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CenturyLink, Inc. (NYSE:CTL)

2014 Morgan Stanley Technology, Media & Telecom Conference Call

March 05, 2014 02:00 PM ET

Executives

Stewart Ewing - Chief Financial Officer

Analysts

Unidentified Analyst

All right, good morning everybody. Before we get started here, please note that all important disclosures including personal holding disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com\researchdisclosures or at the registration desk.

So, it’s my great pleasure to introduce Stewart Ewing, Chief Financial Officer of CenturyLink. Stewart, you recently put out your 2014 guidance, you announced the new buyback program. Can you really talk about what the priorities are for the company this year?

Question-and-Answer Session

Stewart Ewing

Sure. So, for 2014, it’s really just a lot of the execution that we’ve been doing in 2013 as well. So with the consumer business, we’re real pleased with the way the acceptance of our Prism TV product; we added about 69,000 customers last year which is -- and we enabled about 800,000 new homes passed. So we see that product is helping us continue to drive, get closer to revenue stability on the consumer side. Broadband, we added 140,000 customers last year and we expect to continue to add customer this year. So that’s a big part of our strategy on the consumer business is to continue to enable faster speeds for our customers. We 20 MG and higher, we increased homes passed that have availability of 20 MG or higher last year about 25%. So, we continue to try to do things to be a broadband provider of choice in the consumer sector.

In the business sector, we continue to have good momentum in terms of selling the large MPLS networks to multi-site location businesses, both in our legacy footprint where we are the ILEC and outside world where we are CLEC as well. We grew those revenue streams about 4% last year as we did in 2012. So, we continue to have good success there and good momentum. In the small business sector, it’s tougher there and we are still losing customers. Qwest has lost quite a bit of the market share to combination of CLECs and cable companies. And we’re going to try and turn that around over the next couple of years or so.

The wholesale segment, we’ll continue our fiber to the tower builds where we had fiber at the end of 2013 to a little less than 19,000 towers of the 32,000 in our footprint. So, we’ll continue to build fiber to some towers this year, probably fewer than we did last year but continue to enable that. And we expect the revenue from wholesale in fiber to the tower to basically start growing from the standpoint of offsetting the disconnects that we are seeing from the copper circuits when we connect fiber to the tower and the disconnects we are seeing from the towers that we lost as well.

In the data hosting segment, basically we think we can get to mid to upper single-digits revenue growth there this year. We seem to have good momentum selling, cross-selling their services to our network customers. About 30% to 35% of their sales are coming from our existing customer base that buy network from us as well. We are in the process of integrating the Tier 3 acquisition which will significantly help our cloud product; it helps to automate the product. Savvis was one of the first companies with a private cloud but it wasn’t automated. And with the Tier 3 acquisition, we will be able to provide automation for our private cloud and will nicely review that with two or three our large customers that are really excited about getting this rolled out, hopefully mid year or so. And then, we’ll have a public cloud available as well through the Tier 3. So we are integrating the software that they have and the functional they have with the cloud product.

Unidentified Analyst

Okay, great. And the buyback program, you have obviously moved aggressively with the initial $2 billion buyback and you have decided to before that was over, which I think is a little bit out of character for you, but to announce an extent to that, so perhaps you can just talk us through the logic there and what we should expect in terms of pacing?

Stewart Ewing

Yes. So last February, when we cut the dividend, we announced the $2 billion share buyback program, we said that we would execute that over a 24 month period. Actually with the reaction to the stock price, we decided it was -- we needed to use all the free cash flow that we had available to buy shares back which we’ve done. And as a result, we will complete the $2 billion program sometime during the second quarter. And we felt like that just with the value of our shares today that we should make a statement more or less in terms of going back to the market and say that we are still interested in our stock at these prices, and go ahead and have a follow on $1 billion program to be executed over 18 months to 24 months, so that we don’t miss an opportunity to buy the shares where they are today.

So, we will continue to execute that but one of the things that we are doing with the share buyback program, which is free cash flow per share accretive is we are reducing the aggregate dividend that we’re paying too. So it helps us cover the dividend which when we complete the $3 billion of share buyback, we will have reduced our aggregate dividend probably in the range of $200 million or so.

So, it helps keep the dividend without question being covered by the free cash flow of the company. So, our dividend payout ratio this year will be in the mid to upper 40s. When we get to be a full cash tax player and our cash taxes increase significantly in ‘15 and in 16, we’ll be probably in the 60% range.

Unidentified Analyst

Okay. And I think you said on the earnings call, it’s not like 60 is a line in the sand or anything, but it’s sort of a ballpark kind of…

Stewart Ewing

Right, it’s just a ballpark. It’s when we made the change last February, it’s sort of the benchmark that we were using, but it’s not a line in the sand and we can certainly, if the business doesn’t perform quite as well, it can certainly or if we decide we need to spend more capital in the business, it can fluctuate higher than 60%, that’s not a problem.

Unidentified Analyst

So, the original program was two year program, you did that in just over a year basically or you will have done that in just over a year. Is the pacing on the second tranche likely to be a bit slower or is it entirely dependent on the stock price?

Stewart Ewing

It’s really dependent -- it’s dependent on the stock price and just the performance of the company really.

Unidentified Analyst

Yes.

Stewart Ewing

If we perform as we expect, I would imagine it would be potentially towards the 18 months versus if we perform a little bit worse or the stock prices grow stronger, maybe towards the 24 months.

Unidentified Analyst

And is that because of just a generation of free cash flow and…

Stewart Ewing

Just the generation of free cash flow, and actually we spent some time Moody’s, they basically put us on a negative outlook. And we can go to 3.4 times debt to EBITDA Moody’s adjusted without triggering a downgrade. And both their projections and our projection show that if we execute the program certainly over 24 month period and we believe potentially over 18 months, we can get through this program without adversely affecting the rate. But again, it won’t be the 100% [writing] driven, we will -- we’ll do what we think is right for the long term of the business.

Unidentified Analyst

Okay. So if you see the opportunity, you’re comfortable going up closer to that 3.4 times.

Stewart Ewing

Yes.

Unidentified Analyst

Okay, great. So coming back to some of the growth initiatives and adding it all up and the Holy Grail is positive revenue growth. You definitely made some progress towards that goal last year and with your guidance for this year but we’re not there yet. And just give us a little sense of what your latest thinking is and how those pieces all put together and the trajectory to where that’s one, you can hit it; and two, it’s sustainable.

Stewart Ewing

Yes. So it’s easier may be to think about it this way. We define what we call core revenue as really our strategic revenue plus the legacy revenue. So, the only thing -- it’s about 93% of our revenue, it excludes the equipment revenue that we have which is pretty low margin as well as some of the subsidies, some of the universal service fund revenue [received].

Core revenue three years ago was down 3.3%, two years ago down 2.3%, last year was down 1.3%, this year the mid-point of our guidance is 0.6%. So, we’ve made good progress over the last three years. We initially of course thought that we would get revenue stability in ‘14. We had a hockey stick in the last half of ‘13 that we thought…

Unidentified Analyst

In the hosting business primarily?

Stewart Ewing

…..primarily in the hosting business related to the Savvisdirect product that basically when we rolled it out it just, it wasn’t what the market wanted and that’s part of the reason for the Tier 3 acquisition. But I think we have great confidence now that we can get to revenue stability doing 2015 and I think that there is not the hockey stick there. In essence what we need to do is keep doing what we’re doing, what we’ve done over the last 2 to 3 years. We need to keep grounding up our broadband ads on the consumer side. We need to add Prism TV customers which we should be able to do because again we’ve passed about 2 million homes today. We enabled about 800,000 homes last year. This year we’ll enable another 300,000 to 400,000 homes at penetration rates only 8%. So we have a long way to go there from a penetration standpoint. So we have a lot of roadway I think to be able to continue to grow revenue there.

On the business side, we need to continue the revenues growth that we’re seeing from the large and mid-sized business customers. And then in wholesale just continue what we’ve been doing fiber to the tower and selling Ethernet products on a wholesale basis. And then also in the hosting business we again try to get our growth rate when you exclude sort of the onetime items in the acquisitions in the data business, last year it was about 2%. We think we can get that to mid to high single-digits this year 5% to 7%, 8% probably.

Unidentified Analyst

In data hosting?

Stewart Ewing

Data hosting, yes.

Unidentified Analyst

Okay. And is that smooth through the year or is it (inaudible) products come on and then…?

Stewart Ewing

Yes. It’s a little bit back-end loaded. As we’ve talked about on our calls we have some churn that occurred at large customers that were colocation only customers in the Qwest data centers that are moving out to their home data center, some of that happened in the fourth quarter some of that happened in first quarter, but most of that noise should be out by second quarter.

Unidentified Analyst

What sort of macro backdrop are you experiencing? Are you assuming areas like government have been challenging? Is macro a tailwind or no wind or…?

Stewart Ewing

Yes. At this point we have assumed the status quo. So we have assumed that the economy and business formation and the government really is pretty much the status quo if what I heard your Chairman say last night that he indicated that he thought that when we get pass the two year mark of the current administration and people start looking forward to maybe the next administration, things will turn lose a little bit from a business standpoint, businesses will feel better about expanding. And so hopefully that could be a tailwind if that in fact occurs.

Unidentified Analyst

Okay. Well let’s talk about broadband. You referenced some of strong results that you had this past year and the outlook and it’s, I think it’s for a long time people are kind of were writing off the telcos in a sense because it seem like cable had the better product and you have obviously invested heavily in your network. Can you just talk about what the opportunity is there, what the market share you think? And what is it that is necessary for success is, it 20 megs, is that going to stay status quo? I know in Omaha, you have been rolling at fiber to the home, to the prime and doing your own kind of Google fiber thing. So some color on that will be great.

Stewart Ewing

Yes. So we believe, so about 20% of our customers can get 40 meg or higher, this is all unbounded, with bounded we can almost double the space. About 40% of our customers can get 20 meg or higher. And again that’s 25% improvement over a year ago.

So we are making progress there, we are always really competed with the cable companies at a speed deficit and been successful. And I mean we find what our customers are buying or 6 to 12 meg for the most part. In Omaha maybe a little bit faster, just because it’s available there, but still there are not very many people buying the gig that’s available in Omaha.

In Omaha, where we have done fiber-to-the-home to about 45,000 homes and it costs us about $600 per home passed to do that in Omaha. When you enable a house, a home and get the drop and the ONU and the set-top boxes, it’s $1,000 to $1,200 per home that’s enabled really to, and as a customer.

But we have seen really fast penetration in that market. And we have seen somewhat of a [halo] effect in the whole community in terms of where we still have our copper facilities and have the lower speeds, we are seeing an uptick in customer growth there as well. So it seems to be somewhat of a [halo]. And we turned that up midyear last year and it’s been good for a couple of quarters, we will see how long that lasts. But at this point we are really encouraged. We have done fiber-to-home in a couple of areas in Las Vegas, where we just had a 1.5 meg available. And it was not that much more expensive to put fiber-to-home than it was to do fiber-to-node. Also outside the Orlando area we have done some fiber-to-home. And we have actually been doing fiber-to-home for a number of years in Greenfield situations, where you have these sub divisions.

So again we will continue to watch this and see how it goes, but we’re really closely monitoring it and we’ll go heavier fiber to the home, if in fact we continue to see the good success that we’re having in Omaha, but we want to give that a little time.

Unidentified Analyst

So, you reference some of your Prism success and perhaps you can just talk about the economics around that? You talked about some of the CapEx involved in building the network, because obviously content costs, but I think you were referencing that a lot of these customers are new. So, there is -- they are buying 2 or 3 products. So how do you think about not just the revenues, but the contributions margin?

Stewart Ewing

Yes. So about half of the customers that we pick up to our Prism service are new customers to the company. So they are either just nearly moving to the market or they are coming from the cable company or a satellite provider.

The customers who bought Prism service over 90% to 95%, last quarter it was 98%, also buy our broadband service and bundled the video with the broadband. And really about 40% or so actually bundle a land line phone in too. So, we’re getting some of that as well.

What our miles were based on was about a 20% penetration. We can get a good return. We think we can do significantly better than that. We think we can get to EBITDAR breakeven in the market during the third year. So, the programming cost just keeps the margins down somewhat, but again we think we can get good returns overtime.

Unidentified Analyst

And along with that dilutions sort of baked into your run rate anyway so.

Stewart Ewing

The dilution is really baked into run rate and it’s certainly baked into our guidance. Yes, the other thing I might add is that it’s where we go fiber to the node and you don’t have to go fiber to the home everywhere, but fiber to the node, that generally on average costs us about $100 per home passed to give higher speeds there, at least on the areas that we’ve only 8 million or so homes that we’ve developed with fiber to the home, fiber to the node.

Unidentified Analyst

Okay. We’ve had quite a bit of discussion here about Internet Of Things and home automation around San Francisco, [you see me that’s] for the Nest sensors and so forth, alarm monitoring and so forth, have you done the report much about that or the set of products that you can monetize there?

Stewart Ewing

Yes. We actually have that product that we’re rolling out. We’ve owned a security company that probably has 215,000 security customers in the Monroe, North Louisiana area. And we’ve had that for a number of years. And so we are rolling out a home automation product that would include your thermostat, your lights, and your security and things like that so that we are in a process of starting to roll that out.

Unidentified Analyst

Okay. So we talked about the revenues and it sounds like we’re on a good track there. With all of these investments what’s the margin outlook, you’ve got some negative mix shift from the products you are losing versus the products you are gaining, but that is all (inaudible) to the productivity improvement at the same time, how do those old (inaudible)?

Stewart Ewing

Yes. So if you look at our guidance for this year, the mid-point of our guidance is a margin of that 39.7%, I believe it’s where it ends up. Margins will trend down a little bit, because you still have the high margin revenue that you are losing and the lower margin revenue that you are growing. But again we think we get revenue stability in ‘15 and then EBITDA stability would come 12 to 18 months after that, through a combination of really just continued revenue growth of the strategic products, slower revenue decline of the legacy products as it [trips] all and good cost control and some cost cuts enabled through automation and things like that.

So the margins longer term may settle out in the mid to high 30s. But I think if we get to EBITDA stability and EBITDA growth, we’ll be talking more about what should growth going to be as opposed to what the margin is. And that’s our focus is really to get to where we have complete stability in the company not only the revenue stability, but EBITDA stability as well.

Unidentified Analyst

Yes. And do you think -- you mentioned the Tier 3, do you think you have the assets that you need, you talked about most of this being organic. There has been a lot of talk about M&A, we’re obviously seeing Frontier do a deal with AT&T in Connecticut, but there hasn’t been a whole lot of our like type deals here recently. But as you look at the landscape and I know you’ve always had a very clear set of criteria to evaluate these deals. Is it that you’re really focused internally or there is just not that deals out there that make your screen?

Stewart Ewing

I mean we look at things that become -- deals that come up and are available. I think we would be more likely to do the acquisitions of low add-on niche products like a Tier 3 or Appfog that help enhance the ability to be able to attract customers and grow revenue in the data segment, as well as potentially intercity fiber, but as you know those assets are pretty expensive today.

And we can use some of our capital budget to connect the customers that we need to connect to. We’re enabling -- we enabled last year about a 1,000 buildings with GPON in our footprint. That gives our sales people really the opportunity to go in and sell really high quality, high speed services to those buildings and we will continue that program, both in market and out of -- in the RLEC areas and outside of the RLEC areas.

So we feel like we really have the assets that we need and anything that we would look at would be more opportunistic. I don’t think we would do an acquisition just to get synergies, if on the back-end three to five years out we would find that it diluted the asset base that we have and the quality of the assets that we have.

Unidentified Analyst

We had that TDS here this weekend, they were -- they bought rural cable companies and so they have opportunities there, as well as data centers. Is that anything you aren’t really considered?

Stewart Ewing

We have looked at rural cable companies in the past and actually own a few, but at least the ones that we have looked at the quality of the plant has been such so it hasn’t really been and the density has been such that it really hasn’t been advantageous for us to work to actually get on those.

Unidentified Analyst

Well, that’s a nice lead into capital spending. You have obviously talked about a lot of investment programs across most of your businesses. Is mid-teens of revenues, is that the right number for the foreseeable future? We have seen some of the telcos talk about software defined networks and other kind of technology transitions that may have given opportunity to take spending down overtime. Your fiber-to-the-tower program is maturing as well?

Stewart Ewing

Right, we’ll spend probably $150 million to $200 million this year on the fiber-to-the-tower. And that will drop, should drop probably after this year. Probably we’ll spend around $3 billion this year, next year I think we would probably be at about the same level that we are at this year, which if revenues stable then it be about the same percentage of revenue that is today. I mean we think we need to keep investing in the business to give ourselves the opportunity to grow revenue and stabilize EBITDA and grow EBITDA eventually. So they’re good projects that we invest in that we think will drive good long-term returns.

Unidentified Analyst

Okay. And what’s your latest thinking on cash taxes now as you go into 2015?

Stewart Ewing

Yes. So cash taxes, our cash taxes issue will be $50 million to $100 million. Looking out to 2015, we will still have NOL that we can use in ‘15. But even with that, our cash taxes will go up about $600 million in ‘15. So we’d be looking at $650 million to $700 million in cash taxes in ‘15 in total. And then in 2016, cash taxes will go up another $100 million to $200 million. So that’s….

Unidentified Analyst

That will be at run rate?

Stewart Ewing

Where we think we’d be and we believe that will be pretty much at run rate. And our cash is the opportunity too, which we didn’t do in our call. We had a really good year with our pension plan last year. Our unfunded liability at the end of ‘12 was $2.5 million; it ended 2013 at a little over $1 billion. So basically just with the combination of a good return year, as well as increases in the discount rate, we are able to reduce pension liability $1.5 billion and that then show up in the stock price at all, but it’s ultimately a real liability.

Unidentified Analyst

Sure, and then what about the contributions there?

Stewart Ewing

Contributions, we’ll make -- the required contribution is about $125 million in 2014.

Unidentified Analyst

But if we got another 50 basis points move in the long-term, the rates then start to….

Stewart Ewing

Long-term it will help because of the MAP-21 or MAP-22 quarter that we’ve adopted, it actually -- performance really doesn’t in the short-term affect your contributions, but certainly in the long-term it does.

Unidentified Analyst

And what about on the healthcare, retiree healthcare, the (inaudible) side of things you obviously had those changes you referenced, but you also had a new labor deal, so how to start that?

Stewart Ewing

Yes. So we were able to increase the contributions in the union negotiations in the new contract. We were able to increase the contributions that they will make in retirement as well. Not with the current group of retirees, but with the folks that are currently active.

Now, with respect to all the other bargaining unit employees that we have other than the Qwest, bargaining union folks, we basically frozen -- they are basically on same medical plan that everyone else in the company that the non-bargaining unit folks are on. And basically employees hired after certain date for non-bargaining folks is probably seven years ago for bargaining unit folks, it depends on when their contract expired. New folks that are hired basically there is no subsidy on the closer time of the medical.

So that liability should -- it will still trend up a little bit for a time, but it’s just our trending down if you look our five to seven years.

Unidentified Analyst

Okay. And you’ve got some new flexibility on work rules and things like that?

Stewart Ewing

We did get new flexibility on work rules that should help us across the company and basically allow us to -- we had in Colorado for instance, I mean we had employees that were union under the Qwest program and we had non-union employees that relates to CenturyLink working side by side and they couldn’t crossover in another areas. And we’ve basically have more flexibility now with the workforce in terms of how to work, how to assign work. We also have more flexibility in terms of our ability to be able to onshore offshore some work, which I think will help and we got some new classifications of certain groups of employees that will allow us hopefully to be more efficient as well.

Unidentified Analyst

Okay. We’ve got a new Chairman of the FCC; can you talk a little bit about what your regulatory priorities are and what you see coming down the pipe this year?

Stewart Ewing

Yes. So now we’re working on CAF2 which will be the universal service fund replacement. And we feel pretty good about that now. We -- the formula is not finalized, but we believe at least based on the conversations the way it seems to be going is that we’ll end up at least with the opportunity to get at least to get about as much USF as we have today potentially a little bit more, but we’ll have to look at it on a state by state basis and decided whether we want to accept the CAF2 money and the responsibility that goes along with it or not. And we’ll have a period of time after the rules are finalized to be able to do that, but that still in our view probably towards the end of ‘14 or sometime in ‘15.

Unidentified Analyst

Anything on special access, I mean you’re on two sides...?

Stewart Ewing

Yes. We’re on both sides of that. We are basically completing today the request that the FCC has asked for. We certainly believe that there is competition in special access just talk with the folks or just listen at your conference to the other folks that are providing fiber-to-the-tower. So there is definitely competition there and we don’t think it needs to be deregulated, ultimately we don’t really believe it will be. But if it is, it should be regulated for everyone including the cable companies. And that’s to me what I would like to see us get to is a level of plain field, I don’t care whether you regulate the cable companies or deregulate us, prefer to deregulate us, but just pull out some of the cable companies and other competitors on a level of plain field.

Unidentified Analyst

Sure. We’ve got a lot of talk at the conference around mobility and obviously in the areas like fiber-to-the-tower you’re essentially helping the mobility network. But you’ve had some various strategies around wireless, you bought spectrum at (inaudible) you had wireless assets many years ago…

Stewart Ewing

Many years ago, yes.

Unidentified Analyst

You’ve got this Verizon deal that came with the Qwest merger. So where does that stand and any kind of thoughts about how to do more, [bundle] more going forward?

Stewart Ewing

Yes. From our standpoint I mean, we really still don’t -- we don’t believe we need the wireless product to really be an integrated part of the bundle that we sell to customers. Customers at least at this point seem they still make their decisions about their wireless service different and separately from their video service and their broadband service. So I think having the Verizon product available is really all we need. We don’t make much money on it at all; it’s more than [hedged]. And I don’t -- the reason we’ve bought the spectrum that was really prior to the Qwest acquisition and even maybe I think prior to Embarq, so it was -- it covered a pretty good bit of our legacy CenturyTel footprint. And our view there was to try to have some differentiated data product. But after the acquisitions of Embarq and Qwest, it just didn’t make sense to develop it. So, we have divested most of that spectrum and in likelihood we will probably sell the rest of it.

Unidentified Analyst

Well there is active market and people are looking for spectrum.

Stewart Ewing

Yes. So, our investment is about $50 million in what remaining, so it’s not that significant.

Unidentified Analyst

Every $50 million?

Stewart Ewing

Yes, every $50 million out, that’s right.

Unidentified Analyst

Alright. Before we open it up for questions Stewart, I think the stock has been under some pressure, you did have some write-offs last year, but the yield is one of highest in the market, and the S&P and as you have said before it’s pretty well covered, you have got a buyback program. What do you think the market isn’t getting clear perspective because you are signaling with your buyback that you think the stock is very attractive, what do you think you need to do or that the market needs to kind of give you credit for to sort of get back to where you think fair value is?

Stewart Ewing

Yes, so I guess the way I look at it a little bit is that if you take our DCF today and basically try to look at the value of the company, we’re probably valued with a negative 0.5% or so cash flow decrement in the perpetuity. And I think when we get to the point to where we can stabilize revenue and people see and believe that we’ll be able to stabilize and grow EBITDA and the cash flows will actually grow going forward, then I think we’ll get to the point to where the market perception will change. So, I have said even if we get flat free cash flow in the perpetuity, I mean that will have a several dollars of share, if we can move to 0.5% growth in the perpetuity, it could move the stock quite a bit. So I mean that’s why we are buying now. I mean we believe in the future, and we believe in our ability to be able to do that and we think it’s -- the stocks are at good value now.

Unidentified Analyst

And do you feel like the visibility into 2014 is better than your visibility was this time last year?

Stewart Ewing

I believe it is, because again last year, we had some hockey stick really built into revenue in the last half of 2013 and it became evident that that wasn’t going to happen. And I think just again if we can keep executing what we are doing, what we have done in the last couple of years, we’ll be fine from a revenue stabilization standpoint.

Now there are -- we do need to address expenses because if you look at our guidance, effectively reflects our expenses going down somewhat after the first quarter, and that generally doesn’t happen, but we are working now to put programs in place to make sure that happens. I mean it could be a little bit choppy quarter-to-quarter in terms of when the cuts takes place, but we will take the expenses out this year to be able to get to where we need to get to.

Unidentified Analyst

Okay, good, great. Well, we’ve got some mics. We have a question over here Stu.

Unidentified Analyst

Thanks, I just want to follow up on your Moody’s comments. So it sounds like you’re concerned but Moody’s just not a really driver for your actions, whether your share repurchases pr M&A. But I guess my question is, could you really stomach a loss of the IG ratings for both the Qwest Corp and Embarq bonds and how good of an opportunity would it have to be to put your whole $20 billion debt structure into the high yield market?

Stewart Ewing

Yes. So if you -- I mean the Embarq bonds, as they mature, we’re refinancing everything up at the parent company, not investment grade at this point, Embarq is not an issue going forward, at least at this point.

Qwest Corp has about $7.5 billion of debt. About $3 billion of that $7.5 billion are in the $25 baby bonds that are due in 2051, will now be a hundred and -- 52 and 53. So, we’ve refinanced quite a bit of Qwest Corp debt out really long-term at rates between 6% and 7%.

So, it wouldn’t, and to me. if we did take a downgrade at the parent, it would automatically notch Qwest, even though Qwest EBITDA coverage, debt to EBITDA coverage is still 1.8 debt to EBITDA. But it wouldn’t cost us that much at least in the current environment, probably 15 basis points to 20 basis points. So, I guess Moody’s is a factor, but it won’t be really, it will just be one of the factors I think that we consider, again if our performance is what it needs to be to keep the rating or if we feel like we need to execute to share buyback sooner or if we feel like that there is an acquisition out there that might enhance our ability to be able to get to revenue growth quicker.

Unidentified Analyst

So, you mentioned the pensions and we’ve seen several other companies offload their pension liability. Has there been any discussion to do that?

Stewart Ewing

So, we’ve talked about that. Our -- other companies that have done that have had to fund up their plans. And with us not being a cash tax payer right now, we don’t get the same cash flow benefit that others get by making additional pension contribution so that they can offload the liability. But we have looked at that and when our assets get to where we’re over funded, maybe 105% or something like that, we would certainly look at the possibility of trying to offload some of the liability. The other thing that we’re doing is we’re trying to reduce the liability somewhat going forward. So we have a program that we working in 2014 to try to provide lovesome distributions for terminated bested employees who didn’t take a lovesome when they left the company.

And hopefully we’ll be able to reduce our liability and our exposure somewhat by the programs that we’re implementing in ‘14.

Unidentified Analyst

Related question, AT&T and Verizon moved to mark-to-market for their pension accounting, how have you thought about that?

Stewart Ewing

So, we haven’t made that move and we’re still and this moving is what we do. And I don’t know we -- I think we had a net credit last year, basically maybe something $100 million something like that. So it had been that significant course and we just decided not to make the move at this point.

Unidentified Analyst

I was wondering if you could elaborate a little bit on how you think data speeds to residential and business customers can evolve on your network and whether your company sees a technological path to whether it’s closing the gap with cable or just staying on pace with cable data speeds, if you can see that happening and what the cost parameters might be around that?

Stewart Ewing

Could you repeat the last part please?

Unidentified Analyst

What would the cost parameters be around that?

Stewart Ewing

Yes. So in -- just with the, I mean we’ve always completed the speed deficit. And except for places where we have fiber-to-the-home we will be at a speed deficit for the most part. But I guess our view is and what we have seen -- and we’ve still been able to add customers. We added 140,000 customers last year, we’ll add customers this year probably not a 140,000 but we’ll add customers continue to grow at revenue stream. I mean we think we can compete at a speed deficit. Again we don’t believe you need a 100 megs going to your home to be able to really get the services, at least that you’re using today.

And we think that over time I mean we’ll continue to evolve our speeds, we’ll continue to increase the customers that can get better than 20 meg and better than 40 meg and we believe that over time I mean we’ll continue to be able to compete. If we did decide we need to go fiber-to-the-home in urban areas it is $600 a home passed or so at least to construct the infrastructure and then $1,000, $1,200 per (inaudible) that you hook up.

But I mean we think we can do with the combination of technologies. Fiber-to-the-home makes sense and is feasible. And fiber-to-the-node or fiber-to-the-midpoint where fiber-to-the-home doesn’t make sense, except for in the very rural areas which will always be at a speed deficit there in terms of the cable companies and really those areas will have less speed even from the cable companies.

Unidentified Analyst

Following on from the balance sheet question. You’ve obviously termed out a lot of your debt, you’ve reduced the interest cost of capital, is there much left to do or don’t see much action this year on that front?

Stewart Ewing

We are looking. There is still potentially some that we could do. We have three nodes in particular of Qwest Corp that are callable a little bit over a 100 that it may make sense to refinance. So we will be looking at little of that, not as much probably as we have done over the past two or three years.

Maturities this year, we have about $640 million, $650 million, $600 million is on Qwest Corp. And it’s I guess 7.375%, 7.5% node, about $450 million maturities next year, a total of a little less than $5 billion over the next five years.

Unidentified Analyst

Okay. Alright well with that, thank you Stewart we appreciate your time.

Stewart Ewing

Thank you, appreciate it. Thanks for being here.

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Source: CenturyLink's Management Presents at 2014 Morgan Stanley Technology, Media & Telecom Conference (Transcript)
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