equal weighting based on a market approach and a discounted cash flow method. The market
approach includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow
method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the
segments beyond the cash flows from the discrete nine-year projection period. We discounted the estimated cash flows for our regional markets,
wholesale markets, and enterprise markets—network segments using a rate that represents a market participant's weighted average cost of capital,
which we determined to be approximately 6.0% as of the measurement date (which was comprised of an after-tax cost of debt of 3.2% and a cost of
equity of 8.4%). We discounted the estimated cash flows of our enterprise markets—data hosting segment using a rate that represents a market
participant's estimated weighted average cost of capital, which we determined to be approximately 11.0% as of the measurement date (which was
comprised of an after-tax cost of debt of 3.2% and a cost of equity of 12.0%). We also reconciled the estimated fair values of the segments to our
market capitalization as of September 30, 2012 and concluded that the indicated implied control premium of approximately 14% was reasonable based
on recent transactions in the market place. Based on our analysis performed with respect to our reporting units described above, we concluded that
our goodwill was not impaired as of September 30, 2012.
As of September 30, 2012, based on our analysis performed with respect to our four reporting units, the estimated fair value of our equity
exceeded our carrying value of equity for our regional markets, wholesale markets, enterprise markets—network and enterprise markets—data
hosting segments by 19%, 130%, 78% and 10%, respectively.
We may be required to assess our goodwill for impairment before our next required testing date of September 30, 2013 under certain
circumstances, including any failure of our future operating results to meet forecasted expectations or any significant increases in our weighted
average cost of capital. In addition, we cannot assure that adverse conditions will not trigger future goodwill impairment testing or an impairment
charge. A number of factors, many of which we have no ability to control, could affect our financial condition, operating results and business
prospects and could cause our actual results to differ from the estimates and assumptions we employed in our goodwill impairment testing. These
factors include, but are not limited to, (i) further weakening in the overall economy; (ii) a significant decline in our stock price and resulting market
capitalization; (iii) changes in the discount rate; (iv) successful efforts by our competitors to gain market share in our markets; (v) adverse changes
as a result of regulatory actions; (vi) a significant adverse change in legal factors or in the overall business climate; and (vii) recognition of a
goodwill impairment loss in the financial statements of a subsidiary that is a component of our reporting units. For additional information, see "Risk
Factors" in Item 1A of this report. We will continue to monitor certain events that impact our operations to determine if an interim assessment of
goodwill impairment should be performed prior to the next required testing date of September 30, 2013.
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Property, Plant and Equipment
Property, plant and equipment acquired in connection with our acquisitions was recorded based on its estimated fair value as of its acquisition
date. Property, plant and equipment purchased subsequent to our acquisitions is recorded at cost plus the estimated value of any associated legally
or contractually required asset retirement obligation. Renewals and betterments of plant and equipment are capitalized while repairs, as well as
renewals of minor items, are charged to operating expense. Depreciation of property, plant and equipment is provided on the straight-line method
using class or overall group rates. The group method provides for the recognition of the remaining net investment, less anticipated net salvage
value, over the remaining useful life of the assets. This method requires the periodic revision of depreciation rates.
Normal retirements of property, plant and equipment are charged against accumulated depreciation, with no gain or loss recognized. Other
types of property, plant and equipment are stated at cost and, when sold or retired, a gain or loss is recognized. We depreciate such property on the
straight-line method over estimated service lives ranging from 3 to 45 years.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews
utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in
certain instances, actuarially determined probabilities to estimate the remaining life of our asset base.
Due to rapid changes in technology and the competitive environment, selecting the estimated economic life of telecommunications plant,
equipment and software requires a significant amount of judgment. We regularly review data on utilization of equipment, asset retirements and
salvage values to determine adjustments to our depreciation rates. The effect of a hypothetical one year increase or decrease in the estimated
remaining useful lives of our property, plant and equipment would have decreased depreciation by approximately $460 million or increased
depreciation by approximately $650 million, respectively.
We review long-lived assets, other than goodwill and other intangible assets with indefinite lives, for impairment whenever facts and
circumstances indicate that the carrying amounts of the assets may not be recoverable. For measurement purposes, long-lived assets are grouped
with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and
liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable
and exceeds its fair value. Recoverability of the asset group to be held and used is measured by comparing the carrying amount of the asset group
to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not
recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. We
determine fair values by using a combination of comparable market values and discounted cash flows, as appropriate. During 2012, we did not incur
changes in events or circumstances that would indicate that the carrying amounts of our long-lived assets, other than goodwill and other intangible
assets with indefinite lives, may not be recoverable. As a result, no impairment charge was recorded in 2012.
Pension and Post-Retirement Benefits
We sponsor several noncontributory defined benefit pension plans (referred to as our pension plans) for a substantial portion of our
employees. In addition to these tax "qualified" pension plans, we also maintain several non-qualified pension plans for certain eligible highly
compensated employees. We also maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible
retirees.
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Pension and post-retirement health care and life insurance benefits attributed to eligible employees' service during the year, as well as interest
on benefit obligations, are accrued currently. Pension and post-retirement benefit expenses are recognized over the period in which the employee
renders service and becomes eligible to receive benefits as determined using the projected unit credit method. Pension prior service costs and
certain actuarial gains and losses are recognized as components of net periodic expense over the average remaining service period of participating
employees expected to receive benefits. Post-retirement healthcare prior service costs are recognized as components of net periodic expense over
the average expected years to full benefit eligibility for active employees. Certain post-retirement actuarial gains or losses are amortized on a
straight-line basis over the average expected future working lifetime of active employees.
In computing the pension and post-retirement health care and life insurance benefits expenses and obligations, the most significant
assumptions we make include discount rate, expected rate of return on plan assets, health care trend rates and our evaluation of the legal basis for
plan amendments. The plan benefits covered by collective bargaining agreements as negotiated with our employees' unions can also significantly
impact the amount of expense, benefit obligations and pension assets that we record.
The discount rate is the rate at which we believe we could effectively settle the benefit obligations as of the end of the year. We selected the
discount rate based on a cash flow matching analysis using hypothetical yield curves developed by an actuarial firm from U.S. corporate bonds
rated high quality and projections of the future benefit payments that constitute the projected benefit obligation for the plans. This process
establishes the uniform discount rate that produces the same present value of the estimated future benefit payments as is generated by discounting
each year's benefit payments by a spot rate applicable to that year. The spot rates used in this process are derived from a yield curve created from
yields on the 60th to 90th percentile of U.S. high quality bonds.
The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans' assets in the future. The rate of return
is determined by the strategic allocation of plan assets and the long-term risk and return forecast for each asset class. The forecasts for each asset
class are generated primarily from an analysis of the long-term expectations of various third party investment management organizations. The
expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment
strategy.
To compute the expected return on pension and post-retirement benefit plan assets, we apply an expected rate of return to the fair value of the
pension plan assets and to the fair value of the post-retirement benefit plan assets adjusted for contribution timing and for projected benefit
payments to be made from the plan assets. Annual market volatility for these assets is reflected in subsequent years' net periodic combined benefits
expense.
Changes in any of the above factors could significantly impact operating expenses in the consolidated statements of operations and other
comprehensive (loss) income in the consolidated statements of comprehensive (loss) income as well as the value of the liability and accumulated
other comprehensive income (loss) of stockholders' equity on our consolidated balance sheets. The expected return on plan assets is reflected as a
reduction to our pension and post-retirement benefit expense. If our assumed expected rates of return for 2012 were 100 basis points lower, our
qualified pension and post-retirement benefit expenses would have increased by $118 million. If our assumed discount rates for 2012 were 100 basis
points lower, our qualified pension and post-retirement benefit expenses would have increased by $78 million and our projected benefit obligation
would have increased by approximately $2.2 billion. An increase of 100 basis points in the initial healthcare cost trend rate would have increased our
post-retirement benefit expense by $11 million and increased our projected post-retirement benefit obligation by $77 million.
The trusts for the pension and post-retirement benefits plans hold investments in equities, fixed income, real estate and other assets such as
private equity assets. The assets held by these trusts are
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reflected at estimated fair value as of December 31, 2012. For additional information on our trust investments, see Note 8—Employee Benefits to the
consolidated financial statements in Item 8 of this report.
Loss Contingencies and Litigation Reserves
We are involved in several material legal proceedings, as described in more detail in "Legal Proceedings" in Item 3 of this report. We assess
potential losses in relation to these and other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is
considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates are
more or less than the actual liability resulting from the resolution of these matters, our earnings will be increased or decreased accordingly. If the
differences are material, our consolidated financial statements could be materially impacted. If a loss is considered reasonably possible, we disclose
the estimate of the potential loss if material but we do not recognize any expense for the potential loss.
For matters related to income taxes, we determine that if the impact of an uncertain tax position is more likely than not to be sustained upon
audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of
an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Though the validity of any tax position
is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous.
Because of this, whether a tax position will ultimately be sustained may be uncertain. The overall tax liability recorded for uncertain tax positions as
of the successor dates of December 31, 2012 and December 31, 2011, considers the anticipated utilization of any applicable tax credits and net
operating losses ("NOLs").
Income Taxes
Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and
liabilities reflecting future tax consequences attributable to tax net operating losses, or NOLs, tax credit carryforwards and differences between the
financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using
enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax
assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
The measurement of deferred taxes often involves the exercise of considerable judgment related to the realization of tax basis. Our deferred tax
assets and liabilities reflect our assessment that tax positions taken in filed tax returns and the resulting tax basis, are more likely than not to be
sustained if they are audited by taxing authorities. Also, assessing tax rates that we expect to apply and determining the years when the temporary
differences are expected to affect taxable income requires judgment about the future apportionment of our income among the states in which we
operate. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our
financial condition or results of operations.
We record deferred income tax assets and liabilities as described above. Valuation allowances are established when necessary to reduce
deferred income tax assets to amounts that we believe are more likely than not to be recovered. We evaluate our deferred tax assets quarterly to
determine whether adjustments to our valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in tax law,
interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings,
estimated timing of future deductions and benefits represented by the deferred tax assets and our forecasts of future earnings, the latter two
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of which involve the exercise of significant judgment. At December 31, 2012, we established a valuation allowance of $281 million, primarily related
to state NOLs, as it is more likely than not that this amount will not be utilized prior to expiration. If forecasts of future earnings and the nature and
estimated timing of future deductions and benefits change in the future, we may determine that a valuation allowance for certain deferred tax assets
is appropriate, which could materially impact our financial condition or results of operations. See Note 12—Income Taxes to the consolidated
financial statements in Item 8 of this report for additional information.

Liquidity and Capital Resources
Overview
At December 31, 2012, we held cash and cash equivalents of $211 million and we had $1.180 billion available under our $2 billion revolving
credit facility (referred to as our "Credit Facility", which is described further below). At December 31, 2012, cash and cash equivalents of $58 million
were held in foreign bank accounts for the purpose of funding our foreign operations. Repatriation of some foreign balances is restricted by local
law and subject to United States federal income taxes, less applicable foreign tax credits. Excluding cash used for acquisitions, we have generally
relied on cash generated by operations and our Credit Facility to fund our operating and capital expenditures and other cash requirements.
At December 31, 2012, we had a working capital deficit of $982 million, reflecting current liabilities of $4.595 billion and current assets of
$3.613 billion, compared to negative working capital of $500 million at December 31, 2011. The unfavorable change in our working capital position is
primarily due to an increase in current maturities of long-term debt of $725 million, partially offset by a decrease in accounts payable of $193 million.
We anticipate that our existing cash balances and net cash provided by operating activities will enable us to meet our other current obligations,
fund capital expenditures and pay dividends to our shareholders. We also may draw on our Credit Facility as a source of liquidity if and when
necessary.
We currently expect to continue our current practice of paying quarterly cash dividends in respect of our common stock, subject to our board's
discretion to modify or terminate this practice at any time.
Credit Facilities
On April 6, 2012, we amended and restated our $1.7 billion revolving credit facility to increase the aggregate principal amount available to
$2 billion and to extend the maturity date to April 2017. This amended credit facility (the "Credit Facility") has 18 lenders, with commitments ranging
from $2.5 million to $181 million and allows us to obtain revolving loans and to issue up to $400 million of letters of credit, which upon issuance
reduce the amount available for other extensions of credit. Interest is assessed on borrowings using either the LIBOR or the base rate (each as
defined in the Credit Facility) plus an applicable margin between 1.25% and 2.25% per annum for LIBOR loans and 0.25% and 1.25% per annum for
base rate loans depending on our then current senior unsecured long-term debt rating. Our obligations under the Credit Facility are guaranteed by
two of our wholly-owned subsidiaries, Embarq and QCII, and one of QCII's wholly-owned subsidiaries. In the event of a ratings decline below
"investment grade" as defined, Savvis and its operating subsidiaries will become guarantors of the Credit Facility. At December 31, 2012, we had
$820 million in borrowings and no amounts of letters of credit outstanding under the Credit Facility.
Under the Credit Facility, we, and our indirect subsidiary, Qwest Corporation, must maintain a debt to EBITDA (earnings before interest, taxes,
depreciation and amortization, as defined in our Credit Facility) ratio of not more than 4.0:1.0 and 2.85:1.0, respectively, as of the last day of each
fiscal quarter for the four quarters then ended. The Credit Facility also contains a negative pledge covenant, which generally requires us to secure
equally and ratably any advances under the Credit Facility if we
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pledge assets or permit liens on our property for the benefit of other debtholders. The Credit Facility also has a cross payment default provision,
and the Credit Facility and certain of our debt securities also have cross acceleration provisions. When present, these provisions could have a
wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. To the extent that our EBITDA (as
defined in our Credit Facility) is reduced by cash settlements or judgments, including in respect of any of the matters discussed in Note 15—
Commitments and Contingencies to the consolidated financial statements in Item 8 of this report, our debt to EBITDA ratios under certain debt
agreements will be adversely affected. This could reduce our financing flexibility due to potential restrictions on incurring additional debt under
certain provisions of our debt agreements or, in certain circumstances, could result in a default under certain provisions of such agreements.
In April 2011, we entered into a $160 million uncommitted revolving letter of credit facility. At December 31, 2012, our outstanding letters of
credit totaled $120 million under this facility.
Stock Repurchase Program
On February 13, 2013, we announced our board's approval of a two-year program to repurchase up to an aggregate of $2.0 billion of our
outstanding common stock. We expect to execute this share repurchase program primarily in open market transactions, subject to market conditions
and other factors.
Debt and Other Financing Arrangements
Approximately $176 million of our CenturyLink, Inc. Series O 5.500% notes will mature on April 1, 2013, and $750 million of Qwest Corporation
floating rate senior notes will mature on June 15, 2013. In addition, approximately $59 million of Embarq 6.875% notes and $50 million of Embarq
6.750% notes will mature on July 15, 2013 and August 15, 2013, respectively. Subject to market conditions, we expect to continue to issue debt
securities from time to time in the future to refinance a substantial portion of our maturing debt, including issuing QC debt securities to refinance its
maturing debt. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned to us and QC by credit
rating agencies, among others factors.
Following our announcement on February 13, 2013 of changes in our capital allocation plans, one credit agency downgraded CenturyLink's
debt credit ratings and another indicated that it has placed CenturyLink's debt credit ratings under review for a downgrade. As of the date of this
report, the credit ratings for the senior unsecured debt of CenturyLink, Inc. and Qwest Corporation were as follows:
Agency
Standard & Poor's
Moody's Investors
Service, Inc.
Fitch Ratings

CenturyLink, Inc.
BB
Baa3
(under review for
downgrade)
BB+

Qwest Corporation
BBBBaa3
(under review for
downgrade)
BBB-

Additional downgrades of CenturyLink's senior unsecured debt ratings could under certain circumstances incrementally increase the cost of
our borrowing under the Credit Facility or require us to add a couple of additional subsidiary guarantors thereunder. In addition, the recent actions
of the credit agencies, and any additional downgrades in the future, could impact our access to debt capital or further raise our borrowing costs. See
"Risk Factors—Risks Affecting our Liquidity and Capital Resources" in Item 1A of this report.
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Future Contractual Obligations
The following table summarizes our estimated future contractual obligations as of December 31, 2012:

2013
Long-term
debt,
including
current
maturities
and capital
lease
obligations $
Interest on
long-term
debt and
capital
leases(1)
Operating
leases
Purchase
commitments
(2)

Postretirement
benefit
obligation
Non-qualified
pension
obligations
Unrecognized
tax benefits
(3)

Other
Total future
contractual
obligations
(4)

$

2014

2015

2018 and
thereafter

2016
2017
(Dollars in millions)

Total

1,205

781

545

1,488

2,313

14,255

20,587

1,317

1,279

1,220

1,148

1,034

14,397

20,395

297

252

219

183

156

964

2,071

213

76

53

45

41

96

524

74

73

72

70

68

1,100

1,457

6

5

5

5

5

22

48

—
14

—
4

—
5

—
8

—
11

87
135

87
177

3,126

2,470

2,119

2,947

3,628

31,056

45,346

(1)

Actual interest paid in all years may differ due to future refinancing of debt. Interest on our floating rate debt was calculated for all years using the rates effective at
December 31, 2012.

(2)

We have various long-term, non-cancelable purchase commitments for advertising and promotion services, including advertising and marketing at sports arenas and
other venues and events. We also have service related commitments with various vendors for data processing, technical and software support services. Future
payments under certain service contracts will vary depending on our actual usage. In the table above we estimated payments for these service contracts based on the
level of services we expect to receive.

(3)

Represents the amount of tax and interest we would pay for our unrecognized tax benefits. Of our total balance of unrecognized tax benefits of $78 million and related
estimated interest and penalties of $33 million, only $87 million would result in future cash payments if our tax positions were not upheld. The remaining
$24 million is an unrecognized tax benefit in the form of a refund claim that, if not granted, would not result in a cash payment and therefore is not included in the
table above. See Note 12—Income Taxes to the consolidated financial statements in Item 8 of this report for additional information. The timing of any payments for
our unrecognized tax benefits cannot be predicted with certainty; therefore, such amount is reflected in the "2018 and thereafter" column in the above table.

(4)

The table is limited to contractual obligations only and does not include:

•

contingent liabilities;

•

our open purchase orders as of December 31, 2012. These purchase orders are generally issued at fair value, and are generally cancelable without penalty;

•

other long-term liabilities, such as accruals for legal matters and other taxes that are not contractual obligations by nature. We cannot determine with any
degree of reliability the years in which these liabilities might ultimately settle;

•

cash funding requirements for qualified pension benefits payable to certain eligible current and future retirees. Benefits paid by our qualified pension plans are
paid through trusts. Cash funding requirements for these trusts are not included in this table as we are not able to reliably estimate required contributions to
the trusts. Our funding projections are discussed further below;

•

certain post-retirement benefits payable to certain eligible current and future retirees. Not all of our post-retirement benefit obligation amount is a contractual
obligation and only the portion that we believe is a contractual obligation is reported in the table. See additional information on our benefits plans in
Note 8—Employee Benefits to the consolidated financial statements in Item 8 of this report;

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•

contract termination fees. These fees are non-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business
and to optimize our cost structure, we enter into contracts with terms greater than one year to use the network facilities of other carriers and to purchase other
goods and services. Our contracts to use other carriers' network facilities generally have no minimum volume requirements and are based on an
interrelationship of volumes and discounted rates. Assuming we terminate these contracts in 2013, the contract termination fees would be approximately
$495 million. Under the same assumption, termination fees for these contracts to purchase goods and services would be $31 million. In the normal course
of business, we do not believe payment of these fees is likely; and

•

potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business. The nature and terms of these
arrangements vary. Historically, we have not incurred significant costs related to performance under these types of arrangements.

Capital Expenditures
We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and
expand our service offerings. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as
forecasted revenue growth, operating, productivity, expense or service impacts) and our expected return on investment. The amount of capital
investment is influenced by, among other things, demand for our services and products, cash flow generated by operating activities, cash required
for other purposes and regulatory considerations. We estimate our total 2013 capital expenditures to be approximately $2.85 billion to $3.05 billion.
Our capital expenditures continue to be focused on our strategic services such as video, broadband and managed hosting services. In
particular, we expect to continue to focus on expanding our fiber infrastructure, including installations of "fiber to the tower," which is a type of
telecommunications network consisting of fiber-optic cables that run from a wireless carrier's mobile telephone switching office to cellular towers to
enable the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more
traditional copper-based telecommunications network. For more information on capital spending, see Items 1 and 1A of this report.
We have agreed to accept approximately $35 million of the $90 million available to us from Phase 1 of the FCC's Connect America Fund ("CAF")
established by Congress to help telecommunications carriers defray the cost of providing broadband access to remote customers. We intend to use
the funds to deploy broadband service for up to 45,000 homes in unserved rural areas principally in Colorado, Minnesota, New Mexico, Virginia and
Washington. We determined that restrictions on the use of these funds have made acceptance of additional CAF funds uneconomical. We have,
however, filed with the FCC a waiver application, which, if granted, would allow us to deploy broadband services with CAF funds to approximately
60,000 more homes in high-cost unserved areas in our markets. We received approximately $32 million in CAF funds during 2012 and received
approximately $3 million in January 2013.
Pension and Post-retirement Benefit Obligations
We are subject to material obligations under our existing defined benefit pension plans and other post-retirement benefit plans. The accounting
unfunded status as of December 31, 2012 of our defined pension plans and other post-retirement benefit obligations were $2.6 billion and
$3.4 billion, respectively. See Note 8—Employee Benefits to the consolidated financial statements in Item 8 of this report for additional information
about our pension and other post-retirement benefit arrangements.
Benefits paid by our qualified pension plans are paid through a trust that holds all plan assets. We made cash contributions of $32 million
during the year ended December 31, 2012 to our qualified pension plans. In the first quarter of 2013, we made cash contributions totaling
$147 million. Based on current laws and circumstances, we do not expect any further required contributions to the plans for
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the remainder of 2013. For information on a 2012 law that reduced the amount of our required pension plan cash contributions, please see our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.
Certain of our post-retirement health care and life insurance benefits plans are unfunded. Several trusts hold assets that are used to help cover
the health care costs of certain retirees. As of December 31, 2012, the fair value of these trust assets was $626 million; however, a portion of these
assets is comprised of investments with restricted liquidity. We estimate that the more liquid assets in the trust will be adequate to provide
continuing reimbursements for covered post-retirement health care costs for approximately four years. Thereafter, covered benefits will be paid
either directly by us or from the trusts as the remaining assets become liquid. This projected four year period could be substantially shorter or
longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits.
Our estimated annual long-term rate of return on the pension plans trust assets is 7.50% and for the post-retirement plans trust assets ranges
from 6.00% to 7.50% based on the assets currently held; however, actual returns could vary widely in any given year.
Historical Information
The following table summarizes our consolidated cash flow activities (which include cash flows from Savvis and Qwest after their respective
acquisition dates):

Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities

Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities

$

$

Years Ended December 31,
2012
2011
(Dollars in millions)
6,065
4,201
(2,690)
(3,647)
(3,295)
(577)

Increase
(Decrease)

Years Ended December 31,
2011
2010
(Dollars in millions)
4,201
2,045
(3,647)
(859)
(577)
(1,175)

Increase
(Decrease)

1,864
(957)
2,718

2,156
2,788
(598)

The increase in net cash provided by operating activities for 2012 and 2011is primarily attributable to the acquisitions of Qwest and Savvis,
which contributed net cash provided by operating activities of approximately $3.4 billion in 2012 and $2.2 billion in 2011. Our consolidated financial
statements in Item 8 of this report provide information about the components of net income and differences between net income and net cash
provided by operating activities. For additional information about our operating results, see "Results of Operations" above.
Net cash used in investing activities included payments for property, plant and equipment and capitalized software of $2.9 billion in 2012,
including $1.9 billion for Qwest and Savvis' capital expenditures. Net cash used in investing activities included payments for property, plant and
equipment and capitalized software of $2.4 billion in 2011, including $1.3 billion for Qwest and Savvis' post-acquisition capital expenditures,
compared to $864 million in 2010. In addition, we paid $1.7 billion, net of $61 million cash received, for the acquisition of Savvis on July 15, 2011.
Cash used in investing activities in 2011 was partially offset by cash acquired through the April 1, 2011 acquisition of Qwest of $419 million, net of
$5 million cash paid.
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Net cash used in financing activities increased in 2012 compared to 2011, primarily due to a net long-term debt pay down of $1.8 billion in 2012
versus a net long-term debt issuance of $1.1 billion in 2011, a $2.9 billion difference. This difference was primarily due to the $2 billion senior notes
issued in June 2011to finance the Savvis acquisition. Also contributing was a $255 million increase in dividends paid attributable to an increase in
the average number of shares outstanding. These increases in cash used in financing activities were partially offset by a $631 million increase in net
borrowings under our Credit Facility. Net cash used in financing activities decreased in 2011 primarily due to us receiving net debt proceeds in
excess of payments of approximately $1.1 billion in 2011 versus debt payments of $500 million in 2010. In addition, our cash dividends paid
increased $677 million in 2011 as compared to 2010 primarily as a result of the issuance of 308 million common shares in connection with our
acquisitions of Qwest and Savvis in 2011.
On October 26, 2012, QCII redeemed all $550 million of its 8.00% Notes due 2015, which resulted in a gain of $15 million.
On August 29, 2012, certain subsidiaries of CenturyLink paid $29 million and $30 million, respectively, to retire its outstanding Rural Utilities
Service and Rural Telephone Bank debt.
On August 15, 2012, CenturyLink paid at maturity the $318 million principal amount of its 7.875% Notes.
On July 20, 2012, QC redeemed all $484 million of its 7.50% Notes due 2023, which resulted in an immaterial loss.
On June 25, 2012, QC issued $400 million aggregate principal amount of 7.00% Notes due 2052 in exchange for net proceeds, after deducting
underwriting discounts and expenses, of $387 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after
July 1, 2017 at a redemption price equal to 100% of the principal amount redeemed plus accrued interest.
On May 17, 2012, QCII redeemed $500 million of its 7.50% Notes due 2014, which resulted in an immaterial gain.
On April 23, 2012, Embarq redeemed the remaining $200 million of its 6.738% Notes due 2013, which resulted in an immaterial loss.
On April 18, 2012, CenturyLink entered into a term loan in the amount of $440 million with CoBank and several other Farm Credit System banks.
This term loan is payable in 29 consecutive quarterly installments of $5.5 million in principal plus interest through April 18, 2019, when the balance
will be due. We have the option of paying monthly interest based upon either London Interbank Offered Rate ("LIBOR") or the base rate (as
defined in the credit agreement) plus an applicable margin between 1.50% to 2.50% per annum for LIBOR loans and 0.50% to 1.50% per annum for
base rate loans depending on our then current senior unsecured long-term debt rating. Our term loan is guaranteed by two of our wholly-owned
subsidiaries, Embarq and Qwest Communications International Inc ("QCII"), and one of QCII's wholly-owned subsidiaries. The remaining terms and
conditions of our term loan are substantially similar to those set forth in our Credit Facility (as described further in Note 4—Long-Term Debt and
Credit Facilities to the consolidated financial statements in Item 8 of this report).
On April 18, 2012, QC completed a cash tender offer to purchase a portion of its $811 million of 8.375% Notes due 2016 and its $400 million of
7.625% Notes due 2015. With respect to its 8.375% Notes due 2016, QC received and accepted tenders of approximately $575 million aggregate
principal amount of these notes, or 71%, for $722 million including a premium, fees and accrued interest. With respect to its 7.625% Notes due 2015,
QC received and accepted tenders of approximately $308 million aggregate principal amount of these notes, or 77%, for $369 million including a
premium, fees and accrued interest. The completion of these tender offers resulted in a loss of $46 million.
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On April 2, 2012, QC issued $525 million aggregate principal amount of 7.00% Notes due 2052 in exchange for net proceeds, after deducting
underwriting discounts and expenses, of $508 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after
April 1, 2017 at a redemption price equal to 100% of the principal amount redeemed plus accrued interest.
On April 2, 2012, Embarq completed a cash tender offer to purchase a portion of its $528 million of 6.738% Notes due 2013 and its $2.0 billion of
7.082% Notes due 2016. With respect to its 6.738% Notes due 2013, Embarq received and accepted tenders of approximately $328 million aggregate
principal amount of these notes, or 62%, for $360 million including a premium, fees and accrued interest. With respect to its 7.082% Notes due 2016,
Embarq received and accepted tenders of approximately $816 million aggregate principal amount of these notes, or 41%, for $944 million including a
premium, fees and accrued interest. The completion of these tender offers resulted in a loss of $144 million.
On March 12, 2012, CenturyLink issued (i) $650 million aggregate principal amount of 7.65% Senior Notes due 2042 in exchange for net
proceeds, after deducting underwriting discounts, of approximately $644 million and (ii) $1.4 billion aggregate principal amount of 5.80% Senior
Notes due 2022 in exchange for net proceeds, after deducting underwriting discounts, of approximately $1.389 billion. The Notes are unsecured
obligations and may be redeemed at any time on the terms and conditions specified therein.
On March 1, 2012, QCII redeemed $800 million of its 7.50% Notes due 2014, which resulted in an immaterial gain.
Certain Matters Related to Acquisitions
Qwest's pre-existing debt obligations consisted primarily of debt securities issued by QCII and two of its subsidiaries while Savvis' remaining
long-term debt obligations consist primarily of capital leases, all of which are now included in our consolidated debt balances. The indentures
governing Qwest's debt securities contain customary covenants that restrict the ability of Qwest or its subsidiaries from making certain payments
and investments, granting liens and selling or transferring assets. Based on current circumstances, we do not anticipate that these covenants will
significantly restrict our ability to manage cash balances or transfer cash between entities within our consolidated group of companies as needed.
In accounting for the Qwest acquisition, we recorded Qwest's debt securities at their estimated fair values, which totaled $12.292 billion as of
April 1, 2011. Our acquisition date fair value estimates were based primarily on quoted market prices in active markets and other observable inputs
where quoted market prices were not available. The fair value of Qwest's debt securities exceeded their stated principal balances on the acquisition
date by $693 million, which we recorded as a premium.
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The table below summarizes the portions of this premium recognized as a reduction to interest expense or extinguished during the periods
indicated:

Amortized
Extinguished(1)
Total premiums recognized

(1)

$
$

Years Ended
December 31,
2012
2011
(Dollars in millions)
86
154
177
58
263
212

Total Since
Acquisition
240
235
475

See "Debt and Other Financing Arrangements" for more information

The remaining premium of $218 million as of December 31, 2012 will reduce interest expense in future periods, unless otherwise extinguished.
Net Operating Loss Carryforwards
We are currently using federal NOLs to offset a portion of our federal taxable income. We expect to deplete a significant portion of these NOLs
and certain other deferred tax attributes by 2014, and substantially all of these tax benefits by 2015. Once our NOLs are fully utilized, we expect that
the amounts of our cash flows dedicated to the payment of federal taxes will increase substantially. The amounts of those payments will depend
upon many factors, including future earnings, tax law changes and future tax circumstances. For additional information, see "Risk Factors—Risks
Related to our Recent Acquisitions" appearing in Item 1A of Part II of this report.
Other Matters
CenturyLink has cash management arrangements with certain of its principal subsidiaries, in which substantial portions of the subsidiaries'
cash is regularly advanced to CenturyLink. In accordance with generally accepted accounting principles, these advances are eliminated as
intercompany transactions. Although CenturyLink periodically repays these advances to fund the subsidiaries' cash requirements throughout the
year, at any given point in time we may owe a substantial sum to our subsidiaries under these advances, which are not recognized on our
consolidated balance sheets.
In connection with reclassifying certain wireless spectrum assets as assets held for sale, during the second quarter of 2012 we reclassified
$154 million from "other intangible assets, net" to "current assets—other." For more information on the sale of these assets, see "Business—
Operations—Products and Services—Additional Information" in Item 1 of this report.
We also are involved in various legal proceedings that could have a material adverse effect on our financial position. See Note 15—
Commitment and Contingencies to the consolidated financial statements in Item 8 of this report for the current status of such legal proceedings,
including matters involving Qwest.

Market Risk
We are exposed to market risk from changes in interest rates on our variable rate long-term debt obligations and fluctuations in certain foreign
currencies. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting
from changes in rates.
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From time to time, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for fixed
interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates. As of December 31, 2012, we had no such instruments
outstanding. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument
activities. We do not hold or issue derivative financial instruments for trading or speculative purposes. Management periodically reviews our
exposure to interest rate fluctuations and implements strategies to manage the exposure.
There were no material changes to market risks arising from changes in interest rates for the year ended December 31, 2012, when compared to
the disclosures provided in our Annual Report on Form 10-K for the year ended December 31, 2011.
At December 31, 2012, we have approximately $19.9 billion (excluding capital lease and other obligations with a carrying amount of $734 million)
of long-term debt outstanding, 89.9% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We had $2 billion
floating rate debt exposed to changes in the London InterBank Offered Rate (LIBOR). A hypothetical increase of 100 basis points in LIBOR relative
to this debt would decrease our annual pre-tax earnings by $20 million.
With our acquisition of Savvis in July 2011, we have become exposed to the risk of fluctuations in the foreign currencies in which its
international operations are denominated, primarily the Euro, the British Pound, the Canadian Dollar, the Japanese Yen and the Singapore Dollar. As
a consolidated entity, the percentage of revenues generated and costs incurred that are denominated in these currencies are immaterial. We use a
sensitivity analysis to estimate our exposure to this foreign currency risk, measuring the change in financial position arising from hypothetical 10%
change in the exchange rates of these currencies, relative to the U.S. Dollar with all other variables held constant. The aggregate potential change in
the fair value of assets resulting from a hypothetical 10% change in these exchange rates was $18 million at December 31, 2012.
Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may
differ materially from those presented above if market conditions vary from the assumptions used in the analyses performed. These analyses only
incorporate the risk exposures that existed at December 31, 2012.

Off-Balance Sheet Arrangements
We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and
we do not engage in leasing, hedging, or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the
consolidated financial statements, (ii) disclosed in Note 15—Commitments and Contingencies to the consolidated financial statements in Item 8 of
this report, or in the Future Contractual Obligations table included in this Item 7 above or (iii) discussed under the heading "Market Risk" above.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk" in Item 7 of this
report is incorporated herein by reference.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Management
The Shareholders
CenturyLink, Inc.:
Management has prepared and is responsible for the integrity and objectivity of our consolidated financial statements. The consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and
necessarily include amounts determined using our best judgments and estimates.
Our consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, who have
expressed their opinion with respect to the fairness of the consolidated financial statements. Their audit was conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States).
Management is responsible for establishing and maintaining adequate internal control over financial reporting, a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Under the supervision and with the participation of management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). Based on our evaluation under the framework of COSO, management concluded that our internal control over financial reporting was
effective at December 31, 2012. The effectiveness of our internal control over financial reporting at December 31, 2012 has been audited by
KPMG LLP, as stated in their report which is included herein.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
The Audit Committee of the Board of Directors is composed of independent directors who are not officers or employees. The Committee meets
periodically with the external auditors, internal auditors and management. The Committee considers the independence of the external auditors and
the audit scope and discusses internal control, financial and reporting matters. Both the external and internal auditors have free access to the
Committee.
/s/ R. Stewart Ewing, Jr.
R. Stewart Ewing, Jr.
Executive Vice President, Chief Financial Officer and Assistant Secretary
March 1, 2013
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CenturyLink, Inc.:
We have audited the accompanying consolidated balance sheets of CenturyLink, Inc. and subsidiaries (the Company) as of December 31, 2012
and 2011, and the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholders' equity for each of the
years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's
internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2013 expressed an unqualified
opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
Shreveport, Louisiana
March 1, 2013
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CenturyLink, Inc.:
We have audited CenturyLink, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2012, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,
based on criteria established in Internal Control—Integrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of the Company as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income
(loss), cash flows, and stockholders' equity for each of the years in the three-year period ended December 31, 2012, and our report dated March 1,
2013 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Shreveport, Louisiana
March 1, 2013
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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

OPERATING REVENUES
OPERATING EXPENSES
Cost of services and products (exclusive of
depreciation and amortization)
Selling, general and administrative
Depreciation and amortization
Total operating expenses
OPERATING INCOME
OTHER INCOME (EXPENSE)
Interest expense
Net loss on early retirement of debt
Other income
Total other income (expense)
INCOME BEFORE INCOME TAX EXPENSE
Income tax expense
NET INCOME
BASIC AND DILUTED EARNINGS PER
COMMON SHARE
BASIC
DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC
DILUTED

$

Years Ended December 31,
2012
2011
2010
(Dollars in millions, except per share
amounts and shares in thousands)
18,376
15,351
7,042

7,639
3,244
4,780
15,663
2,713

6,325
2,975
4,026
13,326
2,025

2,544
1,004
1,434
4,982
2,060

$

(1,319)
(179)
35
(1,463)
1,250
473
777

(1,072)
(8)
3
(1,077)
948
375
573

(544)
—
15
(529)
1,531
583
948

$
$

1.25
1.25

1.07
1.07

3.13
3.13

620,205
622,285

532,780
534,121

300,619
301,297

See accompanying notes to consolidated financial statements.
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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

2012
NET INCOME
OTHER COMPREHENSIVE (LOSS) INCOME:
Items related to employee benefit plans:
Change in net actuarial loss, net of $432,
$508 and $32 tax
Change in net prior service credit, net of
$4, $23 and $2 tax
Auction rate securities marked to market, net
of $(1), $2 and $— tax
Auction rate securities settlements
reclassified to net income, net of $(1), $—
and $— tax
Foreign currency translation adjustment and
other, net of $—, $2 and $— tax
Other comprehensive (loss) income
COMPREHENSIVE INCOME (LOSS)

$

Years Ended December 31,
2011
(Dollars in millions)
777
573

See accompanying notes to consolidated financial statements.
86

948

(694)

(812)

(53)

(6)

(37)

(3)

2

(4)

—

3

—

—

(18)
(871)
(298)

—
(56)
892

6
(689)
88

$

2010

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CENTURYLINK, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2012
2011
(Dollars in millions
and shares in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, less allowance of $158 and $145
Income tax receivable
Deferred income taxes, net
Other
Total current assets
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment
Accumulated depreciation
Net property, plant and equipment
GOODWILL AND OTHER ASSETS
Goodwill
Customer relationships, net
Other intangible assets, net
Other, net
Total goodwill and other assets
TOTAL ASSETS

$

$

211
1,917
42
891
552
3,613

128
1,950
27
1,019
393
3,517

32,086
(13,054)
19,032

29,585
(10,141)
19,444

21,732
7,052
1,795
796
31,375
54,020

21,732
8,239
2,243
869
33,083
56,044

1,205
1,207

480
1,400

683
356
268
234
642
4,595
19,400

633
383
293
255
573
4,017
21,356

3,644
5,844
1,248
10,736

3,800
4,855
1,189
9,844

—

—

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt
Accounts payable
Accrued expenses and other liabilities
Salaries and benefits
Income and other taxes
Interest
Other
Advance billings and customer deposits
Total current liabilities
LONG-TERM DEBT
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net
Benefit plan obligations, net
Other
Total deferred credits and other liabilities
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' EQUITY
Preferred stock — non-redeemable, $25.00 par value, authorized
2,000 shares, issued and outstanding 7 and 9 shares
Common stock, $1.00 par value, authorized 1,600,000 and 800,000
shares, respectively, issued and outstanding 625,658 and
618,514 shares
Additional paid-in capital
Accumulated other comprehensive (loss) income
Retained earnings
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
87

$

$

626
19,079
(1,701)
1,285
19,289
54,020

619
18,901
(1,012)
2,319
20,827
56,044

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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

2012
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Provision for uncollectible accounts
Long-term debt (premium) discount
amortization
Net loss on early retirement of debt
Changes in current assets and current
liabilities:
Accounts receivable
Accounts payable
Accrued income and other taxes
Other current assets and other current
liabilities, net
Retirement benefits
Changes in other noncurrent assets and
liabilities
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Payments for property, plant and equipment
and capitalized software
Cash paid for Savvis acquisition, net of $61
cash acquired
Cash acquired in Qwest acquisition, net of $5
cash paid
Proceeds from sale of property and intangible
assets
Other, net
Net cash used in investing activities
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt
Payments of long-term debt
Net borrowings (payments) on credit facility
Early retirement of debt costs
Dividends paid
Net proceeds from issuance of common stock
Repurchase of common stock
Other, net
Net cash used in financing activities
Effect of exchange rate changes on cash and
cash equivalents
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents at beginning of
period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Income taxes (paid) refunded, net
Interest (paid) (net of capitalized interest of
$43, $25 and $13)
See accompanying notes to consolidated financial statements.

$

Years Ended December 31,
2011
(Dollars in millions)

2010

777

573

948

4,780
394
187

4,026
395
153

1,434
132
91

(88)
179

(148)
8

1
—

(154)
(72)
(14)

(102)
(58)
31

(118)
(96)
38

16
(169)

(76)
(688)

(127)
(271)

161
68
6,065

(6)
93
4,201

(13)
26
2,045

(2,919)

(2,411)

(864)

(1,671)

—

—
—

419

—

191
38
(2,690)

—
16
(3,647)

—
5
(859)

3,362
(5,118)
543
(346)
(1,811)
110
(37)
2
(3,295)

4,102
(2,984)
(88)
(114)
(1,556)
103
(31)
(9)
(577)

—
(500)
74
—
(879)
130
(17)
17
(1,175)

3

(22)

—

83

(45)

11

$

128
211

173
128

162
173

$

(82) $

118

(424)

$

(1,405) $

(1,225)

(548)

88

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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

2012
COMMON STOCK (represents dollars and
shares)
Balance at beginning of period
Issuance of common stock to acquire Qwest,
including shares issued in connection with
share-based compensation awards
Issuance of common stock to acquire Savvis,
including shares issued in connection with
share-based compensation awards
Issuance of common stock through dividend
reinvestment, incentive and benefit plans
Shares withheld to satisfy tax withholdings
Balance at end of period

$

ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period
Issuance of common stock to acquire Qwest,
including assumption of share-based
compensation awards
Issuance of common stock to acquire Savvis,
including assumption of share-based
compensation awards
Issuance of common stock through dividend
reinvestment, incentive and benefit plans
Shares withheld to satisfy tax withholdings
Share-based compensation and other, net
Balance at end of period

Years Ended December 31,
2011
(Dollars in millions)

2010

619

305

299

—

294

—

—

14

—

8
(1)
626

6
—
619

6
—
305

18,901

6,181

6,020

—

11,974

—

—

601

—

102
(34)
110
19,079

97
(30)
78
18,901

124
(16)
53
6,181

ACCUMULATED OTHER COMPREHENSIVE
(LOSS) INCOME
Balance at beginning of period
Other comprehensive (loss) income
Balance at end of period

(1,012)
(689)
(1,701)

(141)
(871)
(1,012)

(85)
(56)
(141)

RETAINED EARNINGS
Balance at beginning of period
Net income
Dividends declared
Balance at end of period

2,319
777
(1,811)
1,285

3,302
573
(1,556)
2,319

3,233
948
(879)
3,302

19,289

20,827

9,647

TOTAL STOCKHOLDERS' EQUITY

$

See accompanying notes to consolidated financial statements.
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CENTURYLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its
consolidated subsidiaries, including SAVVIS, Inc. and its consolidated subsidiaries (referred to as "Savvis") for periods on or after July 15,
2011 and Qwest Communications International Inc. and its consolidated subsidiaries (referred to as "Qwest") for periods on or after April 1,
2011.
(1) Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
We are an integrated communications company engaged primarily in providing an array of communications services to our residential,
business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line
(including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless and video services. In
certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security
monitoring.
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries over which we exercise
control. These subsidiaries include our acquisition of SAVVIS, Inc. ("Savvis") on July 15, 2011 and Qwest Communications International Inc.
("Qwest") on April 1, 2011. See Note 2—Acquisitions for additional information. All intercompany amounts and transactions with our consolidated
subsidiaries have been eliminated.
Effective January 1, 2012, we changed our rates of capitalized labor as we transitioned certain of Qwest's legacy systems to our historical
company systems. This transition resulted in an estimated $40 million to $55 million increase in the amount of labor capitalized as an asset compared
to the amount that would have been capitalized if Qwest had continued to use its legacy systems and a corresponding estimated $40 million to
$55 million decrease in operating expenses for the year ended December 31, 2012. The reduction in expenses described above, net of tax, increased
net income approximately $25 million to $34 million, or $0.04 to $0.05 per basic and diluted common share, for the year ended December 31, 2012.
Effective January 1, 2012, we changed our estimates of the remaining useful lives and net salvage value for certain telecommunications
equipment. These changes resulted in additional depreciation expense of approximately $26 million for the year ended December 31, 2012. This
additional depreciation expense, net of tax, reduced net income by approximately $16 million, or $0.03 per basic and diluted common share, for the
year ended December 31, 2012.
On April 2, 2012, our subsidiary, Qwest Corporation ("QC"), sold an office building for net proceeds of $133 million. As part of the transaction,
QC agreed to lease a portion of the building from the new owner. As a result, the $16 million gain from the sale was deferred and will be recognized
as a reduction to rent expense over the 10 year lease term.
We also have reclassified certain other prior period amounts to conform to the current period presentation, including the categorization of our
revenues and our segment reporting. See Note 13—Segment Information for additional information. These changes had no impact on total
revenues, total operating expenses or net income for any period.
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Summary of Significant Accounting Policies
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting
principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we made
when accounting for items and matters such as, but not limited to, investments, long-term contracts, customer retention patterns, allowance for
doubtful accounts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets (including deferred tax
assets), impairment assessments, pension, post-retirement and other post-employment benefits, taxes, certain liabilities and other provisions and
contingencies are reasonable, based on information available at the time they were made. These estimates, judgments and assumptions can affect
the reported amounts of assets, liabilities and components of stockholders' equity as of the dates of the consolidated balance sheets, as well as the
reported amounts of revenue, expenses and components of cash flows during the periods presented in our consolidated statements of operations,
our consolidated statements of comprehensive (loss) income and our consolidated statements of cash flows. We also make estimates in our
assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 12—Income Taxes and Note 15—Commitments
and Contingencies for additional information.
For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense
for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of
recoverability and reduce the estimated loss if recovery is also deemed probable.
For matters related to income taxes, if the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant
taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax
position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized
benefit from uncertain tax positions.
For all of these and other matters, actual results could differ from our estimates.
Revenue Recognition
We recognize revenue for services when the related services are provided. Recognition of certain payments received in advance of services
being provided is deferred until the service is provided. These advance payments include activation and installation charges, which we recognize as
revenue over the expected customer relationship period, which ranges from eighteen months to over ten years depending on the service. We also
defer costs for customer activations and installations. The deferral of customer activation and installation costs is limited to the amount of revenue
deferred on advance payments. Costs in excess of advance payments are recorded as expense in the period such costs are incurred. Expected
customer relationship periods are estimated using historical experience. Termination fees or other fees on existing contracts that are negotiated in
conjunction with new contracts are deferred and recognized over the new contract term.
We offer bundle discounts to our customers who receive certain groupings of services. These bundle discounts are recognized concurrently
with the associated revenues and are allocated to the various services in the bundled offering based on the estimated selling price of services
included in each bundled combination.
Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable. If the
elements are deemed separable and separate earnings processes exist, the revenue associated with each element is allocated to each element based
on the relative estimated selling price of the separate elements. We have estimated the selling prices of each
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element by reference to vendor-specific objective evidence of selling prices when the elements are sold separately. The revenue associated with
each element is then recognized as earned. For example, if we receive an advance payment when we sell equipment and continuing service together,
we immediately recognize as revenue the amount allocated to the equipment as long as all the conditions for revenue recognition have been
satisfied. The portion of the advance payment allocated to the service based upon its relative selling price is recognized ratably over the longer of
the contractual period or the expected customer relationship period.
We have periodically transferred optical capacity assets on our network to other telecommunications service carriers. These transactions are
structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber
for a specified term, typically 20 years. We account for the cash consideration received on transfers of optical capacity assets and on all of the other
elements deliverable under an IRU, as revenue ratably over the term of the agreement. We have not recognized revenue on any contemporaneous
exchanges of our optical capacity assets for other optical capacity assets.
We offer some products and services that are provided by third-party vendors. We review the relationship between us, the vendor and the end
customer to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net
basis, we consider whether we act as a principal in the transaction, take title to the products, have risk and rewards of ownership or act as an agent
or broker. Based on our agreements with DIRECTV and Verizon Wireless, we offer these services through sales agency relationships which are
reported on a net basis.
For our data hosting operations, we have service level commitments pursuant to contracts with certain of our clients. To the extent that such
service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will
estimate the amount of credits to be issued and record a reduction to revenue, with a corresponding increase in the credit reserve.
USF, Gross Receipts Taxes and Other Surcharges
In determining whether to include in our revenue and expenses the taxes and surcharges collected from customers and remitted to
governmental authorities, including USF charges, sales, use, value added and some excise taxes, we assess, among other things, whether we are the
primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. In jurisdictions where we determine that we
are the principal taxpayer, we record the surcharges on a gross basis and include them in our revenue and costs of services and products. In
jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and do not
include them in our revenue and costs of services and products.
Advertising Costs
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated
statements of operations. For the years ended December 31, 2012, 2011 and 2010, our advertising expense was $189 million, $275 million and
$49 million, respectively.
Legal Costs
In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other
matters. We expense these costs as the related services are received.
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Income Taxes
We file a consolidated federal income tax return with our eligible subsidiaries. The provision for income taxes consists of an amount for taxes
currently payable, an amount for tax consequences deferred to future periods, adjustments to our liabilities for uncertain tax positions and
amortization of investment tax credits. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax net
operating losses ("NOLs"), tax credit carryforwards and differences between the financial statement carrying value of assets and liabilities and the
tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences
are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the
period that includes the enactment date.
We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than
not to be recovered. A significant portion of our net deferred tax assets relate to tax benefits attributable to NOLs. Each quarter we evaluate the
need to retain all or a portion of the valuation allowance on our deferred tax assets. At December 31, 2012, we had established a $281 million
valuation allowance, primarily related to state NOLs, as it is more likely than not that this amount will not be utilized prior to expiration. See
Note 12—Income Taxes for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from
fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements
approximates their fair value. In evaluating investments for classification as cash equivalents, we require that individual securities have original
maturities of ninety days or less and that individual investment funds have dollar-weighted average maturities of ninety days or less. To preserve
capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition and in high quality and relatively riskfree investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain
products and includes criteria related to credit worthiness of any particular financial institution.
Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for payment.
Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. Until the issued checks are
presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheet. This activity is included in the
operating activities section in our consolidated statements of cash flows.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other
receivables less an allowance for doubtful accounts. The allowance for doubtful accounts receivable reflects our best estimate of probable losses
inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other
currently available evidence. We generally consider our accounts past due if they are outstanding over 30 days. Our collection process varies by
the customer segment, amount of the receivable, and our evaluation of the customer's credit risk. Our past due accounts are written off against our
allowance for doubtful accounts when collection is considered to be not probable. Any recoveries of accounts previously written off are generally
recognized as a reduction in bad debt
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expense in the period received. The carrying value of accounts receivable net of the allowance for doubtful accounts approximates fair value.
Property, Plant and Equipment
Property, plant and equipment acquired in connection with our acquisitions was recorded based on its estimated fair value as of its acquisition
date plus the estimated value of any associated legally or contractually required retirement obligations. Property, plant and equipment purchased
subsequent to our acquisitions is recorded at cost plus the estimated value of any associated legally or contractually required retirement
obligations. Property, plant and equipment is depreciated primarily using the straight-line group method. Under the straight-line group method,
assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar
physical characteristics, use and expected useful lives are categorized in the year acquired on the basis of equal life groups for purposes of
depreciation and tracking. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business
activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss.
A gain or loss is recognized in our consolidated statements of operations only if a disposal is abnormal or unusual. Leasehold improvements are
amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as
incurred. Interest is capitalized during the construction phase of network and other internal-use capital projects. Employee-related costs for
construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies
used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews
utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in
certain instances, actuarially determined probabilities to estimate the remaining life of our asset base.
We have asset retirement obligations associated with the legally or contractually required removal of a limited group of property, plant and
equipment assets from leased properties and the disposal of certain hazardous materials present in our owned properties. When an asset retirement
obligation is identified, usually in association with the acquisition of the asset, we record the fair value of the obligation as a liability. The fair value
of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated
asset. Where the removal obligation is not legally binding, the net cost to remove assets is expensed in the period in which the costs are actually
incurred.
We review long-lived assets, other than goodwill and other intangible assets with indefinite lives, for impairment whenever facts and
circumstances indicate that the carrying amounts of the assets may not be recoverable. For measurement purposes, long-lived assets are grouped
with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and
liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable
and exceeds its fair value. Recoverability of the asset group to be held and used is measured by comparing the carrying amount of the asset group
to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not
recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. We
determine fair values by using a combination of comparable market values and discounted cash flows, as appropriate.
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Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships, capitalized software, trademarks and trade
names, are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of 10 years to 12.5 years,
using either the sum-of-the-years-digits or straight-line methods, depending on the type of customer. We amortize capitalized software using the
straight-line method over estimated lives ranging up to seven years and amortize our other intangible assets predominantly using the sum-of-theyears digits method over an estimated life of four years. Other intangible assets not arising from business combinations are initially recorded at
cost. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of an intangible asset, we classify
the intangible asset as indefinite-lived and such intangible assets are not amortized.
Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line group method over its
estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoting time to the projects and
external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at
which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only
to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training costs
are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized
software is included in other intangible assets, net, in our consolidated balance sheets.
Our long-lived intangible assets with indefinite lives are tested for impairment annually, or, under certain circumstances, more frequently, such
as when events or circumstances indicate there may be an impairment. These assets are carried at historical cost if their estimated fair value is
greater than their carrying amounts. However, if their estimated fair value is less than the carrying amount, other indefinite-lived intangible assets
are reduced to their estimated fair value through an impairment charge to our consolidated statements of operations. We early adopted the
provisions of Accounting Standards Update ("ASU") 2012-2, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment, during the fourth quarter of 2012, which allows us the option to first review qualitative factors to determine the likelihood of
whether the indefinite-lived intangible asset is impaired before performing a qualitative impairment test. Under this approach, if we determine that it
is more likely than not that the indefinite-lived intangible asset is impaired, we are required to compute and compare the fair value of the indefinitelived intangible asset to its carrying amount to determine and measure the impairment loss, if any. We completed our qualitative assessment as of
December 31, 2012 and concluded it is not more likely than not that our indefinite-lived intangible assets are impaired; thus, no impairment charge
was recorded in 2012.
We are required to test goodwill for impairment at least annually, or more frequently if events or a change in circumstances indicate that an
impairment may have occurred. We are required to write-down the value of goodwill in periods in which the recorded amount of goodwill exceeds
the fair value. Our reporting units, which we refer to as our segments, are not discrete legal entities with discrete financial statements. Our assets
and liabilities are employed in and relate to the operations of multiple reporting units. Therefore, the equity carrying value and future cash flows
must be estimated each time a goodwill impairment analysis is performed on a reporting unit. As a result, our assets, liabilities and cash flows are
allocated to reporting units using reasonable and consistent allocation methodologies. Certain estimates, judgments and assumptions are required
to perform these allocations. We believe these estimates, judgments and assumptions to be reasonable, but changes in many of these can
significantly affect each reporting unit's equity carrying value and future cash flows utilized for our goodwill impairment test. Our annual
measurement date for testing goodwill impairment is September 30. As of September 30, 2012, we tested for goodwill impairment on our reporting
units,
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which are our four operating segments (regional markets, wholesale markets, enterprise markets—network and enterprise markets—data hosting)
that we recognized following our internal reorganization effective April 1, 2012. In the fourth quarter of 2012, we completed our annual impairment
testing and concluded that our goodwill was not impaired as of September 30, 2012. See Note 3—Goodwill, Customer Relationships and Other
Intangible Assets for additional information.
We are required to reassign goodwill to reporting units each time we reorganize our internal reporting structure which causes a change in our
operating segments. Goodwill is reassigned to the reporting units using a relative fair value approach. We utilize the earnings before interest, tax
and depreciation as our allocation methodology as it represents a reasonable proxy for the fair value of the operations being reorganized.
We periodically review the estimated lives and methods used to amortize our other intangible assets. The actual amounts of amortization
expense may differ materially from our estimates, depending on the results of our periodic reviews.
Pension and Post-Retirement Benefits
We recognize the overfunded or underfunded status of our defined benefit and post-retirement plans as an asset or a liability on our balance
sheet. Each year's actuarial gains or losses are a component of our other comprehensive (loss) income, which is then included in our accumulated
other comprehensive (loss) income. Pension and post-retirement benefit expenses are recognized over the period in which the employee renders
service and becomes eligible to receive benefits. We make significant assumptions (including the discount rate, expected rate of return on plan
assets and health care trend rates) in computing the pension and post-retirement benefits expense and obligations. See Note 8—Employee Benefits
for additional information.
Foreign Currency
Our results of operations include foreign subsidiaries, which are translated from the applicable functional currency to the United States Dollar
using the average exchange rates during the reporting period, while assets and liabilities are translated at the reporting date. Resulting gains or
losses from translating foreign currency are a component of our other comprehensive (loss) income, which is then included in our accumulated
other comprehensive (loss) income. For the years ended December 31, 2012, 2011 and 2010, our foreign currency translation gain (loss), net of tax,
was $6 million, $(15) million and $-0- million, respectively.
Common Stock
At December 31, 2012, we had unissued shares of CenturyLink common stock reserved of 34 million shares for incentive compensation,
4 million shares for acquisitions and 3 million shares for our employee stock purchase plan ("ESPP").
Preferred stock
Holders of outstanding CenturyLink preferred stock are entitled to receive cumulative dividends, receive preferential distributions equal to $25
per share plus unpaid dividends upon CenturyLink's liquidation and vote as a single class with the holders of common stock.
Out-of-Period Adjustments
During the year ended December 31, 2012, we discovered and corrected an error that resulted in an overstatement of depreciation expense in
2011. We evaluated the error considering both quantitative and qualitative factors and concluded that the error was immaterial to our previously
issued and
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current period consolidated financial statements. Therefore, we recognized a $30 million reduction in depreciation expense during the year ended
December 31, 2012. The correction of the error resulted in an increase in net income of $19 million, or approximately $0.03 per basic and diluted
common share, for the year ended December 31, 2012.
(2) Acquisitions
Acquisition of Savvis
On July 15, 2011, we acquired all of the outstanding common stock of Savvis, a provider of cloud hosting, managed hosting, colocation and
network services in domestic and foreign markets. We believe this acquisition enhances our ability to be an information technology partner with our
existing business customers and strengthens our opportunities to attract new business customers in the future. Each share of Savvis common stock
outstanding immediately prior to the acquisition converted into the right to receive $30 per share in cash and 0.2479 shares of CenturyLink common
stock. The aggregate consideration of $2.382 billion consisted of:
•

cash payments of $1.732 billion;

•

the 14.313 million shares of CenturyLink common stock issued to consummate the acquisition,

•

the closing stock price of CenturyLink common stock at July 14, 2011 of $38.54; and

•

the estimated net value of the pre-combination portion of certain share-based compensation awards assumed by CenturyLink of
$98 million, of which $33 million was paid in cash.

Upon completing the acquisition, we also paid $547 million to retire certain pre-existing Savvis debt and accrued interest, and paid related
transaction expenses totaling $15 million. The cash payments required on or about the closing date were funded using existing cash balances,
which included the net proceeds from the June 2011 issuance of senior notes with an aggregate principal amount of $2 billion. See Note 4—Longterm Debt and Credit Facilities, for additional information about our senior notes.
We have completed our valuation of the fair value of Savvis' assets acquired and liabilities assumed, along with the related allocations to
goodwill and intangible assets. The aggregate consideration paid by us exceeded the aggregate estimated fair value of the assets acquired and
liabilities assumed by $1.349 billion, which we have recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced
financial and operational scale, and product and market diversification that we expect to realize. None of the goodwill associated with this
acquisition is deductible for income tax purposes.
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The following is our assignment of the aggregate consideration:

Cash, accounts receivable and other current assets*
Property, plant and equipment
Identifiable intangible assets
Customer relationships
Other
Other noncurrent assets
Current liabilities, excluding current maturities of long-term debt
Current maturities of long-term debt
Long-term debt
Deferred credits and other liabilities
Goodwill
Aggregate consideration

*

July 15, 2011
(Dollars in millions)
$
214
1,367

$

739
51
27
(129)
(38)
(840)
(358)
1,349
2,382

Includes estimated fair value of $90 million for accounts receivable which had gross contractual value of $101 million on July 15, 2011. The $11 million
difference between the gross contractual value and the estimated fair value assigned represents our best estimate as of July 15, 2011 of contractual cash flows that
would not be collected.

We have retrospectively adjusted our previously reported preliminary assignment of the aggregate Savvis consideration for changes to our
original estimates. These changes are the result of additional information obtained since the filing of our Form 10-K for the year ended December 31,
2011, which occurred during the one-year measurement period. Due to these revisions in our estimates, (i) customer relationships decreased
$55 million due to a decrease in our customer relationships valuation, (ii) property, plant and equipment increased $32 million primarily from a
revision to our valuation of our capital lease assets, and (iii) deferred credits and other liabilities decreased by $30 million primarily from changes in
deferred taxes. Among other minor revisions, goodwill decreased by $8 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 of Qwest
On April 1, 2011, we acquired all of the outstanding common stock of Qwest, a provider of data, Internet, video and voice services nationwide
and globally. We entered into this acquisition, among other things, to realize certain strategic benefits, including enhanced financial and operational
scale, market diversification and leveraged combined networks. As of the acquisition date, Qwest served approximately 9.0 million access lines and
approximately 3.0 million broadband subscribers across 14 states. Each share of Qwest 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 was $12.273 billion 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

•

cash paid in lieu of the issuance of fractional shares of $5 million.
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We assumed approximately $12.7 billion of long-term debt in connection with our acquisition of Qwest.
We have completed our valuation of the fair value of Qwest's 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:

Cash, accounts receivable and other current assets*
Property, plant and equipment
Identifiable intangible assets
Customer relationships
Capitalized software
Other
Other noncurrent assets
Current liabilities, excluding current maturities of long-term debt
Current maturities of long-term debt
Long-term debt
Deferred credits and other liabilities
Goodwill
Aggregate consideration

*

April 1, 2011
(Dollars in millions)
$
2,121
9,529

$

7,558
1,702
189
390
(2,426)
(2,422)
(10,253)
(4,238)
10,123
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.

We have retrospectively adjusted our reported 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, which occurred during the one-year measurement period. 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 $24 million primarily from a revision to our valuation of our buildings, and (iii) deferred credits and other liabilities decreased by
$63 million primarily from a revision to one of our lease valuations and changes in tax liabilities. 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.
On the acquisition date, we assumed Qwest's contingencies. For more information on our contingencies, see Note 15—Commitments and
Contingencies.
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Acquisition-Related Expenses
We have incurred operating expenses related to our acquisition of Savvis in July 2011, Qwest in April 2011 and Embarq in July 2009. The table
below summarizes our expenses related to our acquisitions, which consist primarily of integration and severance expenses:

2012
Acquisition-related expenses

$

Years Ended December 31,
2011
(Dollars in millions)
83
467

2010
145

The total amounts of these expenses are recognized in our cost of services and products and selling, general and administrative expenses.
At December 31, 2012, we had incurred cumulative acquisition related expenses, consisting primarily of integration and severance related
expenses, of $56 million for Savvis and $464 million for Qwest. In addition to the acquisition-related expenses included in the schedule for the year
ended December 31, 2011, transaction expenses in the amount of $16 million were incurred in connection with terminating an unused loan financing
commitment related to our Savvis acquisition. This amount was not considered an operating activity and therefore not included as an operating
expense.
Qwest incurred cumulative pre-acquisition related expenses of $71 million, including $36 million in periods prior to being acquired and
$35 million on the date of acquisition. Savvis incurred cumulative pre-acquisition related expenses of $22 million, including $3 million in periods prior
to being acquired and $19 million on the date of acquisition. These amounts are not included in our results of operations.
References to Acquired Businesses
In the discussion that follows, we refer to the incremental business activities that we now operate as a result of the Savvis acquisition and the
Qwest acquisition as "Legacy Savvis" and "Legacy Qwest", respectively. References to "Legacy CenturyLink", when used to a comparison of our
consolidated results for the years ended December 31, 2012 and 2011, mean the business we operated prior to the Qwest and Savvis acquisitions.
Combined Pro Forma Operating Results (Unaudited)
The following unaudited pro forma financial information presents the combined results of CenturyLink as if the Qwest and Savvis acquisitions
had been consummated as of January 1, 2010.

Operating revenues
Net income
Basic earnings per common share
Diluted earnings per common share

$

Years Ended December 31,
2011
2010
(Dollars in millions)
18,692
19,431
601
293
.97
.48
.97
.48

This pro forma information reflects certain adjustments to previously reported operating results, consisting of primarily:
•

decreased operating revenues and expenses due to the elimination of deferred revenues and deferred expenses associated with
installation activities and capacity leases that were assigned no
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value at the acquisition date and the elimination of transactions among CenturyLink, Qwest and Savvis that are now subject to
intercompany elimination;
•

increased amortization expense related to identifiable intangible assets, net of decreased depreciation expense to reflect the fair value
of property, plant and equipment;

•

decreased recognition of retiree benefit expenses for Qwest due to the elimination of unrecognized actuarial losses;

•

decreased interest expense primarily due to the amortization of an adjustment to reflect the increased fair value of long-term debt of
Qwest recognized on the acquisition date; and

•

the related income tax effects.

The pro forma information does not necessarily reflect the actual results of operations had the Qwest and Savvis acquisitions been
consummated at January 1, 2010, nor is it necessarily indicative of future operating results. The pro forma information does not adjust for
integration costs incurred by us, Qwest and Savvis during 2011 (which are further described above in this note) or integration costs to be incurred
by us in future periods. In addition, the pro forma information does not give effect to any potential revenue enhancements, cost synergies or other
operating efficiencies that could result from the acquisitions (other than those realized in our historical consolidated financial statements after the
respective acquisition dates).
(3) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
December 31,
December 31,
2012
2011
(Dollars in millions)
$
21,732
21,732

Goodwill
Customer relationships, less accumulated amortization of
$2,524 and $1,337
Indefinite-life intangible assets
Other intangible assets subject to amortization
Capitalized software, less accumulated amortization of
$814 and $441
Trade names and patents, less accumulated
amortization of $142 and $71
Total other intangible assets, net

$

7,052

8,239

268

422

1,399

1,622

128
1,795

199
2,243

Total amortization expense for intangible assets for the years ended December 31, 2012, 2011 and 2010 was $1.682 billion, $1.425 billion and
$206 million, respectively.
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We estimate that total amortization expense for intangible assets for the years ending December 31, 2013 through 2017 will be as follows:

2013
2014
2015
2016
2017

$

(Dollars in millions)
1,493
1,369
1,232
1,104
983

Our goodwill was derived from numerous acquisitions whereby the purchase price exceeded the fair value of the net assets acquired. For more
information on our recent acquisitions and resulting fair values, see Note 2—Acquisitions. During the year ended December 31, 2012, during the
respective one-year measurement periods for our recent acquisitions we retrospectively adjusted our previously reported preliminary assignment of
the aggregate consideration for changes to our original estimates. Due to these revisions in our estimates, goodwill increased by $8 million. This
adjustment to goodwill has been reflected in the balance sheets for both December 31, 2012 and December 31, 2011.
Effective April 1, 2012, we restructured our operating segments to support our new operating structure. As a result, we reassigned goodwill to
our reporting units using a relative fair value allocation approach. As of December 31, 2012, we attributed our goodwill balances to our segments as
follows:
December 31, 2012
(Dollars in millions)
$
15,170
3,283
1,788
1,491
$
21,732

Regional markets
Wholesale markets
Enterprise markets—network
Enterprise markets—data hosting
Total goodwill

We test our goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate
there may be impairment. We are required to write down the value of goodwill only in periods in which the recorded amount of goodwill exceeds the
estimated fair value. Our annual measurement date for testing impairment is September 30. As of September 30, 2012, we tested for goodwill
impairment on our reporting units, which are our four operating segments (regional markets, wholesale markets, enterprise markets—network and
enterprise markets—data hosting) that we recognized following our internal reorganization in the second quarter of 2012.
We adopted the provisions of ASU 2011-08, Testing Goodwill for Impairment, in the third quarter of 2011, which permits us to make a
qualitative assessment of whether it is more likely than not that a reporting unit's, which we refer to as our segments, fair value is less than its
carrying amount before applying the two-step goodwill impairment test, which requires us (i) in step one, to identify potential impairments by
comparing the estimated fair value of a reporting unit against its carrying value and (ii) in step two, to quantify any impairment identified in step
one. At September 30, 2012, as a result of the recent internal reorganization of our four segments we did not have a baseline valuation to perform a
qualitative assessment. We estimated the fair value of our four segments using an equal weighting based on a market approach and a discounted
cash flow method. The market approach includes the use of comparable multiples of publicly traded companies whose services are comparable to
ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, which represents the expected
normalized cash flows of the segments beyond the cash flows from the discrete nine-year projection period. We discounted the estimated cash
flows for our regional
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markets, wholesale markets, and enterprise markets—network segments using a rate that represents a market participant's weighted average cost of
capital, which we determined to be approximately 6.0% as of the measurement date (which was comprised of an after-tax cost of debt of 3.2% and a
cost of equity of 8.4%). We discounted the estimated cash flows of our enterprise markets—data hosting segment using a rate that represents a
market participant's estimated weighted average cost of capital, which we determined to be approximately 11.0% as of the measurement date (which
was comprised of an after-tax cost of debt of 3.2% and a cost of equity of 12.0%). We also reconciled the estimated fair values of the segments to
our market capitalization as of September 30, 2012 and concluded that the indicated implied control premium of approximately 14% was reasonable
based on recent transactions in the market place. Based on our analysis performed with respect to our reporting units described above, we have
concluded that our goodwill is not impaired.
Our long-lived intangible assets with indefinite lives are tested for impairment annually, or, under certain circumstances, more frequently, such
as when events or circumstances indicate there may be an impairment. These assets are carried at historical cost if their estimated fair value is
greater than their carrying amounts. However, if their estimated fair value is less than the carrying amount, other indefinite-lived intangible assets
are reduced to their estimated fair value through an impairment charge to our consolidated statements of operations. We early adopted the
provisions of ASU 2012-2, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, during the
fourth quarter of 2012, which allows us the option to first review qualitative factors to determine the likelihood of whether the indefinite-lived
intangible asset is impaired before performing a qualitative impairment test. Under this approach, if we determine that it is more likely than not that
the indefinite-lived intangible asset is impaired, we will be required to compute and compare the fair value of the indefinite-lived intangible asset to
its carrying amount to determine and measure the impairment loss, if any. We completed our qualitative assessment as of December 31, 2012 and
concluded it is not more likely than not that our indefinite-lived intangible assets are impaired; thus, no impairment charge was recorded in 2012.
During the second quarter of 2012, we committed to a plan to sell our Advanced Wireless Services A Block and 700 MHz wireless in the A, B,
and C Blocks, which in the aggregate had a basis of $154 million. We sold $58 million of our wireless spectrum assets during the fourth quarter of
2012, and we sold another $43 million of our wireless spectrum assets in January 2013. In the aggregate, these transactions resulted in a gain of
$32 million. We expect to reach agreements with various other purchasers for the remaining spectrum, and the consummation of which will be
subject to regulatory approval.
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(4) Long-Term Debt and Credit Facilities
Long-term debt, including unamortized discounts and premiums, at December 31, 2012 and 2011 consisted of borrowings by CenturyLink, Inc.
and certain of its subsidiaries, including Qwest and Embarq Corporation ("Embarq"), as follows:

Interest Rates
CenturyLink, Inc.
Senior notes
Credit facility(1)
Term loan
Subsidiaries
Qwest
Senior notes(2)
Embarq
Senior notes
First mortgage bonds
Other
Other subsidiary notes
First mortgage notes
Capital lease and other
obligations
Unamortized premiums
(discounts) and other,
net
Total long-term debt
Less current maturities
Long-term debt, excluding
current maturities

5.000% - 7.650%
1.960% - 4.000%
2.22%

2013 - 2042
2017
2019

3.558% - 8.375%
7.082% - 7.995%
6.875% - 8.770%
6.750% - 9.000%

Various

December 31,
2012
2011
(Dollars in millions)

Maturities

$

6,250
820
424

4,518
277
—

2013 - 2052

9,168

11,460

2016 - 2036
2013 - 2025
2013 - 2019

2,669
322
200

4,013
322
200

—

65

734

712

Various

$

18
20,605
(1,205)

269
21,836
(480)

19,400

21,356

(1)

The information presented here illustrates the interest rates and maturity on our credit facility as amended and restated on April 6, 2012. The outstanding amount of
our Credit Facility borrowings at December 31, 2012 was $820 million with a weighted average interest rate of 2.45%.

(2)

The $750 million of Qwest Corporation Notes due 2013 are floating rate notes, with a rate that resets every three months. As of the most recent measurement date of
December 17, 2012, the rate for these notes was 3.558%.

New Issuances
2012
On June 25, 2012, QC issued $400 million aggregate principal amount of 7.00% Notes due 2052 in exchange for net proceeds, after deducting
underwriting discounts and expenses, of $387 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after
July 1, 2017 at a redemption price equal to 100% of the principal amount redeemed plus accrued interest.
On April 18, 2012, CenturyLink entered into a term loan in the amount of $440 million with CoBank and several other Farm Credit System banks.
This term loan is payable in 29 consecutive quarterly installments of $5.5 million in principal plus interest through April 18, 2019, when the balance
will be due. We have the option of paying monthly interest based upon either London Interbank Offered Rate ("LIBOR") or the base rate (as
defined in the credit agreement) plus an applicable margin between 1.50% to 2.50% per annum for LIBOR loans and 0.50% to 1.50% per annum for
base
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rate loans depending on our then current senior unsecured long-term debt rating. Our term loan is guaranteed by two of our wholly-owned
subsidiaries, Embarq and QCII, and one of QCII's wholly-owned subsidiaries. The remaining terms and conditions of our term loan are substantially
similar to those set forth in our Credit Facility, described in this Note below under "Credit Facilities."
On April 2, 2012, QC issued $525 million aggregate principal amount of 7.00% Notes due 2052 in exchange for net proceeds, after deducting
underwriting discounts and expenses, of $508 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after
April 1, 2017 at a redemption price equal to 100% of the principal amount redeemed plus accrued interest.
On March 12, 2012, CenturyLink issued (i) $650 million aggregate principal amount of 7.65% Senior Notes due 2042 in exchange for net
proceeds, after deducting underwriting discounts, of approximately $644 million and (ii) $1.4 billion aggregate principal amount of 5.80% Senior
Notes due 2022 in exchange for net proceeds, after deducting underwriting discounts, of approximately $1.389 billion. The Notes are unsecured
obligations and may be redeemed at any time on the terms and conditions specified therein.
2011
On October 4, 2011, our indirect wholly owned subsidiary, QC issued $950 million aggregate principal amount of its 6.75% Notes due 2021 in
exchange for net proceeds, after deducting underwriting discounts and expenses, of $927 million. The notes are senior unsecured obligations of QC
and may be redeemed, in whole or in part, at a redemption price equal to the greater of their principal amount or the present value of the remaining
principal and interest payments discounted at a U.S. Treasury interest rate specified in the indenture agreement plus 50 basis points. In October
2011, QC used the net proceeds from this offering, together with the $557 million of net proceeds received on September 21, 2011 from the debt
issuance described below and available cash, to redeem the $1.500 billion aggregate principal amount of its 8.875% Notes due 2012 and to pay all
related fees and expenses, which resulted in an immaterial loss.
On September 21, 2011, QC issued $575 million aggregate principal amount of its 7.50% Notes due 2051 in exchange for net proceeds, after
deducting underwriting discounts and expenses, of $557 million. The notes are senior unsecured obligations of QC and may be redeemed, in whole
or in part, on or after September 15, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to
the redemption date.
On June 16, 2011, we issued unsecured senior notes with an aggregate principal amount of $2.0 billion ("Senior Notes"), consisting of
(i) $400 million of 7.60% Senior Notes, Series P, due 2039, (ii) $350 million of 5.15% Senior Notes, Series R, due 2017 and (iii) $1.250 billion of 6.45%
Senior Notes, Series S, due 2021. After deducting underwriting discounts and expenses, we received aggregate net proceeds of $1.959 billion in
exchange for the Senior Notes. We may redeem the Senior Notes, in whole or in part, at any time at a redemption price equal to the greater of their
principal amount or the present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rates plus 50 basis
points. We used the net proceeds to fund a portion of our acquisition of Savvis and repay certain of Savvis' debt. See Note 2—Acquisitions for
additional information. In April 2011, we received commitment letters from two banks to provide up to $2.0 billion in bridge financing for the Savvis
acquisition. This arrangement was terminated in June 2011 in connection with the issuance of the Senior Notes resulting in $16 million in transaction
expenses recognized in other income (expense), net.
On June 8, 2011, QC issued $661 million aggregate principal amount of its 7.375% Notes due 2051 in exchange for net proceeds, after deducting
underwriting discounts and expenses, of $642 million. The notes are unsecured obligations of QC and may be redeemed, in whole or in part, on or
after June 1,
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2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
Repayments
2012
On October 26, 2012, QCII redeemed all $550 million of its 8.00% Notes due 2015, which resulted in a gain of $15 million.
On August 29, 2012, certain subsidiaries of CenturyLink paid $29 million and $30 million, respectively, to retire its outstanding Rural Utilities
Service and Rural Telephone Bank debt.
On August 15, 2012, CenturyLink paid at maturity the $318 million principal amount of its 7.875% Notes.
On July 20, 2012, QC redeemed all $484 million of its 7.50% Notes due 2023, which resulted in an immaterial loss.
On May 17, 2012, QCII redeemed $500 million of its 7.50% Notes due 2014, which resulted in an immaterial gain.
On April 23, 2012, Embarq redeemed the remaining $200 million of its 6.738% Notes due 2013, which resulted in an immaterial loss.
On April 18, 2012, QC completed a cash tender offer to purchase a portion of its $811 million of 8.375% Notes due 2016 and its $400 million of
7.625% Notes due 2015. With respect to its 8.375% Notes due 2016, QC received and accepted tenders of approximately $575 million aggregate
principal amount of these notes, or 71%, for $722 million including a premium, fees and accrued interest. With respect to its 7.625% Notes due 2015,
QC received and accepted tenders of approximately $308 million aggregate principal amount of these notes, or 77%, for $369 million including a
premium, fees and accrued interest. The completion of this tender offer resulted in a loss of $46 million.
On April 2, 2012, Embarq completed a cash tender offer to purchase a portion of its $528 million of 6.738% Notes due 2013 and its $2.0 billion of
7.082% Notes due 2016. With respect to its 6.738% Notes due 2013, Embarq received and accepted tenders of approximately $328 million aggregate
principal amount of these notes, or 62%, for $360 million including a premium, fees and accrued interest. With respect to its 7.082% Notes due 2016,
Embarq received and accepted tenders of approximately $816 million aggregate principal amount of these notes, or 41%, for $944 million including a
premium, fees and accrued interest. The completion of these tender offers resulted in a loss of $144 million.
On March 1, 2012, QCII redeemed $800 million of its 7.50% Notes due 2014, which resulted in an immaterial gain.
2011
In October 2011, QC used the net proceeds of $927 million from the October 4, 2011 issuance, together with the $557 million of net proceeds
received from the September 21, 2011 debt issuance described above and available cash, to redeem the $1.5 billion aggregate principal amount of its
8.875% Notes due 2012 and to pay all related fees and expenses, which resulted in an immaterial loss.
In June 2011, QC used the net proceeds of $642 million from the June 8, 2011 debt issuance, together with available cash, to redeem $825 million
aggregate principal amount of its 7.875% Notes due 2011 and to pay related fees and expenses, which resulted in an immaterial loss.
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Credit Facilities
On April 6, 2012, we amended and restated our $1.7 billion revolving credit facility to increase the aggregate principal amount available to
$2.0 billion and to extend the maturity date to April 2017. This amended credit facility (the "Credit Facility") has 18 lenders, with commitments
ranging from $2.5 million to $181 million and allows us to obtain revolving loans and to issue up to $400 million of letters of credit, which will reduce
the amount available for other extensions of credit. Interest is assessed on borrowings using either the LIBOR or the base rate (as defined in the
Credit Facility) plus an applicable margin between 1.25% and 2.25% per annum for LIBOR loans and 0.25% and 1.25% per annum for base rate loans
depending on our then current senior unsecured long-term debt rating. Our obligations under the Credit Facility are guaranteed by two of our
wholly-owned subsidiaries, Embarq and QCII, and one of QCII's wholly-owned subsidiaries. In the event of a ratings decline below "investment
grade" as defined, Savvis and its operating subsidiaries will become guarantors of the Credit Facility. As of December 31, 2012, there was
$820 million outstanding under the Credit Facility.
In April 2011, we entered into a $160 million uncommitted revolving letter of credit facility which enables us to provide letters of credit under
terms that may be more favorable than those under the Credit Facility. At December 31, 2012, our outstanding letters of credit totaled $120 million
under this facility.
Aggregate Maturities of Long-Term Debt
Aggregate maturities of our long-term debt (excluding unamortized premiums, discounts and other):
(Dollars in millions)
1,205
781
545
1,488
2,313
14,255
$
20,587

2013
2014
2015
2016
2017
2018 and thereafter
Total long-term debt

$

Interest Expense
Interest expense includes interest on long-term debt. The following table presents the amount of gross interest expense, net of capitalized
interest:
Years Ended
December 31,
2011
(Dollars in millions)

2012
Interest expense:
Gross interest expense
Capitalized interest
Total interest expense

$
$

1,362
(43)
1,319
107

1,097
(25)
1,072

2010

557
(13)
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Covenants
Certain of our loan agreements contain various restrictions, as described more fully below. The covenants currently in place result in no
significant restriction to the transfer of funds from our consolidated subsidiaries to CenturyLink.
The senior notes of CenturyLink were issued under an indenture dated March 31, 1994. This indenture does not contain any financial
covenants, but does include restrictions that limit our ability to (i) incur, issue or create liens upon our property and (ii) consolidate with or merge
into, or transfer or lease all or substantially all of our assets to any other party. The indenture does not contain any provisions that are impacted by
our credit ratings or that restrict the issuance of new securities in the event of a material adverse change to us.
The indentures governing Qwest's debt securities contain customary covenants that restrict the ability of Qwest or its subsidiaries from
incurring additional debt, making certain payments and investments, granting liens, and selling or transferring assets. We do not anticipate that
these covenants will significantly restrict our ability to manage cash balances or transfer cash between entities within our consolidated group of
companies as needed.
Since the Qwest parent company has achieved investment grade ratings from one of the rating agencies, most of the covenants listed above
have been suspended. These covenants will be reinstated if the Qwest parent company loses the investment grade rating from that agency. Under
the indenture governing these notes, we must repurchase the notes upon certain changes of control, which were not triggered upon the acquisition
on April 1, 2011. This indenture also contains provisions for cross acceleration relating to any of our other debt obligations and the debt
obligations of our restricted subsidiaries in an aggregate amount in excess of $100 million.
Embarq's senior notes were issued pursuant to an indenture dated as of May 17, 2006. While Embarq is generally prohibited from creating liens
on its property unless its senior notes are secured equally and ratably, Embarq can create liens on its property without equally and ratably securing
its senior notes so long as the sum of all indebtedness so secured does not exceed 15% of Embarq's consolidated net tangible assets. The indenture
contains customary events of default, none of which are impacted by Embarq's credit rating. The indenture does not contain any financial
covenants or restrictions on the ability to issue new securities in accordance with the terms of the indenture.
Several of our other subsidiaries have outstanding first mortgage bonds or notes. Each issue of these first mortgage bonds or notes is secured
by substantially all of the property, plant and equipment of the issuing subsidiary. Approximately 21% of our property, plant and equipment is
pledged to secure the long-term debt of subsidiaries.
Under the Credit Facility, we, and our indirect subsidiary, QC, must maintain a debt to EBITDA (earnings before interest, taxes, depreciation
and amortization, as defined in our Credit Facility) ratio of not more than 4:1 and 2.85:1, respectively, as of the last day of each fiscal quarter for the
four quarters then ended. The Credit Facility also contains a negative pledge covenant, which generally provides restrictions if we pledge assets or
permit liens on our property, and requires that any advances under the Credit Facility must also be secured equally and ratably. The Credit Facility
also has a cross payment default provision, and the Credit Facility and certain of our debt securities also have cross acceleration provisions.
At December 31, 2012, we were in compliance with all of the provisions and covenants contained in our Credit Facility and other debt
agreements.
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(5) Accounts Receivable
The following table presents details of our accounts receivable balances:

Trade and purchased receivables
Earned and unbilled receivables
Other
Total accounts receivable
Less: allowance for doubtful accounts
Accounts receivable, less allowance

(1)

$

$

December 31,
2011 (1)
2012
(Dollars in millions)
1,782
1,768
274
296
19
31
2,075
2,095
(158)
(145)
1,917
1,950

We have reclassified prior period amounts to conform to the current period presentation.

We are exposed to concentrations of credit risk from residential and business customers within our local service area, business customers
outside of our local service area and from other telecommunications service providers. We generally do not require collateral to secure our
receivable balances. We have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for
services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other
telecommunications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not
experienced any significant loss associated with these purchased receivables.
The following table presents details of our allowance for doubtful accounts:
Beginning
Balance
2012 $
2011 $
2010 $

145
60
48

Additions

Deductions
(Dollars in millions)
187
(174)
153
(68)
91
(79)
109

Ending
Balance

Other
—
—
—

158
145
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(6) Property, Plant and Equipment
Net property, plant and equipment is composed of the following:

Depreciable
Lives
Land
Fiber, conduit and other outside
plant(1)
Central office and other network
electronics(2)
Support assets (3)
Construction in progress(4)
Gross property, plant and equipment
Accumulated depreciation
Net property, plant and equipment

N/A

$

December 31,
2012
2011
(Dollars in millions)
579
590

15-45 years

13,030

12,415

3-10 years
3-30 years
N/A

11,395
6,235
847
32,086
(13,054)
19,032

9,683
6,098
799
29,585
(10,141)
19,444

$

(1)

Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.

(2)

Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to
customers.

(3)

Support assets consist of buildings, computers and other administrative and support equipment.

(4)

Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still
under construction.

Effective January 1, 2012, we changed our rates of capitalized labor as we transitioned certain of Qwest's legacy systems to our historical
company systems. This transition resulted in an estimated $40 million to $55 million increase in the amount of labor capitalized as an asset compared
to the amount that would have been capitalized if Qwest had continued to use its legacy systems and a corresponding estimated $40 million to
$55 million decrease in operating expenses for the year ended December 31, 2012. The reduction in expenses described above, net of tax, increased
net income approximately $25 million to $34 million, or $0.04 to $0.05 per basic and diluted common share, for the year ended December 31, 2012.
Effective January 1, 2012, we changed our estimates of the remaining useful lives and net salvage value for certain telecommunications
equipment. These changes resulted in additional depreciation expense of approximately $26 million for the year ended December 31, 2012. This
additional depreciation expense, net of tax, reduced net income by approximately $16 million, or $0.03 per basic and diluted common share, for the
year ended December 31, 2012.
During the year ended December 31, 2012, we discovered and corrected an error that resulted in an overstatement of depreciation expense in
2011. We evaluated the error considering both quantitative and qualitative factors and concluded that the error was immaterial to our previously
issued and current period consolidated financial statements. Therefore, we recognized a $30 million reduction in depreciation expense during the
year ended December 31, 2012. The correction of the error resulted in an increase in net income of $19 million, or approximately $0.03 per basic and
diluted common share, for the year ended December 31, 2012.
During the first and second quarters of 2012, we retrospectively adjusted our reported preliminary assignment of the aggregate Qwest and
Savvis consideration for changes to our original estimates of the fair value of buildings at the acquisition date. This retrospective adjustment
increased the previously reported December 31, 2011 support assets by $8 million.
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During 2012, we reclassified certain prior period amounts of inventory held for construction to conform to the current period presentation. This
reclassification increased construction in progress at December 31, 2011 by $55 million with an offsetting decrease to fiber, conduit and other
outside plant and central office and other network electronics by $8 million and $47 million, respectively.
We recorded depreciation expense of $3.098 billion, $2.601 billion and $1.228 billion for the years ended December 31, 2012, 2011 and 2010,
respectively.
Asset Retirement Obligations
At December 31, 2012, our asset retirement obligations balance was primarily related to estimated future costs of removing equipment from
leased properties and estimated future costs of properly disposing of asbestos and other hazardous materials upon remodeling or demolishing
buildings. Asset retirement obligations are included in other long-term liabilities on our consolidated balance sheets.
The following table provides asset retirement obligation activity:

Balance at beginning of year
Accretion expense
Liabilities incurred
Liabilities assumed in Qwest and
Savvis acquisitions
Liabilities settled and other
Change in estimate
Balance at end of year

$

$

Years Ended
December 31,
2012
2011
(Dollars in millions)
109
41
7
9
1
—
—
(1)
(10)
106

124
(3)
(62)
109

2010
39
2
—
—
—
—
41

During 2012 and 2011, we revised our estimates for the cost of removal of network equipment, asbestos remediation, and other obligations by
$10 million and $62 million, respectively. These revisions resulted in a reduction of the asset retirement obligation and offsetting reduction to gross
property, plant and equipment.
(7) Severance and Leased Real Estate
Periodically, we have reductions in our workforce and have accrued liabilities for related severance costs. These workforce reductions resulted
primarily from the progression or completion of our integration plans, increased competitive pressures and reduced workload demands due to the
loss of access lines.
We report severance liabilities within accrued expenses and other liabilities-salaries and benefits in our consolidated balance sheets and report
severance expenses in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations.
We have not allocated any severance expense to our regional, enterprise and wholesale markets segments.
In periods prior to our acquisition of Qwest, Qwest had ceased using certain real estate that it was leasing under long-term operating leases. As
of the April 1, 2011 acquisition date, we recognized liabilities to reflect our preliminary estimates of the fair values of the existing lease obligations
for real estate for which we had ceased using, net of estimated sublease rentals. Our fair value estimates were determined using discounted cash
flow methods. We recognize expense to reflect accretion of the discounted liabilities and periodically, we adjust the expense when our actual
experience differs from
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our initial estimates. We report the current portion of liabilities for ceased-use real estate leases in accrued expenses and other liabilities and report
the noncurrent portion in deferred credits and other liabilities in our consolidated balance sheets. We report the related expenses in selling, general
and administrative expenses in our consolidated statements of operations. At December 31, 2012, the current and noncurrent portions of our leased
real estate accrual were $19 million and $112 million, respectively. The remaining lease terms range from 0.1 to 13.0 years, with a weighted average of
9.0 years.
Changes in our accrued liabilities for severance expenses and leased real estate were as follows:
Severance
Real Estate
(Dollars in millions)
$
18
—
132
6
20
168
(133)
(21)
37
153
96
2
(113)
(24)
(3)
—
$
17
131

Balance at December 31, 2010
Accrued to expense
Liabilities assumed in Qwest acquisition
Payments, net
Balance at December 31, 2011
Accrued to expense
Payments, net
Reversals and adjustments
Balance at December 31, 2012

Our severance expenses for the year ended December 31, 2011 included $12 million of share-based compensation associated with the
accelerated vesting of stock awards that occurred in connection with workforce reductions relating to the acquisition of Qwest.
(8) Employee Benefits
Pension, Post-Retirement and Other Post-Employment Benefits
We sponsor several defined benefit pension plans, which in the aggregate cover a substantial portion of our employees including separate
plans for Legacy CenturyLink, Legacy Qwest and Legacy Embarq employees. Until such time as we elect to integrate the Qwest and Embarq benefit
plans with ours, we plan to continue to operate these plans independently. Pension benefits for participants of these plans who are represented by
a collective bargaining agreement are based on negotiated schedules. All other participants' pension benefits are based on each individual
participant's years of service and compensation. We use a December 31 measurement date for all our plans. In addition to these tax qualified
pension plans, we also maintain non-qualified pension plans for certain former highly compensated employees. We maintain post-retirement benefit
plans that provide health care and life insurance benefits for certain eligible retirees. We also provide other post-employment benefits for eligible
former employees.
Pension
In connection with the acquisition of Qwest on April 1, 2011, we assumed defined benefit pension plans sponsored by Qwest for its employees.
Based on a valuation analysis, we recognized a $490 million net liability at April 1, 2011 for the unfunded status of the Qwest pension plans,
reflecting projected benefit obligations of $8.3 billion in excess of the $7.8 billion fair value of plan assets.
Current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization
of the shortfall. Our funding policy for the pension plans is to make contributions with the objective of accumulating sufficient assets to pay all
qualified
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pension benefits when due under the terms of the plans. The accounting unfunded status of our qualified pension plans was $2.5 billion as of
December 31, 2012.
We made cash contributions of approximately $32 million in 2012 to our qualified pension plans. During the first quarter of 2013, we made a
series of cash contributions totaling $147 million to our qualified pension plans. Based on current laws and circumstances, we do not expect any
further required contributions to these plans for the remainder of 2013.
In 2010, to align our benefit structure closer to those offered by our competitors, we froze our Legacy CenturyLink and Legacy Embarq pension
benefit accruals for our non-represented employees at December 31, 2010. Such action resulted in a reduction of our benefit obligation of
approximately $110 million and resulted in the recognition of a curtailment gain of approximately $21 million in 2010. Prior to their acquisition on
April 1, 2011, Qwest had frozen its pension benefit accruals for non-represented employees.
Other Post-Retirement Benefits
Our post-retirement health care plans provide post-retirement benefits to qualified retirees. The post-retirement health care plans we assumed
as part of our acquisitions of Qwest and Embarq provide post-retirement benefits to qualified retirees and allow (i) eligible employees retiring before
certain dates to receive benefits at no or reduced cost and (ii) eligible employees retiring after certain dates to receive benefits on a shared cost
basis. The post-retirement health care plans are primarily funded by us and we expect to continue funding these post-retirement obligations as
benefits are paid. Our plans use a December 31 measurement date.
In connection with the acquisition of Qwest on April 1, 2011, we assumed post-retirement benefit plans sponsored by Qwest for certain of its
employees. At April 1, 2011, we recognized a $2.5 billion liability for the unfunded status of Qwest's post-retirement benefit plans, reflecting
estimated accumulated post-retirement benefit obligations of $3.3 billion in excess of the $762 million fair value of the plan assets.
No contributions were made to the post-retirement trusts in 2012 or 2011, and we do not expect to make a contribution in 2013.
A change of 100 basis points in the assumed initial health care cost trend rate would have had the following effects in 2012:
100 Basis
Points Change
Increase
(Decrease)
(Dollars in millions)
Effect on the aggregate of the service and interest cost
components of net periodic post-retirement benefit expense
(statement of operations)
Effect on benefit obligation (balance sheet)

$

3
77

(3)
(70)

We expect our health care cost trend rate to decrease by 0.25% per year from 6.75% in 2013 to an ultimate rate of 4.50% in 2022. Our postretirement health care expense, for certain eligible Legacy Qwest retirees and certain eligible Legacy CenturyLink retirees, is capped at a set dollar
amount. Therefore, those health care benefit obligations are not subject to increasing health care trends after the effective date of the caps.
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Expected Cash Flows
The qualified pension, non-qualified pension and post-retirement health care benefit payments and premiums and life insurance premium
payments are paid by us or distributed from plan assets. The estimated benefit payments provided below are based on actuarial assumptions using
the demographics of the employee and retiree populations and have been reduced by estimated participant contributions.
Post-Retirement
Benefit Plans
(Dollars in millions)

Pension Plans
Estimated future benefit
payments:
2013
2014
2015
2016
2017
2018 - 2022

$

1,051
1,006
996
985
972
4,626

Medicare Part D
Subsidy Receipts

377
370
358
348
338
1,511

(25)
(26)
(28)
(29)
(31)
(173)

Net Periodic Benefit Expense
The measurement date used to determine pension, non-qualified pension and post-retirement health care and life insurance benefits is
December 31. The actuarial assumptions used to compute the net periodic benefit expense for our qualified pension, non-qualified pension and
post-retirement benefit plans are based upon information available as of the beginning of the year, as presented in the following table.
Pension Plans
2011(1)

2012
Actuarial
assumptions
at
beginning
of year:
Discount rate
Rate of
compensation
increase
Expected
long-term
rate of
return on
plan assets
Initial health
care cost
trend rate
Ultimate
health care
cost trend
rate
Year ultimate
trend rate
is reached

Post-Retirement Benefit Plans
2010

2011(2)

2012

2010

4.25% - 5.10%

5.00% - 5.50%

5.50% - 6.00%

4.60% - 4.80%

5.30%

5.70% - 5.80%

3.25%

3.25%

3.50% - 4.00%

N/A

N/A

N/A

7.50%

7.50% - 8.00%

8.25% - 8.50%

6.00% - 7.50%

7.25%

7.25%

N/A

N/A

N/A

8.00%

8.50%

8.00%

N/A

N/A

N/A

5.00%

5.00%

5.00%

N/A

N/A

N/A

2018

2018

2014

N/A—Not applicable
(1)

This column does not consider Qwest's actuarial assumptions for its pension plan as of the beginning of the year due to the acquisition date of April 1, 2011. Qwest
had the following actuarial assumptions as of April 1, 2011: discount rate of 5.40%; expected long-term rate of return on plan assets 7.50%; and a rate of
compensation increase of 3.50%.

(2)

This column does not consider Qwest's actuarial assumptions for its post-retirement benefit plan as of the beginning of the year due to the acquisition date of April 1,
2011. Qwest had the following actuarial assumptions as of April 1, 2011: discount rate of 5.30%; expected long-term rate of return on plan assets of 7.50%; initial
health care cost trend rate of 7.50% and ultimate health care trend rate of 5.00% to be reached in 2016.

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Net periodic pension expense, which includes the effects of the Qwest acquisition subsequent to April 1, 2011, included the following
components:

Service cost
Interest cost
Expected return on plan assets
Curtailment gain
Settlements
Amortization of unrecognized prior
service cost
Amortization of unrecognized actuarial
loss
Net periodic pension (income) expense

(1)

$

$

Pension Plans
Years Ended December 31,
2011 (1)
2012
(Dollars in millions)
87
70
625
560
(847)
(709)
—
—
—
1

2010
61
246
(283)
(21)
—

4

2

2

35
(96)

13
(63)

17
22

Includes $58 million of income related to the Qwest plans subsequent to the April 1, 2011 acquisition date.

Net periodic post-retirement benefit expense, which includes the effects of the Qwest acquisition subsequent to April 1, 2011, included the
following components:

Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized prior
service cost
Amortization of unrecognized actuarial
loss
Net periodic post-retirement benefit
expense

(1)

$

$

Post-Retirement Plans
Years Ended December 31,
2011 (1)
2012
(Dollars in millions)
22
18
173
152
(45)
(41)

2010
15
32
(4)

—

(2)

(3)

—

—

1

150

127

41

Includes $92 million related to the Qwest plans subsequent to the April 1, 2011 acquisition date.

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Benefit Obligations
The actuarial assumptions used to compute the funded status for the plans are based upon information available as of December 31, 2012 and
December 31, 2011 and are as follows:
Pension Plans
December 31,
2012
2011
Actuarial
assumptions
at end of year:
Discount rate
Rate of
compensation
increase
Initial health
care cost
trend rate
Ultimate
health care
cost trend
rate
Year ultimate
trend rate
is reached

Post-Retirement Benefit Plans
December 31,
2012
2011

3.25% - 4.20%

4.25% - 5.10%

3.60%

4.60% - 4.80%

3.25%

3.25%

N/A

N/A

N/A

N/A

6.75% / 7.50%

7.25% / 8.00%

N/A

N/A

4.50%

5.00%

N/A

N/A

2022 / 2024

2018

N/A—Not applicable

The following table summarizes the change in the benefit obligations for the pension and post-retirement benefit plans:

2012
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan amendments
Acquisitions
Actuarial loss
Curtailment gain
Benefits paid by company
Benefits paid from plan assets
Benefit obligation at end of year

$

$

Pension Plans
Years Ended December 31,
2011
(Dollars in millions)

13,596
87
625
14
—
1,565
—
(5)
(1,001)
14,881
116

4,534
70
560
12
8,267
930
—
(16)
(761)
13,596

2010

4,182
61
246
4
—
427
(110)
(5)
(271)
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Post-Retirement Benefit Plans
Years Ended December 31,
2012
2011
2010
(Dollars in millions)
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Participant contributions
Plan amendments
Acquisitions
Direct subsidy receipts
Actuarial loss (gain)
Benefits paid by company
Benefits paid from plan assets
Benefit obligation at end of year

$

3,930
22
173
86
—
—
19
260
(268)
(147)
4,075

$

558
18
152
64
31
3,284
22
153
(219)
(133)
3,930

582
15
32
14
—
—
1
(32)
(45)
(9)
558

Our aggregate accumulated benefit obligation as of December 31, 2012, 2011 and 2010 was $18.956 billion, $17.499 billion and $4.509 billion,
respectively.
Plan Assets
We maintain plan assets for our qualified pension plans and certain post-retirement benefit plans. The qualified pension plan assets are used
for the payment of pension benefits and certain eligible plan expenses. The post-retirement benefit plan's assets are used to pay health care benefits
and premiums on behalf of eligible retirees and to pay certain eligible plan expenses. The expected rate of return on plan assets is the long-term rate
of return we expect to earn on the plans' assets. The rate of return is determined by the strategic allocation of plan assets and the long-term risk and
return forecast for each asset class. The forecasts for each asset class are generated primarily from an analysis of the long-term expectations of
various third party investment management organizations. The expected rate of return on plan assets is reviewed annually and revised, as
necessary, to reflect changes in the financial markets and our investment strategy. The following tables summarize the change in the fair value of
plan assets for the pension and post-retirement benefit plans:

2012
Change in plan assets
Fair value of plan assets at beginning of year
Return on plan assets
Acquisitions
Employer contributions
Settlements
Benefits paid from plan assets
Fair value of plan assets at end of year

$

$

Pension Plans
Years Ended December 31,
2011
(Dollars in millions)

11,814
1,476
—
32
—
(1,001)
12,321
117

3,732
479
7,777
587
—
(761)
11,814

2010

3,220
483
—
300
—
(271)
3,732

Table of Contents

Post-Retirement Benefit Plans
Years Ended December 31,
2012
2011
2010
(Dollars in millions)
Change in plan assets
Fair value of plan assets at beginning of year
Actual gain on plan assets
Acquisitions
Employer contributions
Participant contributions
Benefits paid from plan assets
Fair value of plan assets at end of year

$

693
80
—
—
—
(147)
626

$

54
4
768
—
—
(133)
693

57
6
—
—
—
(9)
54

Pension Plans: Our investment objective for the pension plan assets is to achieve an attractive risk-adjusted return over time that will provide
for the payment of benefits and minimize the risk of large losses. Our pension plan investment strategy is designed to meet this objective by broadly
diversifying plan assets across numerous strategies with differing expected returns, volatilities and correlations. The pension plan assets have
target allocations of 55% to interest rate sensitive investments and 45% to investments designed to provide higher expected returns than the
interest rate sensitive investments. Interest rate sensitive investments include 35% of plan assets targeted primarily to long-duration investment
grade bonds, 13.5% targeted to high yield, emerging market bonds and convertible bonds and 6.5% targeted to diversified strategies, which
primarily have exposures to global government, corporate and inflation-linked bonds, as well as some exposures to global stocks and commodities.
Assets expected to provide higher returns than the interest rate sensitive assets include broadly diversified equity investments with targets of
approximately 14% to U.S. stocks and 14% to developed and emerging market non-U.S. stocks. Approximately 12% is allocated to other private
markets investments including funds primarily invested in private equity, debt and hedge funds. Real estate investments are targeted at 5% of plan
assets. At the beginning of 2013, our expected annual long-term rate of return on pension assets is assumed to be 7.5%.
Post-Retirement Benefit Plans: Our investment objective for the post-retirement benefit plan assets is to achieve an attractive risk-adjusted
return and minimize the risk of large losses over the expected life of the assets. Investment risk is managed by broadly diversifying assets across
numerous strategies with differing expected returns, volatilities and correlations. Our investment strategy is designed to be consistent with the
investment objective, with particular focus on providing liquidity for the reimbursement of our union-represented employees post-retirement health
care costs. The post-retirement benefit plan assets have target allocations of 35% to equities and 65% to non-equity investments. Specific target
allocations within these broad categories are allowed to vary to provide liquidity in order to meet reimbursement requirements. Equity investments
are broadly diversified with exposure to publicly traded U.S., non-U.S. and emerging market stocks and private equity. While no new private equity
investments have been made in recent years, the percent allocation to existing private equity investments is expected to increase as liquid, publicly
traded stocks are drawn down for the reimbursement of health care costs. The 65% non-equity allocation includes investment grade bonds, high
yield bonds, convertible bonds, emerging market debt, real estate, hedge funds, private debt and diversified strategies. At the beginning of 2013,
our expected annual long-term rate of return on post-retirement benefit plan assets is assumed to be 7.5%.
Permitted investments: Plan assets are managed consistent with the restrictions set forth by the Employee Retirement Income Security Act of
1974, as amended, which requires diversification of assets and also generally prohibits defined benefit and welfare plans from investing more than
10% of their
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assets in securities issued by the sponsor company. At December 31, 2012 and 2011, the pension and post-retirement benefit plans did not directly
own any shares of our common stock or any of our debt.
Derivative instruments: Derivative instruments are used to reduce risk as well as provide return. The pension and post-retirement benefit plans
use exchange traded futures to gain exposure to equity and Treasury markets consistent with target asset allocations. Interest rate swaps are used
in the pension plans to reduce risk relative to measurement of the benefit obligation, which is sensitive to interest rate changes. Foreign exchange
forward contracts and total return swaps are used primarily to manage currency exposures. Credit default swaps are used to manage credit risk
exposures in a cost effective and targeted manner relative to transacting with physical corporate fixed income securities. Options are currently used
to manage interest rate exposure taking into account the implied volatility and current pricing of the specific underlying market instrument. Some
derivative instruments subject the plans to counterparty risk. We closely monitor counterparty exposure and mitigate this risk by diversifying the
exposure among multiple high credit quality counterparties, requiring collateral and limiting exposure by periodically settling contracts.
The gross notional exposure of the derivative instruments directly held by the plans is shown below. The notional amount of the derivatives
corresponds to market exposure but does not represent an actual cash investment.
Gross Notional Exposure
Post-Retirement
Pension Plans
Benefit Plans
Years Ended December 31,
2012
2011
2012
2011
(Dollars in millions)
Derivative instruments:
Exchange-traded U.S. equity
futures
Exchange-traded non-U.S.
equity futures
Exchange-traded Treasury
futures
Interest rate swaps
Total return swaps
Credit default swaps
Foreign exchange forwards
Options

$

302

535

30

12

1

4

—

—

1,763
1,471
—
495
726
768

1,512
635
110
201
635
917

—
—
—
—
21
—

19
—
51
—
23
—

Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date.
We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value
and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. For
additional information on the fair value hierarchy, see Note 11—Fair Value Disclosure.
At December 31, 2012, we used the following valuation techniques to measure fair value for assets. There were no changes to these
methodologies during 2012:
•

Level 1—Assets were valued using the closing price reported in the active market in which the individual security was traded.
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Table of Contents
•

Level 2—Assets were valued using quoted prices in markets that are not active, broker dealer quotations, net asset value of shares
held by the plans and other methods by which all significant input were observable at the measurement date.

•

Level 3—Assets were valued using unobservable inputs in which little or no market data exists as reported by the respective
institutions at the measurement date.

The tables below presents the fair value of plan assets by category and the input levels used to determine those fair values at December 31,
2012. It is important to note that the asset allocations do not include market exposures that are gained with derivatives.

Investment grade bonds (a)
High yield bonds (b)
Emerging market bonds (c)
Convertible bonds (d)
Diversified strategies (e)
U.S. stocks (f)
Non-U.S. stocks (g)
Emerging market stocks (h)
Private equity (i)
Private debt (j)
Market neutral hedge funds
(k)
Directional hedge funds (k)
Real estate (l)
Derivatives (m)
Cash equivalents and shortterm investments (n)
Total investments

$

Fair Value of Pension Plan Assets at December 31, 2012
Level 1
Level 2
Level 3
Total
(Dollars in millions)
830
1,555
— $
2,385
—
1,303
59
1,362
199
396
—
595
—
374
—
374
—
655
—
655
1,225
119
—
1,344
1,212
178
—
1,390
111
193
—
304
—
—
711
711
—
—
465
465
—
—
—
(5)

$

—
3,572

Accrued expenses
Total pension plan assets

906
340
223
3

—
194
337
—

750
6,995

—
1,766

906
534
560
(2)
750
12,333
$

120

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Table of Contents

Investment grade bonds (a)
High yield bonds (b)
Emerging market bonds (c)
Convertible bonds (d)
Diversified strategies (e)
U.S. stocks (f)
Non-U.S. stocks (g)
Emerging market stocks (h)
Private equity (i)
Private debt (j)
Market neutral hedge funds
(k)
Directional hedge funds (k)
Real estate (l)
Cash equivalents and shortterm investments (n)
Total investments

$

$

Fair Value of Post-Retirement Plan Assets
at December 31, 2012
Level 1
Level 2
Level 3
(Dollars in millions)
22
86
— $
—
90
—
—
40
—
—
2
—
—
72
—
55
—
—
58
1
—
—
20
—
—
—
45
—
—
6

Total
108
90
40
2
72
55
59
20
45
6

—
—
—

41
24
21

—
—
28

41
24
49

5
140

21
418

—
79

26
637

Accrued expenses
Reimbursement accrual
Total post-retirement plan
assets

(1)
(10)
$

626

The tables below presents the fair value of plan assets by category and the input levels used to determine those fair values at December 31,
2011. It is important to note that the asset allocations do
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not include market exposures that are gained with derivatives. Investments include dividend and interest receivable, pending trades, trades payable
and accrued expenses.

Investment grade bonds (a)
High yield bonds (b)
Emerging market bonds (c)
Convertible bonds (d)
Diversified strategies (e)
U.S. stocks (f)
Non-U.S. stocks (g)
Emerging market stocks (h)
Private equity (i)
Private debt (j)
Market neutral hedge funds
(k)
Directional hedge funds (k)
Real estate (l)
Derivatives (m)
Cash equivalents and shortterm investments (n)
Total investments

$

Fair Value of Pension Plan Assets at December 31, 2011
Level 1
Level 2
Level 3
Total
(Dollars in millions)
694
2,206
— $
2,900
—
541
79
620
—
295
—
295
—
337
—
337
—
489
—
489
401
944
—
1,345
994
459
—
1,453
102
136
—
238
—
—
791
791
—
—
461
461
—
—
—
12

$

620
268
48
(5)

13
2,216

1,183
7,521

Dividends and interest
receivable
Pending trades receivable
Accrued expenses
Pending trades payable
Total pension plan assets

188
183
535
—

808
451
583
7

—
2,237

1,196
11,974

$
122

32
436
(8)
(620)
11,814

Table of Contents

Investment grade bonds (a)
High yield bonds (b)
Emerging market bonds (c)
Convertible bonds (d)
Diversified strategies (e)
U.S. stocks (f)
Non-U.S. stocks (g)
Emerging market stocks (h)
Private equity (i)
Private debt (j)
Market neutral hedge funds
(k)
Directional hedge funds (k)
Real estate (l)
Cash equivalents and shortterm investments (n)
Total investments

$

$

Fair Value of Post-Retirement Plan Assets
at December 31, 2011
Level 1
Level 2
Level 3
(Dollars in millions)
45
100
— $
—
61
—
—
33
—
—
30
—
—
62
—
64
4
—
62
2
—
—
17
—
—
—
60
—
—
8

Total
145
61
33
30
62
68
64
17
60
8

—
—
—

67
20
19

—
—
26

67
20
45

5
176

20
435

—
94

25
705

Dividends and interest
receivable
Pending trades receivable
Accrued expenses
Pending trades payable
Total post-retirement plan
assets

3
23
(15)
(23)
$

693

The plans' assets are invested in various asset categories utilizing multiple strategies and investment managers. For several of the investments
in the tables above and discussed below, the plans own units in commingled funds and limited partnerships that invest in various types of assets.
Interests in commingled funds are valued using the net asset value ("NAV") per unit of each fund. The NAV reported by the fund manager is based
on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding.
Commingled funds held by the plans that can be redeemed at NAV within a year of the financial statement date are generally classified as Level 2.
Investments in limited partnerships represent long-term commitments with a fixed maturity date, typically ten years. Valuation inputs for these
limited partnership interests are generally based on assumptions and other information not observable in the market and are classified as Level 3
investments. The assumptions and valuation methodologies of the pricing vendors, account managers, fund managers and partnerships are
monitored and evaluated for reasonableness. Below is an overview of the asset categories, the underlying strategies and valuation inputs used to
value the assets in the preceding tables:
(a) Investment grade bonds represent investments in fixed income securities as well as commingled bond funds comprised of U.S.
Treasury securities, agencies, corporate bonds, mortgage-backed securities, asset-backed securities and commercial mortgage-backed
securities. Treasury securities are valued at the bid price reported in the active market in which the security is traded and are classified as
Level 1. The valuation inputs of other investment grade bonds primarily utilize observable market information and are based on a spread to
U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings. The primary observable
inputs include references to the new issue market for similar securities, the secondary trading markets and dealer quotes. Option adjusted
spread models are
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utilized to evaluate securities such as asset backed securities that have early redemption features. These securities are classified as Level 2.
The commingled funds are valued at NAV based on the market value of the underlying fixed income securities using the same valuation
inputs described above. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as
Level 2.
(b) High yield bonds represent investments in below investment grade fixed income securities as well as commingled high yield bond
funds. The valuation inputs for the securities primarily utilize observable market information and are based on a spread to U.S. Treasury
securities and consider yields available on comparable securities of issuers with similar credit ratings. These securities are classified as
Level 2. The commingled funds are valued at NAV based on the market value of the underlying high yield instruments using the same
valuation inputs described above. Commingled funds that can be redeemed at NAV within a year of the financial statement date are
classified as Level 2. Commingled funds that cannot be redeemed at NAV or that cannot be redeemed at NAV within a year of the financial
statement date are classified as Level 3.
(c) Emerging market bonds represent investments in securities issued by governments and other entities located in developing
countries as well as commingled emerging market bond funds. The valuation inputs for the securities utilize observable market information
and are primarily based on dealer quotes or a spread relative to the local government bonds. These securities are classified as Level 2. The
commingled funds are valued at NAV based on the market value of the underlying emerging market bonds using the same valuation inputs
described above. The commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as Level 2.
(d) Convertible bonds primarily represent investments in corporate debt securities that have features that allow the debt to be
converted into equity securities under certain circumstances. The valuation inputs for the individual convertible bonds primarily utilize
observable market information including a spread to U.S. Treasuries and the value and volatility of the underlying equity security.
Convertible bonds are classified as Level 2.
(e) Diversified strategies represent an investment in a commingled fund that primarily has exposures to global government, corporate
and inflation linked bonds, global stocks and commodities. The commingled fund is valued at NAV based on the market value of the
underlying investments. The valuation inputs utilize observable market information including published prices for exchange traded
securities, bid prices for government bonds, and spreads and yields available for comparable fixed income securities with similar credit
ratings. This fund can be redeemed at NAV within a year of the financial statement date and is classified as Level 2.
(f) U.S. stocks represent investments in stocks of U.S. based companies as well as commingled U.S. stock funds. The valuation inputs
for U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are classified
as Level 1. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation
inputs described above. These commingled funds can be redeemed at NAV within a year of the financial statement date and are classified as
Level 2.
(g) Non-U.S. stocks represent investments in stocks of companies based in developed countries outside the U.S. as well as
commingled funds. The valuation inputs for non-U.S. stocks are based on the last published price reported on the major stock market on
which the securities are traded and are classified as Level 1. The commingled funds are valued at NAV based on the market value of the
underlying investments using the same valuation inputs described above. These commingled funds can be redeemed at NAV within a year
of the financial statement date and are classified as Level 2.
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(h) Emerging market stocks represent investments in a registered mutual fund and commingled funds comprised of stocks of
companies located in developing markets. Registered mutual funds are valued at the last published price reported on the major market on
which the mutual funds are traded and are classified as Level 1. The commingled funds are valued at NAV based on the market value of the
underlying investments using the same valuation inputs described previously for individual stocks. These commingled funds can be
redeemed at NAV within a year of the financial statement date and are classified as Level 2.
(i) Private equity represents non-public investments in domestic and foreign buy out and venture capital funds. Private equity funds
are structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting
and other regulatory guidelines. The partnerships use valuation methodologies that give consideration to a range of factors, including but
not limited to the price at which investments were acquired, the nature of the investments, market conditions, trading values on comparable
public securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investments.
These valuation methodologies involve a significant degree of judgment. Private equity investments are classified as Level 3.
(j) Private debt represents non-public investments in distressed or mezzanine debt funds. Mezzanine debt instruments are debt
instruments that are subordinated to other debt issues and may include embedded equity instruments such as warrants. Private debt funds
are structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting
and other regulatory guidelines. The valuation of underlying fund investments are based on factors including the issuer's current and
projected credit worthiness, the security's terms, reference to the securities of comparable companies, and other market factors. These
valuation methodologies involve a significant degree of judgment. Private debt investments are classified as Level 3.
(k) Market neutral hedge funds hold investments in a diversified mix of instruments that are intended in combination to exhibit low
correlations to market fluctuations. These investments are typically combined with futures to achieve uncorrelated excess returns over
various markets. Directional hedge funds—This asset category represents investments that may exhibit somewhat higher correlations to
market fluctuations than the market neutral hedge funds. Investments in hedge funds include both direct investments and investments in
diversified funds of funds. Hedge Funds are valued at NAV based on the market value of the underlying investments which include publicly
traded equity and fixed income securities and privately negotiated debt securities. The hedge funds are valued by third party administrators
using the same valuation inputs previously described. Hedge funds that can be redeemed at NAV within a year of the financial statement
date are classified as Level 2. Hedge fund investments that cannot be redeemed at NAV or that cannot be redeemed at NAV within a year of
the financial statement date are classified as Level 3.
(l) Real estate represents investments in commingled funds and limited partnerships that invest in a diversified portfolio of real estate
properties. These investments are valued at NAV according to the valuation policy of each fund or partnership, subject to prevailing
accounting and other regulatory guidelines. The valuation inputs of the underlying properties are generally based on third-party appraisals
that use comparable sales or a projection of future cash flows to determine fair value. Real estate investments that can be redeemed at NAV
within a year of the financial statement date are classified as Level 2. Real estate investments that cannot be redeemed at NAV or that cannot
be redeemed at NAV within a year of the financial statement date are classified as Level 3.
(m) Derivatives include the market value of exchange traded futures contracts which are classified as Level 1, as well as privately
negotiated over-the-counter swaps that are valued based
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on the change in interest rates or a specific market index and classified as Level 2. The market values represent gains or losses that occur
due to fluctuations in interest rates, foreign currency exchange rates, security prices, or other factors.
(n) Cash equivalents and short-term investments represent investments that are used in conjunction with derivatives positions or are
used to provide liquidity for the payment of benefits or other purposes. U.S. Treasury Bills are valued at the bid price reported in the active
market in which the security is traded and are classified as Level 1. The valuation inputs of other securities are based on a spread to U.S.
Treasury Bills, the Federal Funds Rate, or London Interbank Offered Rate and consider yields available on comparable securities of issuers
with similar credit ratings and are classified as Level 2. The commingled funds are valued at NAV based on the market value of the
underlying investments using the same valuation inputs described above. These commingled funds can be redeemed at NAV within a year
of the financial statement date and are classified as Level 2.
Concentrations of Risk: Investments, in general, are exposed to various risks, such as significant world events, interest rate, credit, foreign
currency and overall market volatility risk. These risks are managed by broadly diversifying assets across numerous asset classes and strategies
with differing expected returns, volatilities and correlations. Risk is also broadly diversified across numerous market sectors and individual
companies. Financial instruments that potentially subject the plans to concentrations of counterparty risk consist principally of investment
contracts with high quality financial institutions. These investment contracts are typically collateralized obligations and/or are actively managed,
limiting the amount of counterparty exposure to any one financial institution. Although the investments are well diversified, the value of plan assets
could change materially depending upon the overall market volatility, which could affect the funded status of the plans.
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The table below presents a rollforward of the pension plan assets valued using Level 3 inputs:
Pension Plan Assets Valued Using Level 3 Inputs
Market
Neutral Directional
Private Private
Hedge
Hedge
Real
Equity
Debt
Fund
Funds
Estate
Other
(Dollars in millions)

High
Yield
Bonds
Balance at
December 31,
2010
$
Net acquisitions
(dispositions)
Actual return on
plan assets:
(Losses) gains
relating to
assets sold
during the
year
(Losses) gains
relating to
assets still
held at yearend
Balance at
December 31,
2011
Net transfers
Acquisitions
Dispositions
Actual return on
plan assets:
Gains relating
to assets
sold during
the year
Gains (losses)
relating to
assets still
held at yearend
Balance at
December 31,
2012
$

Total

—

1

3

—

161

182

3

96

795

453

185

30

318

(3)

(12)

197

13

3

(1)

9

—

209

(5)

(202)

(8)

—

(7)

26

—

(196)

79
(12)
1
(11)

791
—
70
(109)

461
—
120
(102)

2,237
(305)
209
(343)

188
(188)
—
—

183
—
—
—

535
(105)
18
(121)

—
—
—
—

350
1,874

—

3

1

—

—

—

—

4

2

(44)

(15)

—

11

10

—

(36)

59

711

465

—

194

337

—

127

1,766

Table of Contents
The table below presents a rollforward of the post-retirement plan assets valued using Level 3 inputs:
Post-Retirement Plan Assets Valued Using Level 3 Inputs
Private
Private
Real
Equity
Debt
Estate
Total
(Dollars in millions)
Balance at
December 31,
2010
$
Net acquisitions
Actual return on
plan assets:
Gains relating to
assets sold
during the
year
(Losses) gains
relating to
assets still
held at yearend
Balance at
December 31,
2011
Acquisitions
Dispositions
Gains (losses)
relating to
assets sold
during the
year
(Losses) gains
relating to
assets still
held at yearend
Balance at
December 31,
2012
$

—
55

—
8

—
24

—
87

33

1

—

34

(28)

(1)

2

(27)

60
1
(15)

8
—
(3)

26
—
(1)

94
1
(19)

4

2

(1)

5

(5)

(1)

4

(2)

45

6

28

79

Certain gains and losses are allocated between assets sold during the year and assets still held at year-end based on transactions and changes
in valuations that occurred during the year. These allocations also impact our calculation of net acquisitions and dispositions.
For the year ended December 31, 2012, the investment program produced actual gains on qualified pension and post-retirement plan assets of
$1.555 billion as compared to the expected returns of $892 million for a difference of $663 million. For the year ended December 31, 2011, the
investment program produced actual gains on pension and post-retirement plan assets of $483 million as compared to the expected returns of
$750 million for a difference of $267 million. The short-term annual returns on plan assets will almost always be different from the expected long-term
returns and the plans could experience net gains or losses, due primarily to the volatility occurring in the financial markets during any given year.
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Table of Contents
Unfunded Status
The following table presents the unfunded status of the pensions and post-retirement benefit plans:

Benefit obligation
Fair value of plan
assets
Unfunded status
Current portion of
unfunded status
Non-current portion
of unfunded
status

$

Post-Retirement
Pension Plans
Benefit Plans
Years Ended December 31,
Years Ended December 31,
2012
2011
2012
2011
(Dollars in millions)
(14,881)
(13,596)
(4,075)
(3,930)
12,321
(2,560)

$

(6)

$

(2,554)

11,814
(1,782)

—

(1,782)

626
(3,449)

693
(3,237)

(160)

(164)

(3,289)

(3,073)

The current portion of our post-retirement benefit obligations is recorded on our consolidated balance sheets in accrued expenses and other
current liabilities—salaries and benefits.
Accumulated Other Comprehensive (Loss) Income—Recognition and Deferrals
The following tables present cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2011, items
recognized as a component of net periodic benefits expense in 2012, additional items deferred during 2012 and cumulative items not recognized as a
component of net periodic benefits expense as of December 31, 2012. The items not recognized as a
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component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:
As of and for the Years Ended December 31,
Recognition
of Net
Periodic
Net
Benefits
Change in
Expense
Deferrals
AOCI
(Dollars in millions)

2011
Accumulated other
comprehensive (loss)
income:
Pension plans:
Net actuarial (loss)
gain
Prior service (cost)
benefit
Deferred income tax
benefit (expense)
Total pension plans
Post-retirement benefit
plans:
Net actuarial loss
Prior service (cost)
benefit
Deferred income tax
benefit
Total post-retirement
benefit plans
Total accumulated other
comprehensive (loss)
income

$

$

2012

(1,335)

35

(936)

(901)

(2,236)

(29)

4

(13)

(9)

(38)

526
(838)

(15)
24

364
(585)

349
(561)

875
(1,399)

(221)

—

(225)

(225)

(446)

(21)

—

(1)

(1)

(22)

92

—

87

87

179

(150)

—

(139)

(139)

(289)

(988)

24

(724)

(700)

(1,688)

The following table presents estimated items to be recognized in 2013 as a component of net periodic benefit expense of the pension, nonqualified pension and post-retirement benefit plans:
Pension
Post-Retirement
Plans
Plans
(Dollars in millions)
Estimated recognition of net periodic benefit expense in 2013:
Net actuarial loss
Prior service cost
Deferred income tax benefit
Estimated net periodic benefit expense to be recorded in 2013
as a component of other comprehensive income (loss)

$

(81)
(5)
33

(4)
—
2

$

(53)

(2)

Medicare Prescription Drug, Improvement and Modernization Act of 2003
We sponsor post-retirement health care plans with several benefit options that provide prescription drug benefits that we deem actuarially
equivalent to or exceeding Medicare Part D. We recognize the impact of the federal subsidy received under the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 in the calculation of our post-retirement benefit obligation and net periodic post-retirement benefit
expense.
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Other Benefit Plans
Health Care and Life Insurance
We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the
health care plan. Our health care benefit expenses for current employees were $360 million, $377 million and $190 million for the years ended
December 31, 2012, 2011 and 2010, respectively. Union-represented employee benefits are based on negotiated collective bargaining agreements.
Employees contributed $113 million, $90 million and $47 million for the years ended December 31, 2012, 2011 and 2010, respectively. Our group life
insurance plans are fully insured and the premiums are paid by us.
401(k) Plan
We sponsor qualified defined contribution benefit plans covering substantially all of our employees. Under these plans, employees may
contribute a percentage of their annual compensation up to certain maximums, as defined by the plans and by the Internal Revenue Service ("IRS").
Currently, we match a percentage of employee contributions in cash. At December 31, 2012 and December 31, 2011, the assets of the plans included
approximately 10 million and 9 million shares of our common stock, respectively, as a result of the combination of previous employer match and
participant directed contributions. We recognized expenses related to these plans of $76 million, $70 million and $17 million and for the years ended
December 31, 2012, 2011 and 2010, respectively.
Deferred Compensation Plans
We sponsored non-qualified unfunded deferred compensation plans for various groups that included certain of our current and former highly
compensated employees. The plans have been frozen, and the participants are no longer allowed to defer compensation into the plans. The value of
assets and liabilities related to these plans was not significant.
(9) Share-based Compensation
We maintain equity programs that allow our Board of Directors (through its Compensation Committee or our Chief Executive Officer as its
delegate) 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 awards, restricted stock units and market and performance shares. Stock
options generally expire ten years from the date of grant. We also offer an ESPP, which allows eligible employees to purchase our common stock at
a 15% discount based on the lower of the beginning or ending stock price during recurring six month offering periods.
Acquisitions
Upon the July 15, 2011, closing of our acquisition of Savvis, and pursuant to the terms of the acquisition agreement, we assumed certain
obligations under Savvis' share-based compensation arrangements. Specifically:
•

all Savvis stock options outstanding immediately prior to the acquisition were vested in full and were converted into 2,420,532 fully
vested CenturyLink stock options, and

•

all non-vested Savvis restricted stock units outstanding immediately prior to the acquisition converted into an aggregate 1,080,070
non-vested CenturyLink awards.

We estimate the aggregate fair value of the assumed Savvis share-based compensation arrangements was $123 million, of which $98 million was
attributable to services performed prior to the acquisition date and was included in the cost of the acquisition. The fair value of CenturyLink shares
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was determined based on the $38.54 closing price of our common stock on July 14, 2011. The remaining $25 million of the aggregate fair value of the
assumed Savvis awards was attributable to post-acquisition services and was recognized as compensation expense, net of forfeitures, over the
remaining 1.5 year vesting period.
Upon the April 1, 2011, closing of our acquisition of Qwest, pursuant to the terms of the acquisition agreement, we assumed certain obligations
under Qwest's pre-existing share-based compensation arrangements. Specifically:
•

all Qwest non-qualified stock options outstanding immediately prior to the acquisition converted into an aggregate of 7,198,331
CenturyLink non-qualified stock options (including 5,562,198 fully vested options),

•

all non-vested shares of Qwest restricted stock outstanding immediately prior to the acquisition converted into an aggregate of
780,455 non-vested shares of CenturyLink restricted stock, and

•

all Qwest market-based awards outstanding immediately prior to the acquisition vested in full and were paid out by us through the
issuance of an aggregate of 563,269 shares of CenturyLink common stock in April 2011.

The aggregate fair value of the assumed Qwest awards was $114 million, of which $85 million was attributable to services performed prior to the
acquisition date and was included in the cost of the acquisition. The fair value of CenturyLink shares was determined based on the $41.55 closing
price of our common stock on March 31, 2011. We determined the fair value of Qwest's non-qualified stock options, using the Black-Scholes optionpricing model, reflecting a risk-free interest rate ranging from 0% to 2.13% (depending on the expected life of the option), an expected dividend yield
of 6.98%, an expected term ranging from 0.1 to 4.8 years (depending on the option's remaining contractual term and exercise price and on historical
experience), and expected volatility ranging from 11.1% to 35.3% (based on the expected term and historical experience). The remaining $29 million of
the aggregate fair value of the assumed Qwest awards was attributable to the post-acquisition period and was included in the cost of the
acquisition, which is being recognized as compensation expense, net of estimated forfeitures, over the remaining vesting p