LUMN

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009, for CenturyTel, Inc. (operating as CenturyLink). The reporting period is defined by the company's acquisition of Embarq Corporation on July 1, 2009, which substantially expanded its size and scope. Post-acquisition, the company operates as the fourth-largest local exchange telephone company in the U.S., serving approximately 7.0 million access lines and 2.2 million high-speed Internet customers across 33 states. The company provides local and long-distance voice, wholesale network access, data, and video services.

Key Financial Metrics

Note: 2009 figures include Embarq operations from July 1, 2009, making direct year-over-year comparisons less meaningful.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by approximately 91% to $4.97 billion, driven primarily by the inclusion of Embarq's results ($2.56 billion of Embarq revenue included in 2009).
• Debt Assumption: Long-term debt increased significantly to $7.25 billion, reflecting the assumption of approximately $5.1 billion of Embarq's indebtedness upon acquisition.
• One-Time Expenses: The company incurred approximately $340.4 million in one-time expenses in 2009 related to the Embarq acquisition, including severance ($98.9 million), integration costs ($86.4 million), and transaction fees ($47.2 million).
• Extraordinary Gain: A non-cash extraordinary gain of $136.0 million (after-tax) was recorded in Q3 2009 upon the discontinuance of regulatory accounting.
• Access Line Losses: Excluding acquisitions, total access lines declined by 380,000 in 2009 due to competition from wireless and VoIP services.

Guidance, Outlook, and Risks

• 2010 Outlook: Management expects 2010 operating revenues to be higher than 2009 due to a full year of Embarq results. However, excluding the acquisition impact, revenues are expected to decline due to continued access line losses, reduced Universal Service Fund (USF) support, and lower network access revenues.
• Capital Expenditures: The company has budgeted between $825 million and $875 million for capital expenditures in 2010.
• Dividends: The quarterly dividend was increased to $0.725 per share in February 2010. The company intends to maintain investment-grade credit ratings while distributing a substantial portion of free cash flow to shareholders.
• Key Risks:
  • Regulatory: Potential reductions in USF support and intercarrier compensation reforms could materially reduce revenues.
  • Competition: Intensifying competition from wireless, cable, and VoIP providers continues to drive access line losses.
  • Integration: Risks associated with integrating Embarq's systems, culture, and operations, including potential failure to realize anticipated synergies.
  • Pension Obligations: The legacy Embarq pension plan was underfunded by approximately $1.0 billion at acquisition; the company expects to contribute $300 million in 2010.

Investor Verification Checklist

• Integration Progress: Verify the realization of cost synergies and revenue enhancements from the Embarq merger against the $200 million in additional integration expenses expected post-2009.
• Access Line Trends: Monitor the rate of access line loss (estimated 7.5% to 8.5% for 2010) and the effectiveness of retention initiatives.
• Regulatory Impact: Track FCC proceedings regarding intercarrier compensation and USF reforms, which could significantly impact network access revenues.
• Pension Funding: Confirm the $300 million contribution to the legacy Embarq pension plan and monitor future funding requirements based on market returns and discount rates.
• Debt Covenants: Review compliance with leverage and interest coverage ratios in the company's revolving credit facilities, particularly given the increased debt load.