Property, Plant and Equipment

12 Months Ended

Dec. 31, 2012

(6) Property, Plant and Equipment

CenturyLink accounted for its acquisition of us under the acquisition method of accounting, which requires the assignment of the purchase price to the assets acquired based on their fair values at the acquisition date.

Net property, plant and equipment is composed of the following:

			Successor

	Depreciable Lives		December 31, 2012			December 31, 2011
			(Dollars in millions)
Property, plant and equipment:
Land		N/A	$	373			384
Fiber, conduit and other outside plant⁽¹⁾		15-45 years		3,900			3,671
Central office and other network electronics⁽²⁾		3-10 years		4,159			3,460
Support assets⁽³⁾		5-30 years		2,819			2,844
Construction in progress⁽⁴⁾		N/A		514			320

Gross property, plant and equipment				11,765			10,679

Accumulated depreciation				(2,638	)		(1,218	)

Net property, plant and equipment			$	9,127			9,461

(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 legacy systems to the historical systems of our parent, CenturyLink. 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 we had continued to use our legacy systems and a corresponding estimated $40 million to $55 million decrease in operating expenses for the successor year ended December 31, 2012. The reduction in expenses described above, net of tax, increased net income approximately $25 million to $34 million for the successor year ended December 31, 2012.

Effective January 1, 2012, we changed our estimates of the remaining useful lives of certain telecommunications equipment. These changes resulted in a decrease to depreciation expense of approximately $93 million for the successor year ended December 31, 2012. This decrease in depreciation expense, net of tax, had the effect of increasing net income by approximately $57 million for the successor year ended December 31, 2012.

During the first quarter of 2012, we retrospectively adjusted our previously reported assignment of the aggregate consideration for changes to our original estimates of the fair value of buildings at the acquisition date. This retrospective adjustment decreased the previously reported December 31, 2011 support assets by $25 million. Also, 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 $1.522 billion, $1.209 billion, $475 million, and $1.979 billion for the successor year ended December 31, 2012, the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor year ended December 31, 2010, respectively.

Asset Retirement Obligations

As of the successor date of 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:

	Asset Retirement Obligations

	(Dollars in millions)
Balance at December 31, 2010 (Predecessor)	$	63
Accretion expense		2
Liabilities incurred		—
Liabilities settled and other		(1	)
Change in estimate		—

Balance at March 31, 2011 (Predecessor)	$	64

Fair value adjustment		34

Balance at April 1, 2011 (Successor)	$	98
Accretion expense		5
Liabilities incurred		—
Liabilities settled and other		(3	)
Change in estimate		(38	)

Balance at December 31, 2011 (Successor)		62
Accretion expense		4
Liabilities incurred		—
Liabilities settled and other		(1	)
Change in estimate		(6	)

Balance at December 31, 2012 (Successor)	$	59

During 2011, we revised our estimates for the cost of removal of network equipment, asbestos remediation, and other obligations by $38 million. These revisions resulted in a reduction of the asset retirement obligation and offsetting reduction to gross property, plant and equipment.

- Definition

The entire disclosure for long-lived, physical assets that are used in the normal conduct of business to produce goods and services and not intended for resale. Examples include land, buildings, machinery and equipment, and other types of furniture and equipment including, but not limited to, office equipment, furniture and fixtures, and computer equipment and software. This disclosure may include property plant and equipment accounting policies and methodology, a schedule of property, plant and equipment gross, additions, deletions, transfers and other changes, depreciation, depletion and amortization expense, net, accumulated depreciation, depletion and amortization expense and useful lives, income statement disclosures, assets held for sale and public utility disclosures.

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