Table of Contents

 

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

FORM 10-K

(Mark One)

x
ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20152018

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 number 001-35134

LEVEL 3 COMMUNICATIONS, INC.PARENT, LLC
(Exact name of registrant as specified in its charter)

Delaware 47-0210602
(State or other jurisdiction of Incorporation)
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
1025 Eldorado Blvd., Broomfield, CO 80021-8869
(Address of principal executive offices) (Zip Code)
(720) 888-1000
(Registrant’s telephone number,
including area code)

Securities registered pursuant to section 12(b) of the Act:

Common Stock, par value $.01 per shareNew York Stock Exchange

Securities registered pursuant to section 12(g) of the Act
NoneTHE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF CENTURYLINK, INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE PURSUANT TO GENERAL INSTRUCTION I(2).

Indicate by check mark whetherif the registrant is a well-known seasoned issuer, as defined byin Rule 405 of the Securities Act. Yes xo        Nooý

Indicate by check mark whetherif the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o        No xý

Indicate by check mark whether the registrantregistrant: (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 xý        No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xý        No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the 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. xý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated filer,”" "accelerated filer", "smaller reporting company," and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerxo
 
Accelerated filero
   
Non-accelerated fileroý
 
Smaller reporting companyo
(Do not check if a smaller reporting company)  
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 

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

AsAll of June 30, 2015, the aggregate market value of common stocklimited liability company interest in the registrant is held by non-affiliatesan affiliate of the registrant approximated $13.018 billion based upon the closing priceregistrant. None of the common stock as reported on the New York Stock Exchange as of the close of business on that date. Shares of common stock held by each executive officer and director and by each entity that owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate statusinterest is not necessarily a conclusive determination for other purposes.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

TitleOutstanding
Common Stock, par value $.01 per share356,840,483 as of February 24, 2016

publicly traded.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) and (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980.)

Portions of the Company's Definitive Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.REFERENCE: None.






Table of Contents

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIESTABLE OF CONTENTS
Table of Contents
 
Page No.
Part I
  
Item 1PART I
Item 1. Business
45
Item 1A
1A. Risk Factors
3613
Item 1B
1B. Unresolved Staff Comments
5634
Item 2
2. Properties
5635
Item 3
3. Legal Proceedings
5735
Item 4
4. Mining and Safety Disclosures
5735
PartPART II
 
Item 5
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
5836
Item 6
6. Selected Financial Data
6237
Item 7
7. Management's Discussion and Analysis of Financial Condition and Results of Operations
6738
Item 7A
7A. Quantitative and Qualitative Disclosures About Market Risk
8849
Item 8
8. Consolidated Financial Statements and Supplementary Data
8949
Consolidated Statements of Operations
52
Consolidated Statements of Comprehensive Income (Loss)
53
Consolidated Balance Sheets
54
Consolidated Statements of Cash Flows
55
Consolidated Statements of Changes in Member's/Stockholders' Equity
56
Notes to Consolidated Financial Statements
58
Item 9
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
89108
Item 9A
9A. Controls and Procedures
89108
Item 9B
9B. Other Information
90110
PartPART III
 
Item 10
10. Directors, Executive Officers and Corporate Governance
90110
Item 11
11. Executive Compensation
90110
Item 12
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
90111
Item 13
13. Certain Relationships and Related Transactions, and Director Independence
90111
Item 14
14. Principal Accounting Fees and Services
90111
PartPART IV
 
Item 15
15. Exhibits and Financial Statements Schedules
90112
Index to ConsolidatedItem 16. Summary of Business and Financial StatementsInformation
F-1118
Signatures
118
  


2

Table of Contents

Unless the context otherwise requires or expressly stated herein, when we use the words “Level 3,” “we,” “us,” or “our company” in this annual report on Form 10-K, we are referring toEffective November 1, 2017, Level 3 Communications, Inc., became a Delaware corporation, and its subsidiaries. Throughout this Form 10-K, we use various industry terms and abbreviations, which we have defined in the Glossary of Terms at the end of Item 1, “Business.” The Level 3 logo and Level 3 are registered service marks of our wholly owned subsidiary, of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc.’s name changed to Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” "its," the "Company" and "our" refer to Level 3 Parent, LLC in the United Statesand its consolidated subsidiaries.

Part I

Special Note Regarding Forward-Looking Statements

This report and other countries. All rights are reserved. This Form 10-K refers to trade namesdocuments filed by us under the federal securities law include, and trademarks of other companies. The mention of these trade namesfuture oral or written statements or press releases by us and trademarks in this Form 10-K is made with due recognition of the rights of these companies and without any intent to misappropriate those names or marks. All other trade names and trademarks appearing in this Form 10-K are the property of their respective owners.
Cautionary Factors That May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
This Form 10-K contains statements and information that are based on the beliefs of our management as well as assumptions mademay include, forward-looking statements about our business, financial condition, operating results and prospects. These "forward-looking" statements are defined by, and information currently available to us. When we use words like “plan”, “estimate,” “expect,” “anticipate,” “believe,” “intend,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar expressions with respect to future periods in this Form 10-K, as they relate to us or our management, we are intending to identify forwardlooking statements. These statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may vary materially from those described in this document.the "safe harbor" protections under, the federal securities laws. These statements include, among others, statements concerning:others:
expectations as to
forecasts of our anticipated future revenue, margins, expenses,results of operations, cash flows profitability and capital requirements;or financial position;

statements concerning the anticipated impact of our communications business, its advantagestransactions, investments, product development and our strategy for continuing to pursue our business;other initiatives;

statements concerning the anticipated developmentimpact of the Tax Cuts and launch of new servicesJobs Act enacted in our business;late 2017;

anticipated dates on which we will begin providing certain services or reach specific milestones;

statements about our liquidity, profit margins, tax position, tax rates, asset values, contingent liabilities, growth of the communications industry;

our integration of the operations of companies that we acquireopportunities and the anticipated benefitsgrowth rates, business prospects, regulatory and synergies in connection with that acquisition;competitive outlook, market share, product capabilities, investment and expenditure plans, business strategies, capital allocation plans, 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.facts, many of which are highlighted by words such as “may,” “will,” “would,” “could,” “should,” “plan,” “believes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “likely,” “seeks,” “hopes,” or variations or similar expressions with respect to the future.

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, (i) are not guarantees of future results, (ii) are inherently speculative and (iii) 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 including financial, regulatory, environmental, industry growth and trend projections,materialize, or if our underlying assumptions prove incorrect. All of our forward-looking statements are qualified in their entirety by reference to our discussion of factors that could cause our actual events or results to differ materially from those expressedanticipated, estimated, projected or implied by theus in those forward-looking statements. The most important factorsFactors that could prevent us from achieving our stated goalsaffect actual results include but are not limited to:

CenturyLink’s ability to timely realize the anticipated benefit of its November 1, 2017 business combination with us;

the effects of competition from a wide variety of competitive providers, including increased pricing pressures;

the effects of new, emerging or competing technologies, including those that could make our products and services less desirable or obsolete;



our ability to attain our key operating imperatives, including simplifying and consolidating our network, simplifying and automating our service support systems and strengthening our relationships with customers and attaining projected cost savings;

our ability to safeguard our network, and to avoid the adverse impact on our business and our customers of general economic and financial market conditions as well as our failure to:

increase revenue and free cash flow from the services we offer;


3
Table of Contents

successfully use new technology and information systems to support new and existing services;

prevent process andpossible security breaches, service outages, system failures, that significantly disruptequipment breakage, or similar events impacting our network or the availability and quality of the services that we provide;our services;

prevent our security measures from being breached,the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or our services from being degraded as a result of security breaches;judicial proceedings relating to intercarrier compensation, interconnection obligations, special access, universal service, broadband deployment, data protection and net neutrality;

develop new services that meet customer demands and generate acceptable margins;our ability to avoid unanticipated integration disruptions;

our ability to effectively manage expansionsadjust to changes in the communications industry, and changes in the composition of our operations;markets and product mix;

providepossible changes in the demand for our products and services, that do not infringe the intellectual property and proprietary rights of others;including our ability to effectively respond to increased demand for high-speed data transmission services;

attractour ability to successfully maintain the quality and retain qualified managementprofitability of our existing product and other personnel;service offerings and to introduce profitable new offerings on a timely and cost-effective basis;

our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt payments and distributions;

changes in our operating plans, corporate strategies, or capital allocation plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise;

our ability to effectively retain and hire key personnel and maintain satisfactory relations with our workforce;

adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower debt credit ratings, unstable markets or otherwise;

our ability to meet all of the terms and conditions of our debt obligations.obligations, including our ability to make transfers of cash in compliance therewith;

Exceptour ability to maintain favorable relations with our key business partners, suppliers, vendors, landlords and lenders;

our ability to collect our receivables from financially troubled customers;

any adverse developments in legal or regulatory proceedings involving us or our affiliates, including CenturyLink;

changes in tax, communications, healthcare or other laws or regulations;

the effects of changes in accounting policies, practices or assumptions including changes that could potentially require future impairment charges;

the effects of adverse weather, terrorism or other natural or man-made disasters;

the effects of more general factors such as required by applicable lawchanges in interest rates, in exchange rates, in operating costs, in public policy, in the views of financial analysts, or in general market, labor, economic or geo-political conditions; and regulations,



other risks referenced in "Risk Factors" in Item 1A or elsewhere in this report or other of our filings with the SEC.

Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly 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 disclosures that we make on related subjectsFurthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans (including our distribution or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our additional filings with the Securities and Exchange Commission,assumptions or the SEC, should be consulted. For further information regarding the risks and uncertainties that may affect our future results, please review the information set forth below under Item 1A, “Risk Factors.”otherwise.

Part I
ITEM 1. BUSINESS

Introduction
Overview

We are an international facilities-based providercommunications company engaged primarily in providing an integrated array of a broad range of integrated communications services. A facilities-based provider is a provider that owns or leases a substantial portion ofservices to our customers. Our specific products and services are detailed below under the plant, propertyheading "Operations - Products and equipment necessary to provide its services. We have created our international communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.
Our company was incorporated as Peter Kiewit Sons’, Inc. in Delaware in 1941 to continue a construction business founded in Omaha, Nebraska in 1884. In subsequent years, we invested a portion of the cash flow generated by our construction activities in a variety of other businesses, including, among other things, the communications business. In 1998, our historical construction business was split off from the remainder of our operations. In conjunction with the split-off, we changed our name to “Level 3 Communications, Inc.,” and the entity that was split-off and held the prior construction business was named “Peter Kiewit Sons’, Inc.”
We sold various businesses subsequent to the split-off, including our coal mining business in November 2011, as part of our long-term strategy to focus on core communications business operations. Most recently, in October 2011, we acquired Global Crossing Limited and in October 2014 we acquired tw telecom inc. The results of operations of the companies that we have acquired have been included in our consolidated results of operations since the respective closing date of the acquisition.

4
Table of Contents

As of December 31, 2015, we had approximately 12,500 total employees. We believe that our success depends in large part on our ability to attract and retain qualified employees.
We file annual, quarterly and current reports, proxy statements and other information with the SEC. These filings are available to the public on the Internet at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at the SEC’s public reference room, located at 100 F Street, N.E. Room 1580, Washington, D.C. 20549. Our Form 10-K and all other reports and amendments filed with or furnished to the SEC are publicly available free of charge on the investor relations section of our website as soon as reasonably practicable after we file such materials with, or furnish them to, the SEC. Our website is www.level3.com. We caution you that the information on our website is not part of this or any other report we file with, or furnish to, the SEC.
Business Overview, Vision and Strategy
Level 3’s vision is to be the trusted connection to the networked world. We seek to achieve this vision by focusing on:
maximizing the value of our network for our customers by expanding the breadth and depth of our local to global network, and connecting our customers to their digital ecosystem of data and applications;Services."

delivering an exceptionalOur terrestrial and consistent customer experience by innovatingsubsea fiber optic long-haul network throughout North America, Europe, Latin America and Asia Pacific connects to improve the efficiency and scalabilitymetropolitan fiber networks that we operate. We provide services in over 60 countries, with most of our operating platform; and

generating profitable growth by expanding our enterprise customer base and layering value-added services onto existing network and operational capabilities.revenue being derived in the United States.

We strive to createwere incorporated under the laws of the State of Delaware in 1941. Our principal executive offices are located at 1025 Eldorado Boulevard, Broomfield, CO 80021 and our telephone number is (720) 888-1000.

For a culture and business environment that makes it easy for customers to do business with us, and providing high-performing, reliable and secure services on our local-to-global network with superior price value. We focus on operational excellence to streamline our systems and business processes to deliver a superior customer experience, and to reduce overhead costs and transactional costs for ourselves and for our customers.
We believe that we can be successful by making our customers the focal pointdiscussion of all we do. Our value proposition is structured to be fully aligned with helping our customers meet their growth, efficiency and security business challenges both today and in the future and across the globe wherever our services are available.
We believe that advances in optical and Internet Protocol, or IP, technologies have facilitated, and will continue to facilitate, decreases in unit costs for communications service providers that are able to most effectively take advantage of these technology advances. We believe that, over time, rapidly improving technologies and high demand elasticity will continue to drive this market dynamic.
Enterprises are increasingly moving their content and applications to third party providers of on-demand server and storage resources to reduce the costs and complexity of their information technology, or IT, operations. Since these server and storage resources can be offsite in any location and are often virtualized (as opposed to residing on dedicated hardware in a known location) they are referred to as “Cloud Services.” We believe that this migration of enterprise data and applications to the Cloud will drive increased demand for our high-performing, reliable and secure network services.
Today’s market drivers can be broken into three categories as they pertaincertain risks applicable to our core business, strategy:

5
Tablesee "Risk Factors" in Item 1A of Contents

Growth. We expect digital data creation and the associated demand for bandwidth to keep growing, as business relationships and supply chains become increasingly digital, and end users increasingly expect to be able to access their data and applications anytime and anywhere. Cloud application adoption continues to grow for all businesses, especially our enterprise customers. Mobility and Internet connected device proliferation continue to increase the rate at which content - especially video - is consumed, which in turn results in increased demand for higher bandwidth to enable that delivery and consumption. A rapidly increasing numbers of smart homes, cars, and everyday objects are getting connected to the network (the “Internet of Things”), further increasing demand for scalable and secure bandwidth. Globalization trends continue as customers look for growth from emerging markets, particularly with respect to enterprise customers. Additional opportunities for growth are present as a result of changing regulatory requirements in industries such as healthcare, consumer privacy, and financial services.

Efficiency. As traffic volumes grow, our customers are not only under pressure to keep up with this growth but also to do so more efficiently. Accordingly, our product and technology teams take advantage of the scale and capabilities of our network and continuously innovate to deliver cost-effective services that meet customer needs.

Security. Cyber threats continue to escalate, which affects both us and our customers. As more enterprise customer data and applications move to the Cloud, and as more and more consumer devices and personal information become reachable through the Internet, maintaining a secure network and collection of systems and processes is more important than ever.

Technology innovation in Internet Protocol and optical networking technologies has resulted in improvement in the functionality of applications supported by these technologies. We believe that this rapid innovation will continue well into the future across a number of different aspects of the communications marketplace.
We believe that decreases in communications services costs and prices enable the development of new bandwidth intensive applications, which, over time, result in even more significant increases in bandwidth demand. In addition, we believe that communications services are direct substitutes for other existing modes of information distribution from sources such as traditional broadcast entertainment as well as distribution of software, audio and video content using physical media delivered through physical transportation systems. An examplePart I of this dynamicreport. The summary financial information in this Item 1 should be read in conjunction with, and is the use of the Internet for the distribution of video. We believe that as communications services improve more rapidly than traditional content distribution systems, demand for Internet delivered video will continue to grow rapidly. We also believe that high elasticity of demand for both new applications and the substitution for existing distribution systems will continue for the foreseeable future.
We also believe that there are significant implications that result from these market dynamics. First, given the improvement in optical and Internet Protocol technologies, communications service providers that are most effective at rapidly deploying new services that take advantage of these technologies will have an inherent cost and service advantage over companies that are less effective at deploying new services that use these technologies. In addition, given the consolidation in the number of local access providers (that is, the providers of connections from intercity networks to traffic aggregation points or end user locations), communications service providers that have ownership of local and/or metropolitan network facilities will have an inherent cost and service advantage over companies that do not have ownership over these types of assets. With respect to the migration to Cloud Services, this market dynamic creates opportunities for us to provide secure and high performance network connectionsqualified by reference to, our enterprise customers, enabling their employees to connect seamlesslyconsolidated financial statements and efficiently to their content and applications in the Cloud.

6
Table of Contents

In view of these market and technology opportunities, we seek to serve business customers by using a customer-first focus and providing a broad range of communications services over our advanced and extensive fiber optic network. With our network’s extensive geographic reach and deep reach into major metropolitan areas of the United States, Europe and Latin America, we are positioned to provide end-to-end services for business customers entirely on our own facilities across multiple continents.
We have and will continually expand our fiber optic network to new locations where the demands of our customers and potential customers justify the upfront costs of expansion. This allows us to provide an end-to-end connection for the customer across our own fiber optic network, which is more secure and efficient and allows us to deliver a superior customer experience. Today and for the foreseeable future, we will need to connect to some locations using the networks of other carriers. We manage these relationships with other carriers to make the interconnection as efficient and effective as possible. We seek to minimize the need for these “off network” connections by targeting customers whose needs can be met primarily over our network and by building our network to as many high-traffic locations as possible.
Our fiber optic network has extensive reach across North America, Europe and Latin America. Our network reaches not only hundreds of cities (we refer to the part of our network connecting the larger cities as our “intercity” network) but also includes fiber optic routes around the various parts of the larger metropolitan areas (we refer to this part of our network as our “metropolitan” or “metro” networks), which allows us to connect directly with wholesale customers in major traffic aggregation centers (such as central offices of local exchange carriers) and with many medium and large enterprise customers at their offices and data centers. In addition, the fact that our metro networks have significant reach throughout major metropolitan areas means that we can make relatively short network extensions to reach customer locations that our network does not currently reach.
To connect our networks in North America, Europe and Latin America, as well as to connect our network to cities in other parts of the world, we own several undersea cables and have purchased capacity on cables owned by others. Since subsea cables require very large upfront investment and have very large capacity compared to the needs of any one carrier, they typically are either owned by consortia of carriers or are financed significantly by selling a large amount of capacity to other carriers either before the cable is built or shortly thereafter. We historically have been active both in building undersea cables and in buying capacity from others. Today we own more than 33,000 route miles of undersea fiber optic cables around the world. In addition, as we have points of presence (PoPs) in Asia, Africa and Australia, we have also purchased capacity on others’ undersea cables to allow us to offer services in those regions despite the fact that we do not have extensive fiber optic networks of our own in these regions. This is important to our ability to handle the global needs of our multinational customers. For more information about our network, see Item 1, “Business - Our Communication Network” below.
For larger customers, specialized real estate is often required to house the equipment that we and the customer use to exchange traffic. This space requires a concentrated amount of electric power and cooling, as well as server racks, fiber optic cables and other technical equipment. Such specialized real estate, depending upon its nature and the type of companies that use it, is referred to variously as “colocation” or “data center” space. For interconnection among wholesale carriers and some of the largest enterprise customers, we also use real estate owned by third parties. We own or lease more than 250 colocation facilities in North America, approximately 100 colocation facilities in Europe, and approximately 15 colocation facilities in Latin America. In addition, we operate approximately 20 data center facilities in Latin America, Europe and North America.
Our business includes voice services. Historically, end-user voice services were provided over a network of local exchange carriers whose copper wire networks were dedicated to that service. Today, voice services can be carried over the Internet as a data service. This type of voice service usually is referred to as “voice over Internet Protocol,” or “VoIP”. Since many calls include a connection to the traditional voice network on one end and a VoIP connection on the other, early in our existence we

7
Table of Contents

became deeply involved in managing connections between VoIP customers and those on the traditional public switched telephone network. This involves not only developing and managing equipment and software specialized for that purpose but also developing physical connections of our Internet Protocol network with the traditional networks of the various local exchange carriers. Additionally, we have also physically interconnected our IP network with the networks of many cellular telephone carriers. This enables us to provide what we believe is a more comprehensive service than most other carriers can provide to handle customers’ needs for voice connections in today’s changing communications environment. Our services that manage the initiation or termination of customers’ voice calls generally are referred to as “local voice” services. Our voice services also include our comprehensive suite of audio, web and video collaboration services.
We also provide services that handle the termination of large volumes of telephone calls on behalf of other carriers. We refer to these as “wholesale voice” services. These services are provided in a very competitive environment in which many carriers participate and the customer typically uses automated systems to choose the least expensive way to terminate traffic to each city around the world on a minute-by-minute basis.
We provide specialized communications services for companies that distribute video or other digitized content across the Internet. Because the amount of bandwidth required by such media is large, special services are used to ensure delivery of such content at desired levels of quality. We have developed a system of servers, with software to control them, that store more popular content in various locations around the world. The aim is to store content so that it is not transferred very far across the Internet. This type of service typically is referred to as a “Content Delivery Network,” or “CDN.” We also have specialized video services to handle the needs of broadcasters for the rapid transmission of the very large streams of information that emerge when live events are broadcast. We carry these video streams across our network to locations specified by the broadcasters and from which these customers broadcast their final edited content.
Managing the transmission of information across our network requires the proper management of many interconnected technologies, processes and systems to provide high quality, convenient secure and reliable services for our customers. Some of these services may be charged for separately, while others are included as an integral part of our more basic services. Examples of services that are typically charged separately include network security (i.e., helping customers keep their information safe) and network monitoring (i.e., keeping customers informed of the status of various equipment and sub-parts of their connections). We regularly develop new features and ancillary services to keep our network services as valuable as possible to our target customers.
Since a large portion of our communications services are purchased by companies to interconnect their own information technology applications, often we find that certain customers need ancillary services that are not clearly part of communications network services and may more properly be described as information technology services. In an effort to ensure that our customers receive a superior overall experience, we frequently enter into partnerships with providers that specialize in these information technology services, so that we can assemble the full collection of services for the customer. In making the decision to add such services, we consider several factors including our core strengths, the existence of other parties with whom we can work to satisfy the customers’ needs, how important it is to customers that the new service be combined into a single Level 3 offering, and the size of the incremental market that would become addressable by offering such services. For more information about our service offerings, see Item 1, “Business - Our Service Offerings” below.
We are currently focusing our attention on a number of operational and financial objectives, including:
driving profitable revenue growth by increasing sales generated by our Core Network Services;

8
Table of Contents


growing our Enterprise customer base as well as our share of their telecom spend, as this customer group has the largest potential for significant growth;

continually improving the customer experience to increase customer retention and reduce customer churn;

integrating our prior acquisitions, building on the strengths and capabilities of the acquired legacy companies to position the combined company as a premier global communications provider;

launching new products and services to meet customer needs, in particular for Enterprise customers;

reducing network costs and operating expenses relative to our revenue;

growing positive cash flows from operations;

continuing to show improvement in Adjusted EBITDA (as definednotes thereto in Item 7, “Management’s Discussions8 of Part II of this report and "Management's Discussion and Analysis of Financial Condition and Results of Operation”) as a percentageOperations" in Item 7 of revenue;Part II of this report.

concentrating our capital expenditures on those technologies and assets that enable us to increase our Core Network Services revenue; and
Acquisition of Level 3 by CenturyLink

managing our Wholesale Voice Services for margin contribution.On November 1, 2017, CenturyLink acquired us through successive merger transactions, including a merger of Level 3 with and into a merger subsidiary, which survived such merger as CenturyLink's indirect wholly-owned subsidiary under the name of Level 3 Parent, LLC. Our results of operations have been included in the consolidated results of operations of CenturyLink since November 1, 2017.

For additional information about CenturyLink's acquisition of Level 3, see (i) Note 2—CenturyLink Merger to our consolidated financial statements in Item 8 of Part II of this report, (ii) the current report on Form 8-K/A filed by CenturyLink with the Securities and Exchange Commission (the "SEC") on January 16, 2018, (iii) our current report on Form 8-K filed by us with the SEC on November 1, 2017 and (iv) the definitive joint proxy statement/prospectus filed by CenturyLink with the SEC on February 13, 2017.

Financial Highlights

The analysis below is presented on a discussion of our Core Network Servicescombined basis for the successor and Wholesale Voice Services, see Item 1, “Business-Our Service Offerings” below.
Our Strengths
predecessor periods in 2017. We believe that the discussion on a combined basis is more meaningful as it allows our 2018 results of operations to be more readily compared to our aggregate 2017 results of operations. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of Part II of this report.



The following strengths will assist us in implementingtable summarizes our strategy:results of our consolidated operations:
 Successor  Predecessor Combined Predecessor
 
Year Ended December 31, 2018(1)(2)
 
Period Ended December 31, 2017(1)(2)
  
Period Ended
October 31, 2017(2)
 Year Ended December 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
Operating revenue$8,220
 1,407
  6,870
 8,277
 8,173
Operating expenses7,252
 1,249
  5,719
 6,968
 6,728
Operating income968
 158
  1,151
 1,309
 1,445
Net income (loss)341
 (141)  425
 284
 677

Experienced Management Team
(1)The enactment of the Tax Cuts and Jobs Act in December 2017 resulted in a re-measurement of our deferred tax assets and liabilities at the new federal corporate tax rate of 21%. The re-measurement resulted in a tax expense of approximately $92 million and $195 million for 2018 and 2017, respectively.
(2)During the successor year ended December 31, 2018 and period ended December 31, 2017 and the predecessor period ended October 31, 2017 and year ended December 31, 2016, we incurred CenturyLink acquisition-related expenses of $121 million, $28 million, $85 million and $15 million, respectively. For additional information, see "Acquisition of Level 3 by CenturyLink" above and Note 2 - CenturyLink Merger to our consolidated financial statements in Item 8 of Part II of this report.

The following table summarizes certain selected financial information from our consolidated balance sheets:
 As of December 31,
 2018 2017
 (Dollars in millions)
Total assets$32,291
 33,135
Total long-term debt(1)
10,844
 10,890
Total member's equity17,877
 19,272

(1)For additional information on our long-term debt, see Note 5 - Long-Term Debt to our consolidated financial statements in Item 8 of Part II of this report. For information on our total obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital resources - Future Contractual Obligations" in Item 7 of Part II of this report.

We have assembled a management teamestimate that during 2018, approximately 20% of our consolidated revenue was derived from providing telecommunications, colocation and hosting services outside the United States.

Operations

Organizational Structure

Since the November 1, 2017 closing of CenturyLink's acquisition of us, our operations are integrated into and are reported as part of the segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") has become our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we believe is well suited forfile with the SEC. Otherwise, we do not provide our business objectivesdiscrete financial information to the CODM on a regular basis.

Products and strategy. Our senior management has substantial experienceServices

Global enterprises, governmental entities and regional organizations depend on our wide variety of technologies and the services engineered to work in leadingconjunction with them. These range from specific offerings such as networks or cloud-based application hosting to complex multi-layered engagements where we develop custom solutions involving numerous technologies and professional consulting services. In many cases, enterprises engage with us to outsource many of their IT functions so they can focus on their core business.



While most of our customized customer interactions involve multiple integrated technologies and services, we organize our products and services according to the development, marketingcore technologies that drive them. We report our related revenue under the following categories: IP and sale of communicationsdata services, transport and infrastructure services, voice and collaboration services, other revenue and affiliate revenue, which are described in managing, designingfurther detail below.

IP and constructing metropolitan, intercity and international networks.
Data Services

Recognized Industry Leadership. We have a proven track record among communication service providers for being the first to implement many new technologies, including: global MPLS network in 2001, first global provider with IPV6 natively deployed, first to introduce VoIP and MPLS, and the first converged IP solution.

Global Reach of Our Network. We deliver services to more than 60 countries around the world on our global network. Our network connects and crosses North America, Latin America, Europe and a portion of the Asia/Pacific region.

A Broad Range of Communications Services. We provide a broad range of communications services designed to meet the needs of our customers over our network. Our communications service offerings include:

9
Table of Contents

Internet and data services, which includes Internet access and IP and Ethernet Virtual Private Networks, content distribution services including caching and downloading, streaming as well as video broadcast services;

Transport service, which includes services such as wavelengths and private line services (transoceanic, backhaul, intercity, metro and unprotected private line services) as well as dark fiber in both our intercity and metropolitan networks;

Voice and collaboration services, which includes enterprise or business voice services, wholesale VoIP component services, wholesale voice origination and termination services, voice, web and video conferencing and collaboration services.

Colocation and data center services, which offer high quality data center space where customers can locate servers, content storage devices and communications network equipment in a safe and secure technical operating environment.

Value-added services such as Managed Network Services and Managed Security, including protection against Distributed Denial of Service (DDoS) attacks;
The availability of these services varies by location.
For several years we have been developing services that take advantage of the investment that we have made in our network and that generally target large, existing markets. We have also expanded our existing markets for communications services through the acquisitions that we have completed, which has significantly increased the global reach of our network. Through our efforts we have increased significantly our addressable market by adding new addressable customers as well as new voice and data services that take advantage of the geographic coverage and cost advantages of our network.
Significant Metropolitan Network Platform. As of December 31, 2015, we have metropolitan fiber networks in approximately 350 markets in North America, Europe and Latin America, which currently contain approximately 67,000 route miles. The number of route miles may change in the future as we continue our integration activities related to the tw telecom acquisition. Our metropolitan networks enable us to connect directly to points of traffic aggregation and customer locations and reduce our costs for the termination of our customers’ communications traffic on other carriers’ networks.

End-to-End Network Platform. Our strategy is to deploy network infrastructure in major metropolitan areas and to link these networks with significant intercity and trans-oceanic networks in North America, Europe and Latin America. We believe that the integration of our metropolitan and intercity networks with our colocation facilities will expand the scope and reach of our on-net customer coverage, facilitate the uniform deployment of technological innovations as we manage our future upgrade paths and allow us to grow or scale our service offerings rapidly. We believe that we have a unique combination of:

a substantial intercity and subsea network;

large fiber count metropolitan networks;

global network reach;

substantial colocation & data center facilities;


10
Table of Contents

innovative content distribution technology and services; and

a growing set of security services.

Advanced IP Backbone. We operate one of the largest international IP networks or backbones. Our IP services deliver a broad range of IP transit and network interconnection solutions tailored to meet the varied needs of high bandwidth users.

Extensive Patent Portfolio. Our patent portfolio includes patents covering technologies ranging from data and voice services, to content distribution, to transmission and networking equipment. We utilize our patent portfolio in multiple ways. Developing or acquiring technologies and receiving the legal right to preclude others from using them may give us a competitive advantage. The breadth and depth of our patent portfolio may deter others, particularly telecommunications operators, from bringing patent infringement claims against us for fear of counter-claim by us and enhances our ability to enter into cross-licensing arrangements with other patent holders. We will continue to file new patent applications as we enhance and develop products and services, we will continue to seek opportunities to expand our patent portfolio through strategic acquisitions and licensing, and we will continue to appropriately enforce our patents against infringement by others.

A More Readily Upgradeable Network Infrastructure. We generally endeavor to design new networks to take advantage of technological innovations, incorporating many of the features that are not present in older communications networks. We design the transmission network to optimize aspects of fiber and optronics simultaneously as a system to provide an efficient cost structure for the services that we deliver to our customers. As fiber and optical transmission technology changes, we expect to realize new unit cost improvements by deploying more cost efficient technologies in our network. We believe that our network, process and system design will enable us to provide competitive services to our customers while also lowering our costs to provide those services.

Our Service Offerings
We offer a broad range of communications services. All of our services can be purchased by any of our customers, but some services may not be available in all locations or jurisdictions. The following is an overview description of some of the services that we offer.
Core Network Services. The following are the communications services that are included in our financial reporting of Core Network Services revenue.
IP andVPN Data Services. Data services include Internet Services, virtual private network (“VPN”), content delivery network (“CDN”), media delivery, Vyvx broadcast service and Managed Services.

Internet Services. We offer wholesale and content provider customers with high speed access to the Internet over one of the largest international Internet backbones. Using largely our own intercity and metropolitan networks in North America, Europe and Latin America, we provide customers with high performance, reliability and scalability. Access to the Internet is enabled through interconnection among our customers across our network as well as interconnections with other Internet service provider “peers.”

The service is available stand-alone or in conjunction with managed services offerings, such as Managed Router where we deploy and manage a router that is on the customer premise or our network-based Distributed Denial of Service, or DDoS, Mitigation, which protects our business customers from Internet based DDoS attacks.

11
Table of Contents

VPN Service.Network. Built on our extensive optical transport network, we offer customers the ability to create private point-to-point, point-to-multipoint, and full-mesh networks based on IP VPN, Virtual Private LAN service, or VPLS, Ethernet Virtual Private Line, or EVPL, or MPLS VPN technologies.tailored to our customers’ needs. These services allowtechnologies enable service providers, enterprises and government entities to replacestreamline multiple networks withinto a single, cost-effective solution that simplifies the transmission of voice, video, and data over a single or converged network, while delivering high quality of service and security. These services are used for service provider and corporate data and voice networks, data center networking, disaster recovery and out-of-region or redundant customer connectivity for other service providers. VPN services are sold stand-alone or in conjunction with our managed services offerings.secure network;

Level 3 EthernetInternet Protocol ("IP"). Our Internet Services or E-Services. Provide customersprovide global internet access over a high performance, diverse network with geographically diverse, data intensive networks; scale, flexibility and reliabilityconnectivity in order to meet existing and future networking demands.  Level 3 E-Services encompasses E-Line and E-Access.more than 60 countries with over 72 Tbps of global throughput.

Level 3 E-Line serviceEthernet. isWe deliver a Layer 2robust array of networking services built on Ethernet technology. Ethernet services include point-to-point and point-to-multipointmulti-point equipment configurations that facilitate data transmissions across metropolitan areas and larger enterprise-class wide area networks. Our Ethernet technology is also used by wireless service providers for enterprise network connectivity (Ports 100Mb-10Gb, EVC 2Mbdata transmission via our fiber-optic cables connected to 6Gb).their towers; and

Level 3 E-AccessContent Delivery Network (CDN). Our CDN is supported by a global Point of Presence (PoP) footprint across 104 markets in six continents and directly connected to our IP backbone. CDN service supports in-network acquisition of broadcast channels for Over the Top-Video and Internet TV platforms, and a multi-regional Origin Storage Platform delivers high performance egress and rapid time to first byte. Our CDN is a Layer 2 Carrier Grade Ethernet network-to-network interface (NNI)directly connected to enable Service Providers like carriers, data centersmajor cloud storage platforms. Our Digital Download service provides software download, system update, gaming patch, antivirus files or other digital asset delivery with storage, security, scale, and cloud providers to resell Level 3 Ethernet services to their enterprise customers.

•
Level 3SM E-Line Service with Adaptive Network Control offers secure, high availability and scalable network connections with dynamic bandwidth making it ideal for providing high-speed connections among corporate headquarters, data centers and other business locations around the world to migrate legacy networks and equipment to Ethernet, expand existing WANs and get new applications online faster.

Adaptive Network Control provides added capabilities that are layered on to network services to provide greater visibility, flexibility and control of applications traffic traversing your Metro or Wide Area Network:global reach.

Enhanced Management is real time visibility of end-to-end network performance metrics to assist planning, trouble shootingTransport and fine tuning your network for optimal performance. Available for all managed locations and backed by comprehensive service level agreements.
Infrastructure Services

DynamicWavelength. Bandwidth Capacity, which is the ability to make real-time bandwidth adjustments via the Company’s MyPortal customer portal to address fluctuating traffic demands.

CDN Services. Our content delivery network services combine our IP network, Gateway facilities and patented technology that directs a requestor or end user to the best location or server cluster in our network to retrieve the requested content based on location and network conditions. Our CDN service provides customers with improved performance, economics, scalability, reliability and reach for their web applications. Our caching and download services provide efficient http delivery of large files such as video, software, security patches, audio and graphics to mass audiences. Our streaming service can be used toWe deliver high performance streams, either live or on-demand,bandwidth optical networks to end users using leading proprietary protocols. Each service set provides flexible features to enable customers to control their content delivery to ensure quality end-user

12
Table of Contents

experience, security, freshness and targeting. We also offer storage solutions enabling customers to upload and store content to our network as part offirms requiring an optimized delivery platform. In addition to our delivery services, our patented Intelligent Traffic Management service enables customers to set rules to dynamically route traffic to meet failover or dual vendor objectives.

Media Delivery Service. We offer media delivery service to customers seeking to manage, protect and monetize content delivered over the Internet. Our media delivery service extends supportend-to-end transport solution with Ethernet technology by contracting for online distribution models and operation by providing customers with means to ingest and digitize live video content and to manage the organization and presentation of both live and on demand video to end users via a content management system. Additionally, support for content monetization via paid and advertising supported models is provided. Our media delivery services leverage our content delivery network for the delivery of managed content to end users.
Vyvx Broadcast Service. We offer various services to provide audio and video feeds over fiber or satellite for broadcast and production customers. These services vary in capacity provided, frequency of use (that is, may be provided on an occasional or dedicated basis) and price.

Managed Services. This category includes our complete portfolio of advanced performance and managed services, including professional services. Our teams of professionals work with customers to design and customize solutions that match their strategy and can help customers increase network efficiency, reduce overall operational costs, supplement skill sets, or provide specialist knowledge. Services included Managed Router, Application Performance Management, Managed WAN Optimization, Managed Ethernet Services and a variety of other professional services to meet customer needs. Managed Services are purchased in conjunction with our other network services.

Cloud and IT Services. Our multi-disciplinary cloud services draw on many products across our products that are described above. Our Cloud and IT-based services include Level 3 Cloud Connect Solutions, Communications as a Service and Data Center Services. These solutions are focused on the transport and delivery of enterprise data and applications.

Level 3 Cloud Connect Solutions. Level 3 Cloud Connect Solutions create a secure, reliable path for customers to realize the efficiency, scalability and flexibility of the cloud, providing a private network that connects enterprises with leading cloud and data center providers around the world, including Amazon Web Services (AWS), Google Cloud Platform and Microsoft Azure ExpressRoute.

Communications as a Service (CaaS). Our Communications as a Service (CaaS) product offering delivers a Session Initiated Protocol, or SIP, based audio collaboration and on-net web conferencing over a virtual private network using a hosted model.

Transport and Fiber Services. Transport services include wavelengths, private lines, transoceanic services, and dark fiber, as well as related professional services. These services are available across our metropolitan and intercity fiber network. Wavelength services provide unprotected point-to-point connections of a fixedscalable amount of bandwidth with Ethernetconnecting sites or SONET interfaces. Wavelength services are available at a range of speeds from 1 Gbpsproviding high-speed access to more than 100 Gbps. This service offering targets customers that require significant amounts of bandwidth, desire more direct control and provide their own network management. Private line services are also point-to-point connections of dedicated bandwidth but include SONET or Synchronous Digital Hierarchy (SDH) protection to provide

13
Table of Contents

resiliency to fiber or equipment outages. Private line services are available in a wide range of speeds with electrical, optical and Ethernet interfaces. We also provide transport services within our transatlantic cable system connecting North America, Europe and Latin America as well as via leased bulk capacity on other transoceanic systems. International backhaul transport services, interconnecting cable landing stations and our terrestrial North American, European and Latin American networks, are also available.

Our dark fiber service provides carriers, service providers, government entities and enterprises a fiber solution when unique applications, control or scale requirements make this service desirable. This includes fiber, colocation space in our Gateways and in our network facilities, power and physical operations and maintenance of the fiber and associated infrastructure. Professional services related to our transport and fiber services include network architectural design, engineering, installation and turn-up, ongoing network monitoring and management services, and field technical services.
Voice Services. We offer a broad range of local and enterprise voice services including VoIP (Voice over Internet Protocol) services and traditional circuit-switch based services. Our local and enterprise voice services include VoIP enhanced local service, SIP Trunking, local inbound service, Primary Rate Interface (“PRI”) service, long distance service, toll free service and a comprehensive suite of audio, web and video collaboration services. The following is a general description of our voice services. Some of the following services are also offered to our wholesale voice customers. For financial reporting purposes, voice services also include our collaboration services that are described below.

VoIP Enhanced Local. Our VoIP enhanced local service is a VoIP service that enables broadband cable operators, IXCs, voice over IP providers, and other companies operating their own switching infrastructure to launch IP-based local and long-distance voice services via any broadband connection.

SIP Trunking. SIP Trunking is a VoIP-based local phone service offered to medium and large enterprises as a replacement for traditional fully featured enterprise TDM voice services. SIP Trunking allows customers with an IP PBX to manage calls to and from the PSTN without having to purchase traditional access lines dedicated to voice.

Local Inbound. Our local inbound service terminates traditional telephone network originated calls to Internet Protocol termination points. This one-way service is sold primarily to customers, such as call centers, conferencing providers, voice over IP service providers and enterprises to only receive calls at their locations. The customers can obtain telephone numbers from us or port-in local telephone numbers that the customer already controls. These local calls are then converted to IP and transported over our backbone to a customer’s IP voice application at a customer-selected IP voice end point.

Enterprise Long Distance. Our long distance service portfolio consists of local and long distance transport and termination services. Medium and large enterprises purchase our long distance services for their corporate calling or outbound contact center needs. All Level 3 long distance services are offered at the customer’s option over circuit switch or softswitch technologies.

Enterprise Toll Free. Our toll free service terminates toll free calls that are originated on the traditional telephone network. These toll free calls are carried over either a circuit switch or softswitch network and delivered to customers in Internet Protocol or traditional TDM format.

14
Table of Contents

Collaboration Services. We offer a comprehensive suite of audio, web and video collaboration services, which include the following services:

Audio Conferencing. Ready-Access®, our on-demand/reservation less audio conferencing service, provides toll free access in key business markets worldwide. We also provide operator-assisted, full-service conference calls where participants can access our service by dialing in on either a toll or a toll-free number, or by being dialed out to by an operator.

Web Conferencing. Our Ready-Access Web Meeting is fully integrated with Ready-Access audio conferencing for on-demand collaboration, allowing customers to manage their calls on-line, change account options, share presentations with participants and record entire meetings, including visuals. eMeeting is a full-featured Web conferencing application that allows customers to collaborate and share documents, presentations, applications, data and feedback with polling and instant messaging features. Live Meeting service uses technology licensed from Microsoft® to allow multiple attendees to participate in meetings using only their computer, a phone, and an Internet connection. We have integrated Ready-Access as an audio conferencing component into Live Meeting.

Videoconferencing Service. Our videoconferencing service provides video over IP and ISDN platforms, using multi-point bridging to connect multiple sites. Enhanced options available with our videoconferencing services include scheduling, recording and hybrid meetings that combine our audio and video services.cloud computing resources;

Colocation and Data Center Services. Colocation and Data Center services includeWe provide different options for organizations’ data center facilities and services including cloud, hosting, and application management solutions. Our data center facilities offer high quality, data center space where customers can locate servers, content storage devices and communications network equipment in a safe and secure technical operating environment. In addition, we offer high-speed, reliable connectivity to our network and to other networks, including metro and intercity networks, the traditional public switched telephone network and the Internet.needs. Our data center services range from dedicated hosting and cloud services to more complex managed solutions, including disaster recovery, business continuity, applications management support and security services to manage mission critical applications.applications;

Security Services. Dark FiberAlso reported. We possess an extensive array of unlit optical fiber, known as “dark fiber.” Many large enterprises are interested in building their networks with this category, Level 3 Security Solutions can be usedhigh-bandwidth, highly secure optical technology and the dark fiber option gives them exclusive access to enable customersthe technology. We provide professional services to address the growing threat of cyber-attackengineer these networks and allow customers to create a secure network, safeguard brand value, enable business continuity, and avoid complexity and cost. Our Security Services include: Secure Access which provides secure and encrypted connectivitymanage them for mobile users or remote offices; Cloud and Premises based Managed Firewall and Unified Threat Management Services including Intrusion Prevention and Detection service and Web Content filtering; network-based Distributed Denial of Service (DDoS) Mitigation, which protects against Internet based DDoS attacks; and Security Consulting services for Governance, Risk Management and Compliance. Security Services are sold stand-alone or in conjunction with Data Services.many customers;

Wholesale VoicePrivate Line. We deliver a private line (including business data services), a direct circuit or channel specifically dedicated for connecting two or more organizational sites. Private line service offers a high-speed, secure solution for frequent transmission of large amounts of data between sites, including wireless backhaul transmissions;

Professional Services. Our Wholesale experts deliver a robust array of consulting services to organizations either as part of a larger engagement or as stand-alone services. This category includes network management, installation and maintenance of data equipment, the building of proprietary fiber-optic networks for government and business customers.



Voice and Collaboration Services include

Voice. We offer a complete portfolio of traditional Time Division Multiplexing (TDM) voice terminationservices to businesses and enterprises including Primary Rate Interface (“PRI”) service, local inbound service, switched one-plus, toll free, service. Theselong distance and international services;
Voice Over IP (VoIP). We deliver a broad range of local and enterprise voice and data services share many of the same features as thebuilt on VoIP (Voice over Internet Protocol) technology. Our local and enterprise voice services described above.
Voice Termination. Our wholesaleinclude VoIP enhanced local service, national and multinational SIP Trunking, Hosted VoIP, support of Primary Rate Interface (“PRI”) service, long distance offer include domesticservice, and international voice termination services targeted to IXCs, wireless providers, local phone companies, cable companies, resellerstoll-free service; and voice over IP providers.

15
Table of Contents


Toll Free. As with Enterprise Toll Free, Level 3’s wholesale Toll Free service terminates toll free calls that are originated on the traditional telephone network. Customers for these services include call centers, conferencing providers, and voice over IP providers.

Collaboration. We deliver collaboration capabilities partnered with leading technology providers including Cisco, Microsoft, and Amazon. Collaboration elements (audio, video, web) are seamlessly integrated providing a simple solution that is easy to manage as businesses grow and change. Our priority remainsexpertise and ongoing partnership with technology leaders like Cisco, Microsoft and AWS provides enterprises with the flexibility to protectselect and adopt the confidentialityright solution and latest innovation. Audio, web and video conferencing services are also available

Affiliate revenue

Affiliate Services. We provide our affiliates with telecommunication services that we also provide to external customers. Please see our products and services listed above for further description of these services.

From time to time, we may change the categorization of our customers’ data,products and to protect and secure our network. In addition, it is our policy and our practice to comply with laws in every country where we operate, and to provide government agencies access to customer data only when we are compelled to do so by the laws in the country where the data is located. We will continue to operate our global network in this manner to comply with applicable laws and the regulatory requirements of the telecommunications industry.services.

Additional Information

For a discussion of certain geographicfurther information regardingon regulatory, technological and competitive factors that could impact our revenue, from external customerssee "Regulation" and long-lived assets"Competition" under this Item 1 below and a discussion of"Risk Factors" under Item 1A below. For more information on the financial information and operating segments, please see the notes to our consolidated financial statements appearing elsewhere in this annual report on Form 10-K. For a discussioncontributions of our communications revenue, pleasevarious services, see Item 7, “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations” appearing laterOperations" in Item 7 of Part II of this Form 10-K.report.

Our management continuesNetwork

Most of our products and services are provided using our telecommunications network. A substantial portion of our equipment operates with licensed software.

We continue to reviewenhance and expand our existing linesnetwork by deploying various 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 technology and customer demands, including demands for enhanced digitization, automation and customer self-service capabilities.

Like other large communications companies, we are a constant target of cyber-attacks of varying degrees, which has caused us to spend increasingly more time and money to deal with increasingly sophisticated attacks. Some of the attacks result in security breaches, and we periodically notify our customers, our employees or the public of these breaches when necessary or appropriate. None of these resulting security breaches to date have materially adversely affected our business, and service offeringsresults of operations or financial condition.

Similarly, like other large communication companies operating complex networks, from time to determine how those lines of business and service offerings align with our strategy and our financial objectives. This exercise takes placetime in the ordinary course of our business. Tobusiness we experience disruptions in our service. Although none of these outages have thus far materially adversely affected us, certain of these outages have resulted in regulatory fines, negative publicity, service credits and other adverse consequences.


We rely on several other communications companies to provide our offerings. We lease a portion of our core fiber network from our competitors and other third parties. Many of these leases will lapse in future years. A portion of our services are provided by other carriers under agency agreements or through reselling arrangements with other carriers. Our future ability to provide services on the extent that certain linesterms of business or serviceour current offerings are not considered to be compatible with our strategy or with our financial objectives, we may exit those lines of business or stop offering those serviceswill depend in part upon our ability to renew or in whole.
Our Distribution Strategy
Our customers generally include the following types of customers: Enterprises; Content; Governmentreplace these leases, agreements and Wholesale. Our enterprise customers include:
large multinational customers;
larger enterprises that purchase communications services in a mannerarrangements on terms substantially similar to carriers;
enterprises that purchase communications services on a regional or local basis;
portals and large search enterprises;
regional service providers;
systems integrators; and
software service providers.those currently in effect.

For additional information regarding our systems, network, assets, network risks, capital expenditure requirements and reliance upon third parties, see "Risk Factors," generally, in Item 1A of Part I of this report, and, in particular, "Risk Factors—Risks Affecting Our Content customers comprise subgroupsBusiness" and "Risk Factors—Risks Affecting Our Liquidity and Capital Resources." For more information on our properties, see Item 2 of customers including:
Digital Entertainment, such as providersPart I of online gaming; social networking providers; technology companies that enable digital advertising and digital ad agencies; and companies that provide video over the Internet;this report.

Media
Patents, Trade Names, Trademarks and Entertainment, such as media conglomerates; programmers; studios and production companies; and broadcast station ownership groups; and

16
Table of Contents


Sports teams (professional and college); and stadiums and venues.Copyrights

Our Government customers include U.S. Federal government departments and agencies, the government departments and agencies of other countries around the world, U.S. states and municipalities as well as research and educational consortia.
Our Wholesale customers include domestic and international carriers; voice service providers, which include calling card companies, conferencing providers, and contact centers that use VoIP technology to better manage costs and enable advanced applications; wireless providers; and broadband cable television operators.
To implement our strategy and reach our target large, multinational enterprise customers, we have established a Global Account Management team, which operates across our regions. In North America we have also implemented a General Manager sales model to target enterprises that are not Global Account Management accounts and government customers, where sales leaders manage sales, sales support, marketing, service delivery, service assurance, network planning and financial personnel. In North America, we also use an inside or call center based sales force, and indirect sales channels of third-party agents to reach our target customers.
In EMEA and Latin America, our sales teams use a combination of a direct sales force, an inside or call center based sales force, and indirect sales channels of third-party agents.
The specific elements that we use to reach our target customers depend upon the nature of the customers that are being targeted.
Our sales functions are supported by dedicated employees in sales and customer target marketing. These sales functions are also supported by centralized service or product management and development, general or corporate marketing, network services, engineering, information technology, and corporate functions including legal, finance, strategy and human resources.
For the year ended December 31, 2015, our top ten communications customers represented approximately 16% of our total revenue.
For a discussion of certain geographic information regarding how we manage our business, please see the discussion under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing later in this Form 10-K.
Our Communications Network
Our network is an advanced, international, facilities based communications network. We primarily provide services over our own facilities. As of December 31, 2015, our network encompasses:
approximately 106,000 intercity route miles in North America, Europe and Latin America;

metropolitan fiber networks in approximately 350 markets containing approximately 67,000 route miles;

approximately eight million square feet of Gateway and transmission facilities in North America, Europe and Latin America;

more than 360 colocation and data center facilities globally;

approximately 33,000 route miles of subsea optical fiber cable systems; and

17
Table of Contents

more than 60 countries in service around the world.

Terrestrial Intercity Networks. Our intercity network covers approximately 70,000 route miles in North America, 26,000 route miles in Europe, and 10,000 route miles in Latin America as of December31, 2015. We may eliminate specific routes or duplicate routes as we continue to look at opportunities to optimize our cost structure and remove unnecessary cost. Our intercity network generally includes the following characteristics:
Optical fiber strands designed to accommodate Dense Wave Division Multiplexing, or DWDM, transmission technology. Our optical fiber strands are designed to accommodate DWDM technology. We believe that the installation of newer optical fibers will allow a combination of greater wavelengths of light per strand, higher transmission speeds and longer physical spacing between network electronics. We also believe that each new generation of optical fiber will allow increases in the performance of these network design aspects and will therefore enable lower unit costs.
High speed intercity DWDM equipment. Our high speed intercity DWDM equipment provides high quality, reliable and cost effective transmission across our fiber backbone. We are continually evaluating advancements in technology that will enable us to scale, lower our cost and provide higher speed services over our intercity network. We believe that the market will continue to move toward Ethernet based services and higher speed interfaces. Through our technology evaluations we believe that we have positioned ourselves to be able to deliver these capabilities for both our own IP network needs as well as those of our customers.
Open, non-proprietary hardware and software interfaces. Our intercity network is designed to maximize the use of open, non-proprietary hardware and software interfaces to allow less costly upgrades as hardware and software technology improves.
Local Market Infrastructure. Our local facilities include fiber optic metropolitan networks connecting our intercity network and Gateways to buildings housing communications intensive end users, enterprise customers and traffic aggregation points-including ILEC and CLEC central offices, long distance carrier points-of-presence or POPs, cable head-ends, wireless providers’ facilities and Internet peering and transit facilities. Our high fiber count metropolitan networks allow us to extend our services directly to our customers’ locations at low costs, because the availability of this network infrastructure does not require extensive multiplexing equipment to reach a customer location, which is required in ordinary fiber constrained metropolitan networks. As of December 31, 2015, we had approximately 58,000, 3,200 and 6,200 route miles of metropolitan fiber networks in North America, Europe and Latin America, respectively, and had operational, facilities based, local metropolitan networks in 229, 67, 55 and 2 markets in North America, Europe, Latin America and Asia, respectively. As we continue to integrate the tw telecom acquisition, we may eliminate specific and/or duplicate routes as we continue to look at opportunities to reduce and/or optimize our network cost structure.
We operate approximately eight million square feet of space for our Gateway and transmission facilities. Our initial Gateway facilities were designed to house local sales staff, operational staff, our transmission and Internet Protocol routing, Content Delivery Networks and voice switching facilities and technical space to accommodate colocation services that is, the colocation of equipment by high-volume Level 3 customers, in an environmentally controlled, secure site with direct access to Level 3’s network generally through dual, fault tolerant connections. As of December 31, 2015, we had more than 250 colocation facilities in North America, approximately 90 colocation facilities in Europe, and approximately 15 colocation facilities in Latin America.
Most of these facilities offer a complete set of data center services ranging from housing and hosting, to more complex managed solutions, including disaster recovery, applications management, business continuity, and security services to manage mission critical applications.

18
Table of Contents

Transoceanic Networks. We own a number of subsea fiber optic cable systems, including Atlantic Crossing-1 (“AC-1”), Atlantic Crossing-2 (“AC-2”), Mid-Atlantic Crossing (“MAC”), South American Crossing (“SAC”), Pan American Crossing (“PAC”) and an approximately 300 route mile system connecting the U.K. and Ireland. AC-1 and AC-2 link our European network to our North American intercity network and each of AC-1 and Yellow (AC-2) consists of four fiber strand pairs. MAC provides a strategic gateway between the Eastern Seaboard of the U.S. and our Latin America assets, a route that is experiencing acute demand growth. SAC connects major markets throughout Latin America and is one of only two sub-sea systems currently in operation that circumnavigates the majority of South America. PAC is integrated with a 2,300 mile terrestrial ring route (including associated backhaul) within Mexico, as well as an extension to Costa Rica.
We also own capacity in the TAT-14 transatlantic cable system. In addition, we purchased 700 Gigabits of transatlantic capacity from Apollo Submarine Cable System Ltd. We have acquired an additional one Terabit of capacity on the Apollo South cable system, which will be drawn down over a multi-year period. We also are an owner of the Japan-US, and China-US cable systems, an indefeasible right of use, or IRU, holder on the Southern Cross cable system extending from Australia to California, as well as an owner of the Americas II cable extending from Florida to Brazil, and an IRU holder on the Arcos system in the Caribbean. In addition, we own capacity on the Reliance-Globacom transatlantic system Flag Atlantic-1 and capacity on the Hibernia transatlantic cable system.
Content Acquisition and Distribution Services Architecture. Content distribution network, or CDN, describes a system of computers networked together across the Internet to provide content to users in the most efficient manner to enable an optimal user experience. In a CDN, nodes or groups of computers are deployed in multiple locations closer to the end user, also known as the “edge of the network” and cooperate with each other to satisfy requests for content by end users, transparently moving content behind the scenes to optimize the delivery process. Requests for content are directed intelligently through sophisticated software applications to nodes that provide optimal performance for end users.
The CDN platform directs network traffic across our existing physical network and infrastructure. The CDN platform is composed of the edge server or computer that provides caching and streaming functions, and the global server that provides load balancing-that is, a computer that directs the traffic to the most efficient edge server to meet the end user’s request. The edge server enables the storage of popular content in a location that is closer to the end user and thereby reduces bandwidth requirements and improves response times for that stored content.
The Vyvx platform transmits audio and video programming for our customers over our fiber optic network and via satellite. We use our network to carry many live traditional broadcast and cable television events from the site of the event to the network control centers of the broadcasters of the event.
Our Patent Portfolio
Through acquisitions and throughor our own research and development, as of December 31, 2018, we have more than 1,000had approximately 1,800 patents and patent applications in the United States and around the world, asother countries. Our patents cover a wide range of December 31, 2015. Our patent portfolio includes patents covering technologies, ranging fromincluding those relating to data and voice services, to content distribution toand transmission and networking equipment.
In addition to the patents and patent applications we own, we
We have also received licenses to use patents held by others, including through acertain extensive cross-license agreement with IBM entered into in December 2007, giving us access to technology covered by IBM’s approximately (at that time) 42,000 patents covering many technologies relevant to our business. While patentsarrangements. Patents give us the right to prevent others, particularly competitors, from using our proprietary technologies, patenttechnologies. Patent licenses give us the freedom to operate our business without the risk of interruption from the holder of the patent that has been licensedpatented technology. We plan to us.

19
Table of Contents

We use our patent portfolio in a number of ways. First, developing or acquiring technologies and receiving the legal right to preclude others from using them may give us a competitive advantage. Second, the breadth and depth of our patent portfolio may deter others, particularly telecommunications operators, from bringing patent infringement claims against us for fear of counter-claim by us. Most of the patent infringement suits brought against us to date have been initiated by patent-holding companies who do not operate telecommunications businesses and who are less likely to be subject to a counter-claim of infringement by us. Finally, the extensiveness of our patent portfolio gives us the option to cross-license with others having similarly broad portfolios on terms acceptable to us, mitigating the risk that others will wish to assert patent infringement claims against us.
We will continue to file new patent applications as we enhance and develop products and services, and we willplan to continue to seek opportunities to expand our patent portfolio through strategic acquisitions and licensing and we will continue to appropriately enforce our patents against infringement by others.licensing.
Business Support Systems
We believeperiodically receive offers from third parties to purchase or obtain licenses for patents and other intellectual property rights in exchange for royalties or other payments. We also periodically receive notices, or are named in lawsuits, alleging that itour products or services infringe on patents or other intellectual property rights of third parties. In certain instances, these matters can potentially adversely impact our operations, operating results or financial position. For additional information, see “Risk Factors—Risks Affecting Our Business” in Item 1A of Part I of this report, and Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report.

Sales and Marketing

We maintain local offices in most major and secondary markets within the U.S. and in most of the larger population centers within our local service area and in many of the primary markets of the more than 60 countries in which we provide services. These offices provide sales and customer support services. We also rely on our channel partners to promote sales of services that meet the needs of our customers. Our sales and marketing strategy is important to streamline and simplifyenhance our processes and systems. To pursue our business strategies, we have developed and are continuing to develop and implement a set of integrated software applications designed to automate our operational processes. These development activities also relatesales by offering solutions tailored to the integration of the systems that were used by the companies that we have acquired. Through the developmentneeds of our business support systems, we believe that we havevarious customers and promoting our brands. To meet the opportunity to obtain a competitive advantage relative to traditional telecommunications companies. In addition, we recognize that for the successneeds of certain ofdifferent customers, our offerings include both stand-alone services that some of our business support systems will need to be easily accessible and usable directly by our customers.
We are currently developing and deploying a unified set of simplified processes and systems that have been designed to streamline and synchronize our service, sales and operational functions. These processes and systems have beenbundled services designed to provide improved capability in service catalog management, sales opportunity management, customer management, quoting, order entry, order workflow, physical and logical network inventory management, service management, and financial management.
Key design aspectsa complete offering of the business support system development program are:
integrated modular applications to allow us to upgrade specific applications as new services are available;services.

Our sales and marketing approach to our business customers includes a scalable architecture that allowscommitment to provide comprehensive communications and IT solutions for business, wholesale and government customers of all sizes, ranging from small business offices to the world's largest global enterprise customers. We strive to offer our business customers stable, reliable, secure and third-partytrusted solutions. Our marketing plans include marketing our products and services primarily through direct sales channel partners direct access to certain functions that would otherwise have to be performed byrepresentatives, inbound call centers, telemarketing and third parties, including telecommunications agents, system integrators, value-added resellers and other telecommunications firms. We support our employees;distribution through digital advertising, events, website promotions and public relations.



phased completion of software releases designed to allow us to test functionality on an incremental basis;Regulation

“web-enabled” applications so that on-line access to order entry, network operations, billing, and customer care functions are available to all authorized users, including our customers;Overview

use of a service-oriented architecture that is designed to separate data and applications, and is expected to allow reuse of software capabilities at minimum cost;

use of pre-developed, commercial “off-the-shelf” applications or Software as a Service (SaaS), where applicable, which will interface with our internally developed applications; and

20
Table of Contents

creation of a mobility solution for useOur domestic operations are regulated by sales and certain operational functions to improve productivity and customer experience.

Competition
The communications industry has been and remains highly competitive. In the late 1990s and the early 2000s, significant new capacity was deployed by both existing and new entrants. This oversupply led to a period of financial restructuring and industry consolidation. Given the significant economies of scale inherent in the communications industry, we believe further consolidation may occur such as Verizon’s recently announced acquisition of XO.
Our primary competitors are long distance carriers, ILECs, CLECs, Post Telephone and Telegraphs, or PTTs, companies that operate Content Delivery Networks, or CDNs, and other companies such as cable companies, that provide communications services. The following information identifies some key competitors for each of our service offerings.
Our key competitors for our IP and data services include Verizon, AT&T, XO, NTT, Tata and Cogent in North America, and BT, Orange, TeliaSonera and Tata in Europe. In Latin America, our main competitors are Telefonica, Telmex and national incumbent telecommunications carriers.
For transport and fiber services, our key competitors in North America are other facilities based communications companies including AT&T, Verizon, CenturyLink, Zayo, and XO. In Europe, our key competitors are other carriers such as PTT companies, BT, Orange, Vodafone, TeliaSonera, Colt, Interoute, KPN and Belgacom. In Latin America, our main competitors are Telefonica, Telmex and national incumbent telecommunications carriers.
For voice services our key competitors are other providers of communications services including
AT&T, Verizon, CenturyLink, CLECs and national incumbent telecommunications carriers.
For our colocation and datacenter services, our key competitors are other facilities based communications companies, and other colocation providers such as web hosting companies and third-party colocation companies. In North America, these companies include Equinix, Terremark (Verizon), and CoreSite. In Europe, competitors include Equinix, Global Switch, InterXion, Telecity and Telehouse Europe. In Latin America, our largest competitors include Telefonica, Telmex, and IBM.
For CDN services, our key competitors include Akamai Technologies, Limelight Networks, Amazon, Edgecast Networks (Verizon), Fastly and CDNetworks.
For security services, our key competitors include Akamai, Verizon, CenturyLink, AT&T and Cloudflare.
In the enterprise and government markets, our key competitors in North America include ILECs (such as AT&T, Verizon and CenturyLink) and CLECs (such as XO). In Europe, they include BT, Vodafone, Deutsche Telekom and Orange. In Latin America, competitors include Telefonica and Telmex.
The communications industry is subject to rapid and significant changes in technology. For instance, periodic technological advances permit substantial increases in transmission capacity of both new and existing fiber, and the introduction of new products or emergence of new technologies may reduce the cost or increase the supply of certain services similar to those which we plan on providing. Accordingly, in the future our most significant competitors may be new entrants to the communications industry, such as content companies that have existing significant customer bases and substantial cash resources that are greater than ours, and, unlike the traditional incumbent

21
Table of Contents

carriers we also compete with, would not be burdened by an installed base of outmoded or legacy equipment.
Regulation
U.S. Regulation
Federal Regulation
The Federal Communications Commission (“FCC”(the “FCC”) has jurisdiction over, various state utility commissions and occasionally by local agencies. Our non-domestic operations are regulated by supranational groups (such as the European Union), national agencies and, frequently, state, provincial or local bodies. Generally, we must obtain and maintain operating licenses from these bodies in most areas where we offer regulated services.

The following description discusses some of the major industry regulations that affect our operations, but numerous other regulations not discussed below also have a substantial impact on us. For additional information, see "Risk Factors" in Item 1A of Part I of this report.

Federal Regulation of Domestic Operations

General

The FCC regulates the interstate and international communications services. We have obtainedAdditionally, the FCC approvalregulates a number of aspects of our business related to landprivacy, public safety and network infrastructure, including our transoceanic cables in the United States. We have also obtained FCC authorizationaccess to provide internationaland use of local telephone numbers and our provision of emergency 911 services. Level 3 provides competitive services on a facilities and resale basis, as well as via various wireless licenses. Under the Telecommunications Act of 1996 (the “1996 Act”), any entity, including cable television companies and electric and gas utilities, may enter any telecommunications market,that are generally not subject to reasonable stateregulation to the same degree as incumbent local exchange carriers (“ILECs”).

In April 2017, the FCC revised the regulation of safety, quality and consumer protection. The United States House of Representatives Energy and Commerce Committee recently began to consider revising and updating the 1996 Act, including potential changes to the FCC, its jurisdiction and its organizational structure. It is too early in this process for us to either predict any modifications that might be made to the 1996 Act as part of this process, their effects on us, or the pace at which this process may proceed.
The 1996 Act previously required certain tariffs to define the services, terms, and conditions under which said services were to be offered. Subsequent deregulatory measures have eliminated some tariff requirements for competitive services.
Accordingly, as of August 1, 2001, our tariffs for interstate end user services were eliminated and our tariffs for international interexchange services were eliminated on January 28, 2002. Our rates must still be “just and reasonable” and “nondiscriminatory” under the 1996 Act. Our state tariffs remain in place where required (some states do not have, or have eliminated, the requirement to file certain tariffs). We have historically relied primarily on our sales force and marketing activities to provide information to our customers regarding these matters and expect to continue to do so. Further, in accordance with certain FCC tariff filing requirements, we maintain a schedule of our rates, terms and conditions for our domestic and international private line services on our web site.
Special Access Regulation. Special access services are “lit” loop or transport facilities that support the transmissionprovision of data on a point-to-point basis, often referredservices by ILECs to as “private lines.”businesses providing greater freedom to respond to competition for these business data services. Level 3 purchases a substantialsignificant amount of special accessthese services from ILECsILECs. Several parties appealed the FCC's decision and other telecommunications carriers to reach customer premises and, less frequently, to support interoffice transport requirements. In addition, Level 3 provides special access services to end user customers and to other carriers via its own network and/or through the resale of other carriers’ special access services.
In January 2005, the FCC commenced an examinationresulting remand proceedings remain pending. The ultimate impact on us of the regulatory framework governing the rates, terms, and conditions under which ILECs subject to “price cap” regulation provide interstate special access services. In this rulemaking, the FCCFCC's recent actions is reviewing both the price cap regime by which ILEC special access rates are set in most areas, as well as the “pricing flexibility” regime under which ILECs have obtained, in so-called “phase I” areas, the ability to enter into more individualized relationships with customers and to lower prices, and in so-called “phase II” areas, the ability to raise prices based upon certain threshold showings of the presence of competitors in a specific geographic and product market. In August 2012, the FCC froze further grants of phase II pricing flexibility. In December 2012, the FCC issued an order stating that it will gather additional data on a mandatory basis from both providers and purchases of special access services so that it can conduct a comprehensive evaluation of the state of competition in the special access market. Responses to these additional, mandatory data requests were made in early 2015,

22
Table of Contents

but we cannot predict when the FCC will complete its review of the data submitted. In addition, the FCC has commenced a review to determine whether certain tariff terms of price cap ILECs, known in the industry as “demand lock-up” terms, are anticompetitive and therefore unlawful. We cannot predict if or when the FCC will complete its review or its outcome.currently unknown.
Network Neutrality and Open Internet. On February 26, 2015, the FCC adopted its most recent Open Internet order, the Open Internet Remand Order. The 2015 Order prohibits broadband providers from: blocking access to lawful content; impairing or degrading (also known as throttling) Internet traffic; prioritizing some content over other content in exchange for payment or other consideration; or unreasonably interfering with or disadvantaging the ability of users to access lawful content. The 2015 Order also provides the Commission with authority to hear complaints regarding interconnection disputes with broadband providers. The 2015 Order has been challenged in court. We cannot predict the outcome of that challenge, but we expect it to be decided in 2016. There have also been a variety or legislative efforts to water down the 2015 Order. We cannot predict the outcome of those legislative initiatives.
IP Interconnection. We have noted IP interconnection and congestion disputes with last mile bottleneck broadband providers, some of which historically refused to augment (or add) bandwidth at congested interconnection links between our respective networks (which is known to degrade the quality of third party content) without the payment of tolls unilaterally dictated by the broadband supplier. During 2015, we concluded improved IP Interconnection agreements with several large broadband providers, some of which were announced publically. We cannot predict at this time whether these arrangements will in all cases provide us with sufficient last mile interconnection capacity to avoid Internet congestion as the Internet continues to grow and/or when these agreements expire. The FCC’s current Open Internet rules provide Level 3 a forum to lodge interconnection disputes with the FCC for resolution, but how such disputes would be resolved, as well as the future of these Open Internet Rules, is unclear (see “Network Neutrality and Open Internet” discussion immediately above).
Intercarrier Compensation. Telecommunications carriers compensate one another for traffic carried on each other’s networks. Interexchange carriers pay access charges to local telephone companies for long distance calls that originate and terminate on local networks. Local telephone companies typically charge one another for local and Internet-bound traffic terminating on each other’s networks. The methodology by which carriers compensate one another for exchanged traffic, whether it be for local, intrastate or interstate traffic, has been under review by the FCC for over a decade.
In November 2011, the FCC released its Universal Service Fund/Intercarrier Compensation Transformation Order (USF/ICC Transformation Order). Along with addressing other matters, the USF/ ICC Transformation Order established a prospective intercarrier compensation framework for terminating switched access and VoIP traffic. Under the USF/ICC Transformation Order and subsequent related FCC orders, most terminating switched access charges and all reciprocal compensation charges were capped at then-current levels, and will be reduced to zero over, as relevant to Level 3, generally a six year transition period that began July 1, 2012.

Level 3 maintains approximately 300 interconnection agreements with other telecommunications carriers. These agreements set out the terms and conditions under which the parties will exchange traffic. The largest agreements are with AT&T and Verizon. Most of Level 3’s agreements with AT&T and Verizon have expired terms but remain effective in evergreen status. As these and other interconnection agreements expire, we will continue to evaluate simply allowing them to continue in evergreen status (so long as the counterparty allows it) or negotiating new agreements. Any renegotiation would involve uncertainty as to the final terms and conditions, including the compensation rates for various types of traffic. In addition, changes in law, including

23
Table of Contents

FCC orders, may allow or compel us to renegotiate current and successor interconnection agreements over the next year.
Intercarrier Compensation/VoIP. Pursuant
Broadband Regulation

In February 2015, the FCC adopted an order classifying Broadband Internet Access Services (“BIAS”) under Title II of the Communications Act of 1934 and applying new regulations. In December 2017, the FCC voted to repeal most of those regulations and the USF/ICC Transformation Order, VoIP, while remaining unclassifiedclassification of BIAS as either an informationa Title II service and to preclude states from imposing substantial regulations of their own on broadband. Opponents of this change have appealed this action in federal court and have advocated in favor of re-instituting regulation of Internet services under Title II of the Communications Act. Several states have also opposed the change and have initiated state executive orders or a telecommunicationsintroduced legislation focused on state-specific Internet service was prospectively categorized as either local or non-local traffic. If “local”, then VoIP trafficregulation. The result of these appeals is subjectpending and the potential impact to reciprocal compensation; if “non-local”, then it is subject to interstate rates, thus eliminating any intrastate access rate applicable to VoIP. The USF/ICC Transformation Order did not address the treatment of VoIP retroactively. Level 3 is involved in a number of intercarrier compensation disputes dealing with the rating of VoIP traffic. During 2015, the FCC issued clarifications concerning the rating of VoIP traffic that were favorable to Level 3. Those clarifications have been appealed, and at this time, we cannot predict the outcome of these appeals.currently unknown.
Other VoIP Regulation. The FCC has imposed various regulatory requirements on VoIP providers that had previously been applicable only to traditional telecommunications providers, such as obligations to provide 911 functionality, contribute to the federal universal service fund, to comply with regulations relating to local number portability (including contributing to the costs of managing number portability requirements), to abide by the FCC’s service discontinuance rules, to contribute to the Telecommunications Relay Services fund, and to abide by the regulations concerning Customer Proprietary Network Information and the Communications Assistance for Law Enforcement Act. In addition, a number of state public utility commissions are conducting regulatory proceedings that could affect our rights and obligations with respect to IP-based voice applications. Specifically, some states have taken the position that the “local” component of VoIP service is subject to traditional regulations applicable to local telecommunications services, such as the obligation to pay intrastate universal service fees. We cannot predict whether the FCC or state public utility commissions will impose additional requirements, regulations or charges upon our provision of services related to IP communications.
Intercarrier Compensation/Wireless. There are currently a number of lawsuits ongoing in the United States concerning the intercarrier compensation charges applicable to certain wireless telephone calls, how to determine whether those calls were local or long distance under the applicable rules, and what statute of limitations applies to such claims. We are defendants in certain of these lawsuits, and are potential plaintiffs in others. As with any litigation, the outcome of this litigation is difficult to predict.
Universal Service. Level 3 is subject to federal and state regulations that implement universal service support for access to communications services in rural and high-cost areas and to low-income consumers at reasonable rates; and access to advanced communications services by schools, libraries and rural health care providers. The FCC assesses Level 3 a percentage of interstate and international revenue it receives from retail customers as its contribution to the Federal Universal Service Fund, which assessments are generally passed on to our customers. Additionally, the FCC has ruled that states may assess contributions to their state Universal Service Funds from VoIP providers. Any change in the assessment methodology may affect Level 3’s revenue and expenses, but at this time it is not possible to predict the extent we would be affected, if at all.
Network Security Agreement. In connection with the acquisition of Global Crossing, we entered into an agreement (the “Network Security Agreement”) with certain agencies of the U.S. Government to address the U.S. Government’s national security and law enforcement concerns. The Network Security Agreement is intended (i) to ensure our ability to carry out lawfully authorized U.S. Government electronic surveillance of communications that originate and/or terminate in the U.S.; (ii) to prevent and detect access to and use of U.S. communications; and (iii) to satisfy U.S. critical infrastructure protection requirements. Failure to comply with our obligations under the Network Security Agreement could result in the revocation of our telecommunications licenses by the FCC

24
Table of Contents

and other penalties. The Network Security Agreement also imposes significant requirements related to information storage and management, traffic routing and management, physical, logical and network security, personnel screening and training, audit, reporting and other matters.
State Regulation of Domestic Operations
The 1996 Act is intended to increase competition in the telecommunications industry, especially in the local exchange market. With respect to local services, ILECs are required to allow interconnection to their networks and to provide unbundled access to network facilities, as well as a number of other pro-competitive measures.
State regulatory agencies have jurisdiction when our facilities and services are used to provide intrastate telecommunications services. A portion of our traffic may be classified as intrastate telecommunications and thereforeLevel 3 provides competitive services that are generally not subject to state regulation. We expect that we will offer more intrastate telecommunications services (including intrastate switched services)regulation to the same degree as our business and product lines expand. We are authorized to provide telecommunications services in all fifty states and the District of Columbia. In addition, we need to maintain interconnection agreements with ILECs where we wish to provide service. We expect that we should be able to negotiate or otherwise obtain renewals or successor agreements through adoption of others’ contracts or through arbitration proceedings, although the rates, terms, and conditions applicable to interconnection and the exchange of traffic with certain ILECs could change significantly in certain cases. The degree to which the rates, terms, and conditions may change will depend not only upon the negotiation and arbitration process and availability of other interconnection agreements, but will also depend in significant part upon state commission proceedings that either uphold or modify the current regimes governing interconnection and the exchange of certain kinds of traffic between carriers.ILECs.
There are initiatives in several state legislatures to lower intrastate access rates, aligning them with interstate rates, some of which may be affected by the FCC Order on intercarrier compensation. While we believe that rate adjustment initiatives such as this are generally better considered holistically by the FCC as part of its overall intercarrier compensation reforms, some states have and may continue to determine otherwise. Depending on whether we are a net collector or a net payer of any adjusted rate, such rate adjustments could have a negative effect on us.
Some states also require prior approvals or notifications for certain transfers of assets, customers or ownership of certificated carriers and for issuances by certified carriers of equity or debt.
Local Regulation
International Regulations

Our networkssubsidiaries operating outside of the United States are subject to numerous localvarious regulations such as building/permitting/trenching codes and licensing/franchise fees. Such regulations vary on a city-by-city, county-by-county and state-by-state basis. To install our own fiber optic transmission facilities, we need to obtain rights-of-way over privately and publicly owned land. Rights-of-way that are not already secured, or which may expire and not be renewed, may not be available to us on economically reasonable or advantageous terms in the future.
European Regulation
Unlike the United States which has a federal-state regulatory scheme, the European Union, or EU, has adopted a more systematic approachmarkets where service is provided. The scope of regulation varies from country to the convergence of networks and the regulation of telecommunications services. The European Commission oversees the implementation by its Member States of various directives developed to regulate electronic communications. In March 2002, the European Union adopted a new regulatory framework for electronic communications that is designed to address in a technologically neutral manner the convergence of communications

25
Table of Contents

across telecommunications, computer and broadcasting networks. The directives address: (1) framework, (2) interconnection and access, (3) authorization and licensing, (4) universal service, and (5) privacy. These directives along with an additional decision on radio spectrum set out the basis for regulation at the national level.
Pursuant to these measures, the licensing regime was replaced with one of general authorization, whereby all providers of electronic communication services, or ECS, are authorised by statute in all 28 EU countries to (1) build/maintain a network and (2) sell any form of ECS, other than mobile or broadcast services, without the need for an individual license. Accordingly, as for all communications providers, our existing licenses were canceled and replaced with statutory authorization, subject to various general conditions imposed by national regulatory authorities, or NRAs. NRAs continue to be responsible for issuing specific licenses in relation to radio spectrum.
In November 2009, the European Parliament and Council of Ministers agreed to implement a number of changes to the existing regime, comprising the “Better Regulation” Directive (Directive 2009/140/EC) and the “Citizens’ Rights” Directive (Directive 2009/136/EC), which adjust the existing regulations in order to remove areas of potential ambiguity and more clearly define user rights. .
The Framework requires NRAs, on a rolling basis, to analyze a set of markets for electronic communications which may require ex-ante regulation to function competitively.
This analysis contains three different elements:
Market definition - first the NRA must define the relevant geographic and product market.

SMP assessment - in a second step the NRA must analyze whether one or more undertaking active in that market possesses significant market power (conceptually similar to dominance), either individually or jointly with others.

Decision on remedies - if the NRA identifies a market with a lack of effective competition, it is required to impose certain regulatory obligations, so-called remedies.

The basis for this measure is the European Commission’s Recommendation on Relevant Markets, which contains a list of markets that should be subject to ex ante regulation. Whenever a NRA concludes that a given market shows failures that hamper competition, it must impose appropriate remedies on undertakings with a significant market power in accordance with the market Access Directive and Universal Service Directives.
Notwithstanding a synchronized approach to regulation in Europe, the implementation of the directives has not been uniform across the Member States of the European Union. Recognizing this concern, in November 2009, the EU also implemented one regulation establishing the Body of European Regulators for Electronic Communications (Regulation (EC) No 1211/2009), or BEREC. BEREC’s remit is to improve harmonization between national regulatory measures so as to ensure greater consistency of remedies and to anticipate emerging regulatory requirements. From 2012 through 2015, BEREC adopted a common position on several issues of relevance, including wholesale local and broadband access, wholesale leased lines and net neutrality. BEREC’s work program for 2016 adopted in December 2015 identifies four key areas of focus: (1) promoting competition and investment, including work on wholesale access products, challenges and drivers for NRA roll-out and preparation for all-IP networks; (2) promoting the internal market, by coordinating input to regulatory proposals related to Digital Single Market initiative; (3) empowering and protecting end-users; and (4) improving the quality and efficiency of individual NRAs.

26
Table of Contents

In 2010, the EU adopted a long term strategic policy known as the Digital Agenda for Europe 2010 - 2020, aimed at ensuring that the EU derives the maximum economic, industrial and social benefit from advanced communications services, including the extensive roll-out of ‘superfast broadband.’ The majority of Member States have each adopted their own national policies in support of this high level agenda.
In November 2015, the EU adopted Regulation EU 2015/2120 which, among other things set out new legislation in relation to open internet. The net neutrality provisions of this Regulation are effective at the beginning of the second quarter 2016. In 2015, the EU Commission also began a review of the entire suite of Directives and Regulations relating to the communications sector and it is expected that proposals will be published during 2016 with a view to agreeing any changes in sufficient time to have these transposed into Member State law by 2019.
Middle East and African Regulation
In recent years, we have expanded our operations beyond the borders of the European Union. While a number of jurisdictions have adopted regulatory regimes broadly similar to the European model and promote full competition, many of the countries in this region have not yet committed to liberalizing their telecommunications regimes and opening their telecommunications markets to foreign investment as part of the 1998 World Trade Organization Agreement on Basic Telecommunications Services. We cannot be certain of how many regional countries may ultimately liberalize their national markets or how quickly change may take place and the effect on our business of future regulatory change cannot be accurately predicted.
Canadian Regulation
The Canadian Radio-television and Telecommunications Commission (“CRTC”) regulates telecommunications providers and their service offerings in Canada. Regulatory developments over the past several years have terminated the historic monopolies of the ILECs, bringing significant competition to this industry for both domestic and international long distance services. The provision of Canadian domestic and international transmission facilities based services is no longer restricted to “Canadian carriers”. Prior to June 2012, these carriers had to have majority ownership and control in-fact by Canadians. There are no such Canadian ownership and control requirements for companies that resell the services and facilities of a Canadian carrier. Accordingly, we have historically operated as a reseller of Canadian domestic and international transmission facilities-based services in Canada. Material ownership restrictions were repealed, thus allowing us to register with the CRTC as a facilities-based telecommunications common carrier, which we did and also obtained a Basic International Telecommunications Service license, allowing us to carry traffic that originates or terminates in points outside of Canada.
Latin American Regulation
The regulatory status of the telecommunications markets in Latin America varies to some degree. All of the countries in which we currently operate are members of the World Trade Organization, and most have committed to some deregulatory measures such as market competition and foreign ownership. Some countries now permit competition for all telecommunications facilities and services, while others allow less competition for some facilities and services, but restrict competition for other services.country. The telecommunications regulatory regimes in certain of many Latin American countriesour non-domestic markets are in the process of development. Many issues, such as regulationincluding the pricing of incumbent providers, interconnection, unbundling of local loops, resale of telecommunications services, and pricing have not been addressed fully, or even at all. We cannot accurately predict whether and how these issues will be resolved, or their effect on our operations.

27
Table of Contents

Below is a summary of certain Further, some of the regulations currently applicable tolegal requirements governing our Latin Americanforeign operations by country. The regulations apply equally to all ofare more restrictive than or conflict with those governing our operating entities in a given country.domestic operations, which raises our compliance costs and regulatory risks.
Argentina
The Argentine telecommunications market was opened to competition on November 9, 2000. Following market liberalization, the government issued a series of regulations to transition to competition, including Decree No. 764/00. The Decree established rules for the granting of licenses for telecommunications services, interconnection, and the management and control of the radio spectrum. The Decree also established new rules and regulations to promote access to telecommunications services for customers located in high-cost access or maintenance areas or with physical limitations or special social needs. These rules and regulations, effective as of January 1, 2001, established that these services would be financed by all telecommunications providers (including us) through a Universal Service Fund (“USF”), backed by the payment of 1% of each provider’s total revenue for telecommunications services.
The Argentine telecommunications sector is subject to a new comprehensive national telecommunications act effective as of December 2014: “Digital Argentina Law” No. 27078 (the “New Telecom Law”).
The New Telecom Law establishes that the former Law No. 19,798, its supplementary laws and decrees, will remain in full force and effect as long as they do not contradict the New Telecom Law and until the new regulatory authority enacts the required new supporting regulatory framework. Most relevant aspects to our business such as the licensing processes, USF regime, interconnection regime and spectrum regime set forth under the former Law No. 19,798 and its supplementary laws will continue in full force.
In December 2015June 2016, following a national referendum, the newlyUnited Kingdom (the “UK”) elected government has publicly communicatedto terminate its intention to set information and communications technology policies as an economy driver. Some rules, which include the intervention of the recently created authority (“Autoridad Federal de Tecnologías de la Información” or Federal Authority for Information Technology) and the requirements of National Decrees 267/15 and 268/15 are providing a temporary framework until a new National Telecom Act is enacted in 2016.
Brazil
Telecommunications services in Brazil are regulated by the Ministry of Communications, pursuant to Law No. 9,472 as of July 16, 1997 (the “General Telecommunications Law”). This law authorized the creation of the Agencia Nacional de Telecomunicações (the “National Telecommunications Agency,” known as “ANATEL”), an independent agency under the Ministry of Communications that regulates and supervises all aspects of telecommunications services. ANATEL enforces the legislative determinations of the Ministry of Communications. ANATEL has generally pursued a policy of market liberalization and supported a competitive telecommunications environment.
Chile
The telecommunications industry in Chile is regulated by the Undersecretariat of Telecommunications, a department under the Ministry of Transportation and Telecommunications.
In 1978, the National Policy on Telecommunications was issued which, in its most relevant aspects, called for the development of telecommunications services to be conducted by private institutions through authorizations granted by the government. However, it also endorsed a series of

28
Table of Contents

regulations aimed at establishing increased technical control over such investments and conferring certain discretionary powers upon the government. The policy was formalized through the General Law on Telecommunications approved in 1982, in which free, non-discriminatory access was granted to private firmsmembership in the development of the nation’s telecommunications services. This law established responsibilities with respect to telecommunication services, compulsory interconnection of facilities between public service licensees, and effectuated mandatory tariffing of services where existing market conditions were deemed insufficient to guarantee a free tariff system.
Chile amended its General Law on Telecommunications in 1985 to provide that concessions and permits may be granted without limit depending upon the quantity and type of service and geographic location.EU (“Brexit”). The law guarantees interconnection among telecommunications service concessionaires. Chile defines value added services as supplementary services. It is not necessary to have a telecommunications service license to offer supplementary services, although those who provide additional services must comply with the technical standards established by the Department of Telecommunications, and obtain authorization therefrom.
The General Law on Telecommunications has been amended on several occasions regarding such matters as network neutrality, the recent elimination of domestic long distance telephony, and full implementation of number portability, and establishing a national plan for critical telecommunications infrastructure to ensure continuity of services.
Colombia
The telecommunication industry in Colombia is subject to regulation by the Colombian Ministry of Communications. Since 1991, the Colombian Government has pursued a policy of liberalization and has encouraged joint ventures between public and private telecommunication companies to provide new and improved telecommunication services. In 2009, the Colombian government adopted a new regulatory regime (Law 1341, the “TIC law”) that was aimed at further deregulating the telecommunications market.
The telecommunication industry in Colombia is subject to regulation by the Communications Regulation Commission (CRC), the National Spectrum Agency (ANE) and the National Television Authority (ANTV).
The competition authority and consumer protection agency in Colombia is the Superintendence of Industry and Commerce (SIC), which is responsible for enforcing antitrust regulations, protecting consumers’ rights and promoting competition in all economic sectors, including telecommunications.
The Ministry of Information and Communications Technologies (“ICT”) is in charge of telecommunications policymaking, and the Minister isUK will remain a member of the boardEU until at least March 29, 2019. Several factors which are currently unknown will influence Brexit’s impact on our business, including the form Brexit will take. We operate a staging facility in the UK, where certain core network elements and customer premises equipment is configured before being shipped to both UK and EU locations. The UK is currently also the central location of our stores of spare replenishment in our European operations. In respect to our UK workforce, we do not anticipate any adverse impact from Brexit as only a small percentage of the workforce are EU nationals. The same is true of UK nationals working in our EU located workforce. We are currently monitoring Brexit developments, reviewing our supply chain alternatives, and assessing the short- and long-term implications of Brexit on our operations. Nonetheless, based on current information, we do not anticipate Brexit will have a substantial impact on our business.

Other Regulations

Our networks are subject to numerous local regulations, including codes that regulate our trenching and construction operations or that require us to obtain permits, licenses or franchises to operate. Such regulations are enacted by municipalities, counties or other regional governmental bodies, and can vary widely from jurisdiction to jurisdiction as a result. Such regulations may also require us to pay substantial fees.

Various foreign, federal and state laws govern our storage, maintenance and use of customer data, including a wide range of consumer protection, data protection, privacy, intellectual property and similar laws. The application, interpretation and enforcement of these laws are often uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction. Various foreign, federal and state legislative or regulatory bodies (CRC, ANTVhave recently adopted increasingly restrictive laws or regulations governing the protection or retention of data, and ANE).others are contemplating similar actions. In particular, regulatory bodies in Europe have aggressively enforced the stringent terms of the EU’s General Data Protection Regulation.

For additional information about these matters, see “Risk Factors-Risks Affecting Our Business” and “Risk Factors-Risks Relating to Legal and Regulatory Matters” in item 1A of Part I of this report.

Competition

We compete in a rapidly evolving and highly competitive market, and we expect intense competition from a wide variety of sources under evolving market conditions to continue. In addition to competition from larger telecommunication service providers, we are facing increasing competition from several other sources, including cable and satellite companies, wireless providers, technology companies, cloud companies, broadband providers, device providers, resellers, sales agents facilities-based providers, and smaller more narrowly focused niche providers either using their own networks leasing parts of our network, or providing services such as VoIP, SD-WAN and security independent of network assets. The TIC Law createdability to provide such services independently of the network challenges more traditional solution selling. Further technological advances and regulatory and legislative changes have increased opportunities for a new ICT registerwide range of 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 communications industry has, in recent years, experienced substantial consolidation, 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. In certain overseas markets, we compete against national incumbent telecommunications providers and other regional or international companies that may have a longer history of providing service in the market.



We compete to facilitateprovide services to business customers based on a variety of factors, including the comprehensiveness and reliability of our network, our data transmission speeds, price, the latency of our available intercity and metro routes, the scope of our integrated offerings, the reach and peering capacity of our IP network, and customer service. Depending on the applicable market entry by telecommunications operators, as licenses were no longer tiedand requested services, competition can be intense, especially if one or more competitors in the market have network assets better suited to the provisioncustomer’s needs or are offering faster transmission speeds or lower prices.

Similar to us, many technology or other communications companies that previously offered a limited range of telecommunications 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 and pricing of our services.

As customers increasingly demand high-speed connections for communications and productivity, we expect the demands on our network will continue to increase over the next several years. To succeed, we must continue to invest in Colombia. Ifour networks to ensure that they can deliver competitive services providers require spectrumthat meet these increasing bandwidth and speed requirements. In addition, network reliability and security are increasingly important competitive factors in our business.

Additional information about competitive pressures is located (i) under the Ministry grantedheading "Risk Factors-Risks Affecting Our Business" in Item 1A of Part I of this report.


Environmental Compliance

From time to time we may incur environmental compliance and remediation expenses, mainly resulting from owning or operating prior industrial sites or operating 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 currently believe that future environmental compliance and remediation expenditures will have a spectrum use permit. During 2015, the CRCmaterial adverse effect on our financial condition or results of operations. For additional information, see "Risk Factors—Risks Relating to Legal and the MinistryRegulatory Matters—Risks posed by other regulation" in Item 1A of InformationPart I of this report and Communications Technologies (“MinICT”) issued regulationsNote 16—Commitments, Contingencies and policies to promote and improve competitionOther Items included in Item 8 of Part II of this report.

Seasonality

Overall, our business is not materially impacted by seasonality. Our network-related operating expenses are, however, generally higher in the telecommunications sectorsecond and third quarters of the year. From time to time, weather related problems have resulted in Colombia, relatingincreased costs to among other things, customer contracts, reporting, interconnection chargesrepair 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 Atlantic and Gulf of Mexico coastlines.

Employees

At December 31, 2018, we had approximately 11,500 employees.

Website Access and Important Investor Information

Our website is www.centurylink.com. We routinely post important investor information in the mobile market"Investor Relations" section of our website at ir.centurylink.com. The information contained on, or that may be accessed through, our website is not part of this 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 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 and on the SEC's website at www.sec.gov. From time to time we also use our website to webcast our earnings calls and certain local accounting rules.of our meetings with investors or other members of the investment community.
The Colombian government


We typically disclose material non-public information by disseminating press releases, making public filings with the SEC, or disclosing information during publicly accessible meetings or conference calls. Nonetheless, from time to time we have used, and intend to continue to use, our website and social media accounts to augment our disclosures.

Lenders should also be aware that while we do, at various times, answer questions raised by securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information. Accordingly, lenders should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance. To the National Development Plan (NDP), which is intended to increase competitionextent 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 use of information technologyfederal 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 country. The NDP contains provisions to allow for the efficient deployment of infrastructure and services.

29
Table of Contents

The Colombian government is interested in joining the Organization for Economic Cooperation and Development, or OECD, and this will require the adoption of some reforms in the telecommunication sector, such as measures to ensure the independence of the regulatory authorities, eliminate concentration in fixed and mobile markets and remove barriers to network infrastructure deployment, which would not affect our business in Colombia.
Costa Rica
Costa Rica was the last country in Central America to liberalize the telecommunications market. Telecommunications in Costa Rica had historically been under the structure of a state-owned monopoly. Following ratification of the free trade agreement between the US and Central American States, in 2007, Costa Rica started the reform of its regulatory environment to open telecommunications to competition.
In pursuit of this objective, which is still ongoing, the government of Costa Rica moved to a total liberalized telecom market in the country from 2008. The Telecommunications Law was enacted in June 2008 and the regulatory body, the Telecommunications Superintendence (“SUTEL”), was appointed in 2009. SUTEL is an administrative body within the former Public Services Regulatory Authority (ARESEP).
Examples of SUTEL’s responsibilities are: implementing policy and legislation, regulating the market entry by service providers and the services, imposing access and interconnection obligations, resolving intercarrier and unfair competition disputes, approving both retail tariffs (only if there are no effective competition conditions within the market) and adhesion contracts with end users, overseeing the universal service fund (FONATEL), and managing scarce resources, including numbers and radio spectrum. SUTEL also ensures compliance with consumer protections and promotes competition in the telecommunications sector.
The executive branch retains certain direct responsibilities in the telecom sector through the Ministry of Science, Technology and Telecommunications (“MICITT”), which is the main authority for the promotion and definition of national telecommunications policy, including the definition of a national plan for the development of telecommunications and granting spectrum licenses.
In 2014, SUTEL started to conduct market research on the prices of submarine cable access services in Costa Rica, to determine whether prices in that country are competitive in comparison with international prices. The final report on this research has not been released yet.
At the end of 2014, SUTEL announced that it expects to review the conditions for effective competition in the various telecommunications markets in Costa Rica (fixed, mobile, data, etc.), which could lead to the liberalization of the prices of telecommunication services in some markets or a review of new regulatory rulings to promote competition.
In October 2015, MICITT released the National Telecommunications Plan 2015-2021. The plan addresses the main objectives for the growth of the telecommunications sector until 2021 and the telecommunications market milestones. These objectives are mandatory both to MICITT and SUTEL regarding the spectrum procurement proceedings and the procurement proceedings financed through FONATEL.
Ecuador
A new Law of Telecommunications was enacted in February of 2015. As a result, the organizational structure of public entities in Ecuador will changed with the creation of the Agency for the Regulation and Control of Telecommunications (“ARCOTEL”), which will be responsible for the planning, regulation and control of telecommunications services as well as spectrum management.

30
Table of Contents

The Ministry of Telecommunications will remain in charge of the development of information and communication technologies in Ecuador. It issues policies and general plans and monitors their implementation. The Ministry also evaluates, coordinates and promotes actions to ensure equal access to services and the effective and efficient use thereof.
Mexico
In June, 2013, the Mexican government performed an integral amendment of the regime, through the enactment of a Constitutional Decree. Such Decree included the modification of the Mexican Constitution and several legislative measures and will require a series of further regulations amending the main regulatory framework of the telecommunications industry. Some of the most important aspects set forth in the amendment are the following: (i) the Federal Institution of Telecommunications (“IFETEL”) was created as a constitutionally autonomous entity, replacing the existing Federal Telecommunications Commission (“COFETEL”), as the sole telecommunications regulatory body; and (ii) foreign investment was allowed with up to 100% in telecommunications and satellite communication services (previously capped at 49%) and up to 49% in broadcasting services (previously prohibited).
A new telecommunications law was approved by the Federal Congress of Mexico and became effective on August 13, 2014.
The telecommunications sector in Mexico is regulated primarily by the Federal Institute of Telecommunications (“IFETEL or IFT”). Among other aspects, the IFT regulates the requirements for licensing public telecommunications networks, and the obligations of telecommunication companies in Mexico. Further, it manages licensing requirements for radioelectric spectrum, satellite geostationary orbits assigned to Mexico and its related spectrum, makes declarations of preponderant agents in the telecommunications and broadcasting sectors (more than 50% of the users, subscribers, audience, network traffic or used network capacity, measured on a national basis), analyzes the divestiture and restructuring plans submitted by Preponderant agents to reconsider their status and authorizations to commercialize telecommunications services.
Under the new telecommunications law, the provision of value-added services has been deregulated. Also, there is a new concession-granting regime, which establishes a unique concession for the provision of all telecommunication services. The unique concession may be granted by the IFT only to Mexican individuals or companies, but there will be no limitation on foreign investment. However, the concessions granted before the new law was enacted, will remain valid until they expire or the operator decides to apply for a master concession (transition regime).
On March 6 2014, the IFT declared America Movil SAB de CV, Telefonos de Mexico SAB de CV, and Grupo Carso, among other companies, to be preponderant agents in the telecommunications sector, and Grupo Televisa, among others, to be a preponderant agent in the open broadcast television sector. The divestiture plan submitted by America Movil is pending approval.
The IFT may impose asymmetric regulations and specific obligations upon preponderant agents such as rates, quality, shared-use of infrastructure, rights of way and disaggregation of the local telecommunication network.
Some important regulatory measures were issued by the IFT in 2015: (i) the application of no charge for the interconnection with networks of the preponderant agents and (ii) the modification of tariffs for national long distances telephony services due to the Mexican territory treatment as a local area.

31
Table of Contents

While the IFT provides the main regulatory framework of the telecommunications industry, other relevant laws in the field are the Federal Antitrust Law, the Foreign Investment Law, the Law of Protection of Personal Information in Possession of Private Entities, and the Federal Consumers Protection Law, all of which play a part in the overall regulation of the sector, in addition to the general commerce and contractual laws. The above mentioned laws also shall be adjusted to the new telecommunication law.
The enactment of the new law and the initial measures taken by the IFT in 2014 have increased the dynamism of the Mexican telecommunications market, in which the main players are moving faster and new players are emerging, such as AT&T, which acquired USACELL at the end of 2014.
Panama
In Panama the telecommunications market was privatized in 1997 and deregulated in 2003, and services have seen strong growth since that time. Due to the comparative advantages of the geographical location of Panama there is a significant supply of subsea connections.
The telecommunications industry in Panama is regulated by Autoridad Nacional de los Servicios Públicos or ASEP (formerly Ente Regulador de los Servicios Públicos), an independent regulatory body. ASEP is a multi-sector regulator in charge of all Panama utilities including telecommunications.
Peru
The telecommunications industry in Peru is regulated by the Supervisory Authority for Private Investment in Telecommunications (“OSIPTEL”) and the Ministry of Transportation and Communications (“MTC”). OSIPTEL is an independent regulatory body attached to the Office of the President of the Council of Ministers.
Under Peruvian law, the provision of public telecommunications services requires a concession. The functions related to the issuance of concessions and market access registration and the assignment of the radio spectrum for public telecommunications services are managed by the MTC’s General Directorate of Concessions in Telecommunications. Since market liberalization became effective in August 1998, there has been no limitation on the issuance of concessions, except for services subject to natural limitations on grounds of scarce resources, as in the case of the radio spectrum.
During 2014, the National Congress submitted a General Telecommunication Bill which would modify the existing general regulatory regime. The bill remains under debate and has not yet been passed.
Uruguay
The telecom market in Uruguay is highly regulated. The Executive Branch, through the Ministry of Industry, Energy and Mining, is the final authority in regards with telecom matters, while the Telecom National Office (Dirección Nacional de Telecomunicaciones) works as a general advisory body and the Communication Services Regulatory Unit URSEC (Unidad Reguladora de Servicios de Comunicaciones) participates as a regulatory agency.
To provide telecommunications services, it is necessary to hold a license. Moreover, if the service also requires the assignment of spectrum, it is also necessary to have a concession. The Executive Branch grants licenses to broadcast and also grants assignments of spectrum with a fixed term. URSEC is entitled to grant licenses and concessions in all the remaining cases. The international long distance telephony is a closed market with approximately ten players operating in that market. Through our Uruguayan branch “GC Sac Argetina SRL Sucursal Uruguay,” we are licensed for data transmission services and as an international long distance service provider.

32
Table of Contents

Venezuela
The Venezuelan telecommunications industry is regulated by the Comisión Nacional de Telecomunicaciones (“CONATEL of Venezuela”), which is ascribed to and under the purview of the Minister of People’s Power for Communication and Information. Venezuela opened its telecommunications market to competition on November 28, 2000. In 2007, the Venezuelan government nationalized the incumbent telecommunications operator, CANTV. In December 2010, the government issued a new law declaring that the provision of telecommunications services is an activity of the “public domain.” To date, the government has not indicated its intent to expand nationalization within the telecommunications sector.
Asian Regulation
The status of liberalization of the telecommunications regulatory regimes of the Asian countries in which we operate or may inand the future operate varies. Some countries allow full competition in the telecommunications sector, while others limit competition for many or most services. Similarly, some countries in Asia maintain foreign ownership restrictions which limit the amount of foreign direct investment and require foreign companies to seek local joint venture partners.
Most of the countries in the region have committed to liberalizing their telecommunications regimes and opening their telecommunications markets to foreign investment as part of the World Trade Organization Agreement on Basic Telecommunications Services, which came into force in 1998. Additionally, the United States has entered into bilateral Free Trade Agreements with Singapore, Australia and South Koreacommunications industry generally. You should be aware that became effective in 2003, 2005 and 2012, respectively, and a Trans-Pacific Partnership agreement with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam that was concluded in 2015. We cannot predict what effect, if any, these agreements will have on other countries in the region or whether the U.S. will pursue similar agreements with other countries. We also cannot be certain whether this liberalizing trend will continue or accurately predict the pace and scope of liberalization. It is possible that one or more of the countries in which we operate or may in the future operate will slow or halt the liberalization of its telecommunications markets. The effect on us of such an action cannot be accurately predicted.
The telecommunications regulatory regimes of many Asian countries are in the process of development. Many issues, such as regulation of incumbent providers, interconnection, unbundling of local loops, resale of telecommunications services, offering of voice services and pricing have not been addressed fullyindependently verified data from industry or at all. Weother third-party sources and cannot accurately predict whetherguarantee its accuracy or how these issues will be resolved and their effect on our operations in Asia.completeness.

Glossary of Terms

accessTelecommunications services that permit long distance carriers to use local exchange facilities to originate and/or terminate long distance service.
access chargesThe fees paid by long distance carriers to LECs for originating and terminating long distance calls on the LECs’ local networks.
ATMAsynchronous transfer mode. An information transfer standard that is one of a general class of packet technologies that relay traffic by way of an address cell. The ATM format can be used by many different information systems, including LANs, to deliver traffic at varying rates, permitting a mix of data, voice and video.

33
Table of Contents

backboneA high-speed network that interconnects smaller, independent networks. It is the through‑portion of a transmission network, as opposed to spurs which branch off the through‑portions
CAPCompetitive Access Provider. A company that provides its customers with an alternative to the local exchange company for local transport of private line and special access telecommunications services.
cachingA process by which a Web storage device or cache is located between Web servers (or origin servers) and a user, and watches requests for HTML pages and objects such as images, audio, and video, then saves a copy for itself. If there is another request for the same object, the cache will use its copy, instead of asking the origin server for it again.
capacityThe information carrying ability of a communications facility.
carrierA provider of communications transmission services by fiber, wire or radio.
CDNContent Distribution Network or CDN describes a system of computers networked together across the Internet that cooperate transparently to deliver various types of content to end users. The delivery process is optimized generally for either performance or cost. When optimizing for performance, locations that can serve content quickly to the user are chosen. When optimizing for cost, locations that are less expensive to serve from may be chosen instead.
central officeTelephone company facility where subscribers’ lines are joined to switching equipment for connecting other subscribers to each other, locally and long distance.
CLECCompetitive Local Exchange Carrier. A company that competes with ILECs in the local services market.
co-carrierA relationship between a CLEC and an ILEC that affords each company the same access to and right on the other’s network and provides access and services on an equal basis.
common carrierA government defined group of private companies offering telecommunications services or facilities to the general public on a non-discriminatory basis.
conduitA pipe, usually made of metal, ceramic or plastic, that protects buried cables.
dark fiberFiber optic strands that are not connected to transmission equipment.
dedicated linesTelecommunications lines reserved for use by particular customers.
facilities based carriersCarriers that own and operate their own network and equipment.
fiber opticsA technology in which light is used to transport information from one point to another. Fiber optic cables are thin filaments of glass through which light beams are transmitted over long distances carrying enormous amounts of data. Modulating light on thin strands of glass produces major benefits including high bandwidth, relatively low cost, low power consumption, small space needs and total insensitivity to electromagnetic interference.
GatewayGateways are the primary technical facilities in the markets we serve. They are the endpoints of each long haul city-pair segment. Where we have metro rings, they are the locations most metro rings home to.
GbpsGigabits per second. A transmission rate. One gigabit equals 1.024 billion bits of information.
ISDNIntegrated Services Digital Network. An information transfer standard for transmitting digital voice and data over telephone lines at speeds up to 128 Kbps.
ILECIncumbent Local Exchange Carrier. A company historically providing local telephone service. Often refers to one of the Regional Bell Operating Companies (RBOCs). Often referred to as “LEC” (Local Exchange Carrier).

34
Table of Contents

InterconnectionInterconnection of facilities between or among the networks of carriers, including potential physical colocation of one carrier’s equipment in the other carrier’s premises to facilitate such interconnection.
ISPsInternet Service Providers. Companies formed to provide access to the Internet to consumers and business customers via local networks.
IXCInterexchange Carrier. A telecommunications company that provides telecommunications services between local exchanges on an interstate or intrastate basis.
KbpsKilobits per second. A transmission rate. One kilobit equals 1,024 bits of information.
LATALocal Access and Transport Area. A geographic area composed of contiguous local exchanges, usually but not always within a single state. There are approximately 200 LATAs in the United States.
leased lineAn amount of telecommunications capacity dedicated to a particular customer along predetermined routes.
LECLocal Exchange Carrier. A telecommunications company that provides telecommunications services in a geographic area. LECs include both ILECs and CLECs.
local exchangeA geographic area determined by the appropriate state regulatory authority in which calls generally are transmitted without toll charges to the calling or called party.
local loopA circuit that connects an end user to the LEC central office within a LATA.
long distance carriersLong distance carriers provide services between local exchanges on an interstate or intrastate basis. A long distance carrier may offer services over its own or another carrier’s facilities.
MbpsMegabits per second. A transmission rate. One megabit equals 1.024 million bits of information.
MPLSMultiProtocol Label Switching. A standards approved technology for speeding up network traffic flow and making it easier to manage. MPLS involves setting up a specific path for a given sequence of packets, identified by a label put in each packet, thus saving the time needed for a router or switch to look up the address to the next node to forward the packet to.
multiplexingAn electronic or optical process that combines a large number of lower speed transmission lines into one high speed line by splitting the total available bandwidth into narrower bands (frequency division), or by allotting a common channel to several different transmitting devices, one at a time in sequence (time division).
PBXPrivate Branch eXchange. A PBX, sometimes known as a phone switch or phone switching device, is a device that connects office telephones in a business with the PSTN. The functions of a PBX include routing incoming calls to the appropriate extension in an office, sharing phone lines between extensions, automated greetings for callers using recorded messages, dialing menus, connections to voicemail, automatic call distribution and teleconferencing.
peeringThe commercial practice under which ISPs exchange traffic with each other. Although ISPs are free to make a private commercial arrangement, there are generally two types of peering. With a settlement free peering arrangement the ISPs do not need to pay each other for the exchange of traffic. With paid peering, the larger ISP receives payment from the smaller ISP to carry the traffic of that smaller ISP. Peering occurs at both public and private exchange points.
POPPoint of Presence. Telecommunications facility where a communications provider locates network equipment used to connect customers to its network backbone.
private lineA dedicated telecommunications connection between end user locations.

35
Table of Contents

PSTNPublic Switched Telephone Network. That portion of a local exchange company’s network available to all users generally on a shared basis (i.e., not dedicated to a particular user). Traffic along the public switched network is generally switched at the local exchange company’s central offices.
RBOCsRegional Bell Operating Companies. Originally, the seven local telephone companies established as a result of the divestitures of AT&T in connection with its settlement with the U.S. Department of Justice of an antitrust lawsuit.
reciprocal compensationThe compensation of a CLEC for termination of a local call by the ILEC on the CLEC’s network, which is the same as the compensation that the CLEC pays the ILEC for termination of local calls on the ILEC’s network.
 resaleResale by a provider of telecommunications services (such as a LEC) of such services to other providers or carriers on a wholesale or a retail basis.
routerEquipment placed between networks that relays data to those networks based upon a destination address contained in the data packets being routed.
selective routerTelephone switch or functional equivalent, controlled by the relevant local exchange carrier (LEC), which determines the public safety answering point to which a 911 call should be delivered based on the location of the 911 caller.
SONETSynchronous Optical Network. An electronics and network architecture for variable bandwidth products which enables transmission of voice, data and video (multimedia) at very high speeds. SONET ring architecture provides for virtually instantaneous restoration of service in the event of a fiber cut or equipment failure by automatically rerouting traffic in the opposite direction around the ring.
special access servicesThe lease of private, dedicated telecommunications lines or “circuits” along the network of a local exchange company or a CAP, which lines or circuits run to or from the long distance carrier POPs. Examples of special access services are telecommunications lines running between POPs of a single long distance carrier, from one long distance carrier POP to the POP of another long distance carrier or from an end user to a long distance carrier POP.
streamingStreaming is the delivery of media, such as movies and live presentations, over a network in real time. A computer (a streaming server) sends the media to another computer (a client computer), which plays the media as it is delivered.
switchA device that selects the paths or circuits to be used for transmission of information and establishes a connection. Switching is the process of interconnecting circuits to form a transmission path between users and it also captures information for billing purposes.
TbpsTerabits per second. A transmission rate. One terabit equals 1.024 trillion bits of information.
TDMTime Division Multiplexing. A technology that transmits multiple signals simultaneously over a single transmission path.
unbundledServices, programs, software and training sold separately from the hardware.
unbundled accessAccess to unbundled elements of a telecommunications services provider’s network including network facilities, equipment, features, functions and capabilities, at any technically feasible point within such network.
VoIPVoice over Internet Protocol.
ITEM 1A. RISK FACTORS
Forward Looking Statements
We, or our representatives, from time to time may make or may have made certain forward-looking statements, either orally or in writing, including without limitation statements made or to be made

36
Table of Contents

in this Form 10-K, our quarterly reports on Form 10-Q, information contained in other filings with the SEC, press releases and other public documents or statements. In addition, our representatives, from time to time, participate in speeches and calls with market analysts, conferences with investors or potential investors in our securities and other meetings and conferences. Some of the information presented at these speeches, calls, meetings and conferences may include forward-looking statements. We use words like “plan,” “estimate,” “expect,” “anticipate,” “believe,” “intend,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods to identify forward-looking statements.
We wish to ensure that all forward-looking statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the safe harbor established in the U.S. Private Securities Litigation Reform Act of 1995. Accordingly, all forward-looking statements are qualified in their entirety by reference to, and are accompanied by, theThe following discussion of certain important factorsidentifies the most significant risks or uncertainties that could (i) materially and adversely affect our business, financial condition, results of operations, liquidity or prospects or (ii) cause our actual results to differ materially from those projected in these forward-looking statements. We caution the reader that this list of important factors may not be exhaustive. We operate in a rapidly changing business, and new risk factors emerge from time to time.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. We cannot predict every risk factor, nor can we assess the effect, if any, of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Further, we undertake no obligation to update forward-looking statements that may be made from time to time, whether as a result of new information, future developments or otherwise, after the date they are made to conform the statements to actual results or changesother expectations. The following information should be read in our expectations.
For more information about our resultsconjunction with the other portions of operations and financial condition, you should see the discussion included underthis report, including “Special Note Regarding Forward-Looking Statements” preceding Item 7,1, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing laterOperations” in this Form 10-K.
Risks RelatedItem 7 and our consolidated financial statements and related notes in Item 8. Please note that the following discussion is not intended to our Business Operations
We needcomprehensively list all risks or uncertainties faced by us. Our operations or actual results could also be similarly impacted by additional risks and uncertainties that are not currently known to increase Core Network Services revenue from the servicesus, that we offercurrently deem to realizebe immaterial, that arise in the future or that are not specific to us, such as general economic conditions. In addition, certain of the risks described below apply only to a part of our targets for financial and operating performance.
We must increase Core Network Services revenue at acceptable margins to realize our targets for financial and operating performance, including free cash flow. If:
we do not avoid excessive customer churn or improve our current relationships with existing key customers;business.

we are not able to expand the available capacity on our network to meet our customers’ demands in a timely manner; orRisks Affecting Our Business

Our failure to simplify our customers determine to obtain these services from either their own network or from oneservice support systems could adversely impact our competitive position.

For many of our competitors,services, we can effectively compete only if we can quickly and efficiently (i) quote and accept customer orders, (ii) provision and initiate ordered services, (iii) provide customers with adequate means to manage their services and (iv) accurately bill for our services. To attain these goals, we believe we must digitally transform our service support processes to permit greater automation and customer self-service options. This digital transformation is complex and will require a substantial amount of resources, especially in light of the multiplicity of our systems. Development of systems designed to support this transformation will continuously require our personnel and third-party vendors to, among other things, (i) adjust to changes in our offerings and customers’ preferences, (ii) simplify our processes, (iii) improve our data management capabilities, (iv) eliminate inconsistencies between our legacy and acquired operations, (v) eliminate older support systems that are costly or obsolete, (vi) develop uniform practices and procedures, and (vii) automate them as much as possible. We cannot assure you that these undertakings will be successful. Our competitive position could be adversely impacted if we fail to continuously develop viable service support systems that are satisfactory to our current and potential customers.

weWe may not be able to increasecompete successfully against current or maintainfuture competitors.

Each of our Core Network Services revenue at acceptable marginsofferings to our customers face increasingly intense competition from a wide variety of sources under evolving market conditions. In particular aggressive competition from a wide range of communications and technology companies has limited the prospects for several of our offerings to our customers. We expect these trends to continue. For more detailed information, see “Business-Competition” in Item 1 of this report.



In addition to competition from a wide range of technology companies and communications providers (including those described above), we are facing increasing competition from several other sources, including cloud companies, broadband providers, software developers, device providers, resellers, sales agents and facilities-based providers using their own networks as well as those leasing parts of our free cash flow,network. Further competition could arise through industry consolidation, technological innovation, or changes in regulation, including changes allowing foreign carriers to more extensively compete in the U.S. market.

Some of our current and potential competitors (i) offer a more comprehensive range of communications products and services, (ii) offer products or services with features that we cannot readily match in some or all of our markets, (iii) install their services more quickly than we do, (iv) have greater marketing, engineering, research, development, technical, provisioning, customer relations, financial or other resources, (v) have larger or more diverse networks with greater transmission capacity, (vi) conduct operations or raise capital at a lower cost than us, (vii) are subject to less regulation, which would adversely affect our abilitywe believe enables such competitors to become and/operate more flexibly than us with respect to certain offerings, (viii) offer services nationally or remain profitable.

37
Tableinternationally to a larger geographic area or larger base of Contents

Our business requires the continued development of effective business support systems and uniform standards, controls and policiescustomers, (ix) have substantially stronger brand names, which may provide them with greater pricing power than ours, or (x) have larger operations than ours, which may enable them to implement customer orders andcompete more successfully in recruiting top talent, entering into operational or strategic partnerships or acquiring companies. Consequently, these competitors may be better equipped to provide more attractive offerings, to charge lower prices for their products and bill for services.
Our business depends on our ability to continueservices, to develop and manage effectiveexpand their communications and network infrastructure more quickly, to adapt more swiftly to changes in technologies or customer requirements, to devote greater resources to the marketing and sale of their products and services, to provide more comprehensive customer service, to provide greater resources to research and development initiatives and to take advantage of business support systems. In certain cases,or other opportunities more readily.

Competition could adversely impact us in several ways, including (i) the loss of customers, market share, or traffic on our networks, (ii) our need to expend substantial time or money on new capital improvement projects, (iii) our need to lower prices or increase marketing expenses to remain competitive and (iv) 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.

Rapid technological changes could significantly impact our competitive and financial position.

The communications industry has been and continues to be impacted by significant technological changes, which in general are enabling a broader array of companies to compete with us. Many of these technological changes are (i) enabling customers to reduce or bypass use of our networks, (ii) displacing or reducing demand for our services, or (iii) enabling the development of these business support systems is requiredcompetitive products or services. Continuous improvements in wireless data technologies have enabled wireless carriers to realize anticipated benefits from both pastoffer competing products, and future acquisitions. The development and management of business support systems is a complicated undertaking requiring significant resources and expertise, the development of uniform standards, controls, procedures and policies and the efficient consolidation and elimination of business support systems that are no longer useful in the business. This undertaking also requires support from third-party vendors. Following the development of the business support systems, the data migration regarding network and circuit inventory must be completed for the full benefit of the systems to be realized. Business support systems are needed for:
quoting, accepting and inputting customer orders for services;

provisioning, installing and delivering services;

providing customers with direct access to our information systems so that they can manage the services that they purchase from us, generally through web-based customer portals; and

billing for services.

Because our business provides for continued rapid growth in the number of customers that we serve, the volume of services offered as well as the integration of any acquired companies’ business support systems, there is a need to continually develop our business support systems on a schedule sufficient to meet proposed milestone dates. The failureexpect this trend to continue as technological advances enable these carriers to develop effective unified business support systems or complete thecarry greater amounts of data migration regarding networkfaster and circuit inventory into these systems could materially adversely affect our ability to implement our business plans and realize anticipated benefits from our acquisitions.with less latency.

We may lose customersnot be able to accurately predict or respond to changes in technology or industry standards, or to the introduction of newly-offered services. Any of these developments could make some or all of our offerings less desirable or even obsolete, which would place downward pressure on our market share and revenue. These developments could also require us to (i) expend capital or other resources in excess of currently contemplated levels, (ii) forego the development or provision of products or services that others can provide more efficiently, or (iii) make other changes to our operating plans, corporate strategies or capital allocation plans, any of which could be contrary to the expectations of our security holders or could adversely impact our business operating results.

Even if we experience system failuressucceed in adapting to changes in technology or industry standards by developing new products or services, there is no assurance that significantly disrupt the availability and quality of thenew products or services that we provide. System failures may also cause interruptions to service delivery and the completion of other corporate functions.
Our operations dependwould have a positive impact on our ability to limit and mitigate interruptionsprofit margins or degradation in service for customers. Interruptions in service or performance problems for whatever reason, including integration related activities, could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new ones. financial performance.

In addition because many of our services are critical to the businesses of many of our customers, any significant interruption or degradation in service could result in lost profits or other lossesintroducing new technologies and offerings, we may need, from time to customers. Although we generally limit our liability for service failures in our service agreementstime, to limited service credits (generally in the form of free service for a short period of time)phase out outdated and generally exclude any liability for “consequential” damages such as lost profits, a court might not enforce these limitations on liability in the manner contemplated, which could expose us to financial loss. In addition, we often provide our customers with committed service levels.unprofitable technologies and services. If we are unable to meet these service level commitments,do so on a cost-effective basis, we may be obligated to provide service credits or other compensation to our customers. Because we offer emergency notification services referred to as “911” services, any significant interruption or degradation in those services could create legal and financial exposure.
The failureexperience reduced profits. Similarly, if new market entrants are not burdened by an installed base of anyoutdated equipment or facilityobsolete technology, they may have a competitive advantage over us.



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 failure to meet the evolving needs of our customers could adversely impact our competitive position.

In order to compete effectively and respond to changing market conditions, we must continuously offer products and services on terms and conditions that allow us to retain and attract customers and to meet their evolving needs. To do so, we must continuously (i) invest in our network, (ii) develop, test and introduce new products and services and (iii) rationalize and simplify our offerings by eliminating older or overlapping products or services. Our ability to maintain attractive products and services and to successfully introduce new product or service offerings on a timely and cost-effective basis could be constrained by a range of factors, including our network operations control centers and network data storage locations, could result inlimitations, support system limitations, limited capital, an inability to attract key personnel with the interruption of customer service andnecessary skills, intellectual property constraints, inadequate digitization or automation testing delays, technological limits or an inability to act as quickly or efficiently as other corporate functions until necessary repairs are effected or replacement equipment is installed.competitors. In addition, our business continuity plansnew product or service offerings may not be adequate to address a particular failure that we experience. Delays, errors, network equipment or network facility failures, including with respect towidely accepted by our network

38
Table of Contents

operations control centers and network data storage locations, could also result from natural disasters (including natural disasters that may increase in frequency as a result of the effects of climate change), disease, accidents, terrorist acts, power losses, security breaches, vandalism or other illegal acts, computer viruses, or other causes.customers. Our business could be significantly hurt from these delays, errors, failures or faults including as a result of:
service interruptions;
exposurematerially adversely affected if we are unable to customer liability;
the inability to install new service;
the unavailability of employees necessary to provide services;
the delay in the completion of other corporate functions such as issuing bills and the preparation of financial statements; or

the need for expensive modifications to our systems and infrastructure.

We have only recently generated net income for our two most recent full fiscal years and have generated substantial net losses in the past.
While we did have net income of $3.433 billion (which included a $3.3 billion income tax benefit due to the release of a valuation allowance against U.S. federal and state deferred tax assets) and $314 million for the year ended December 31, 2015 and 2014, respectfully, we generated net losses of approximately $109 million and $422 million for the years ended December 31, 2013 and 2012, respectfully. Although we anticipate that our operating results will continue to improve over time, there can be no assurance that the recent level of operating results and profitability will continue and that currently anticipated future operating improvements will be realized on schedule or that we will be able to sustain profitability in the future. If we would incur net losses in the future they could limit our ability to fund expansions of our network, investments in our products and services, interest and principal payments on our debt, or other business needs.
If our security measures are breached, or if our services are subject to attacks that degrade or deny the ability of users to access our systems, products and services, we may experience significant legal and financial exposure, our products and services may be perceived as not being secure, users and customers may curtail or stop using ourmaintain competitive products and services and to timely and successfully develop and introduce new products or services.

We could experience difficulties in consolidating, integrating, updating and simplifying our technical infrastructure.

Our ability to consolidate, integrate, update and simplify our systems and information technology infrastructure in response to our growth and changing business needs is important to our ability to develop and maintain attractive product and service offerings and to interface effectively with our customers. In addition, there may be issues related to our expanded or updated infrastructure that are not identified by our testing processes, and which may only become evident after we have started to fully utilize the redesigned systems. Our failure to modernize, consolidate and upgrade our technology infrastructure could have adverse consequences, including the delayed implementation of new service offerings, decreased competitiveness of existing service offerings, network instabilities, increased operating or acquisition integration costs, service or billing interruptions or delays, service offering inconsistencies, customer dissatisfaction, and the diversion of development resources. Any or all of the foregoing developments could have a negative impact on our business, mayresults of operations, financial condition and cash flows.

We could be disrupted.harmed by security breaches or other significant disruptions or failures of networks, information technology infrastructure or related systems owned or operated by us.
Network
We are materially reliant upon our networks, information technology infrastructure and informationrelated technology systems (including our billing and other technologies are criticalprovisioning systems) to provide products and services to our customers and to manage our operations and affairs. We face the risk, as does any company, of a security breach or significant disruption of our information technology infrastructure and related systems. As a communications company that transmits large amounts of information over communications networks, we face an added risk that a security breach or other significant disruption of our network, infrastructure or systems, or those that we operate or maintain for certain of our business activities. Networkcustomers, could lead to material interruptions or curtailments of service. Moreover, in connection with processing and storing sensitive and confidential customer data, we face a heightened risk that a security breach or disruption could result in unauthorized access to our customers’ proprietary information.



We strive to maintain the security and integrity of information systems-related events such as computer hackings, cyber-attacks,and systems under our control, 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 customer information), account takeovers, unavailability of service, computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of servicemalware, ransomware, distributed denial-of-service attacks, or other malicious activities,forms of cyber-attacks or any combination of the these items, could result in a degradationsimilar events. These threats may derive from human error, hardware or disruption of our services, damage to our properties,software vulnerabilities, aging equipment and data, or unauthorized disclosure of confidential information. We experience cyber-attacks against our network and information systems of varying degrees on a regular basis, and as a result, unauthorized parties could obtain access to our data or our customers’ data. Our security measuresaccidental technological failure. These threats may also be breached due to employee error, malfeasance,stem from fraud, malice or otherwise. Additionally,sabotage on the part of employees, third parties or foreign nations, including attempts by outside parties may attempt to fraudulently induce our employees or customers to disclose sensitive information to gainor grant access to our data or our customers’ data, potentially including information subject to stringent domestic and foreign data protection laws and regulations such as the national laws implementing the European Union Directive on Data Protection and various U.S. federal and state laws governing personally identifiable information, protected health information and Customer Proprietary Network

39
Tableor other similar types of Contents

Information. The risksensitive data. These threats may also arise from failure or breaches of systems owned, operated or controlled by other unaffiliated operators to the extent we rely on such other systems to deliver services to our customers. Each of these systems-related events and security breaches occurring has intensified, in part becauserisks could further intensify to the extent we maintain certain information necessary to conduct our businesses in digital form stored on servers connected to the Internet.
While
Similar to other large telecommunications companies, we developare a constant target of cyber-attacks of varying degrees. Although some of these attacks have resulted in security breaches, thus far none of these breaches have resulted in a material adverse effect on our operating results or financial condition. You should be aware, however, that the risk of breaches is likely to increase due to several factors, including the increasing sophistication of cyber-attacks, our greater use of open and maintainsoftware-defined networks, our increased operation of offshore systems, and processes designedour increased profile due to the growth of our organization and our customer base. You should be further aware that defenses against cyber-attacks currently available to U.S. companies are unlikely to prevent systems-related events and security breaches from occurring, the development and maintenance of these systems and processes is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Despite our efforts, there can be no assuranceintrusions by a highly-determined, highly-sophisticated hacker. Consequently, you should assume that unauthorized access and security breacheswe will not occur in the future. In addition, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniquesimplement security barriers or to implement adequateother preventative measures.
measures that repel all future cyber-attacks. Any such future security breachbreaches or unauthorized accessdisruptions could resultmaterially adversely affect our business, results of operations or financial condition, especially in significant legal and financial exposure, including in respect of customer credits, lost revenue due to business interruption, increased expenditures on security measures, monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, damage to our reputation and the market perceptionlight of the effectivenessgrowing frequency, scope and well-documented sophistication of cyber-attacks and intrusions.

Although CenturyLink maintains cyber liability insurance coverage that may, subject to policy terms and conditions (including self-insured deductibles, coverage restrictions and monetary coverage caps), cover certain aspects of our security measures could cause us to lose customers. Moreover, the amount and scope ofcyber risks, such insurance we maintain against losses resulting from unauthorized accesscoverage may be unavailable or security breaches may not be sufficientinsufficient to cover our losses or otherwise adequately compensate us for any disruptionslosses.

Additional risks to our businesses that may result.network, infrastructure and related systems include, among others:
Failure to develop and introduce new services could affect
capacity or system configuration limitations, including those resulting from changes in our ability to compete in the industry.
We continuously develop, test and introduce new services that are delivered over our communications network. These new services are intended to allow us to address new segments of the communications marketplace, address the changing communications needs of our existing customers and compete for additional customers.
In certain instances,customer's usage patterns, the introduction of new services requires the successful development of new technology. To the extent that upgrades of existing technology are required for the introduction of new services, the success of these upgrades may be dependent on reaching mutually acceptable terms with vendorstechnologies or products, or incompatibilities between our newer and on vendors meeting their obligations in a timely manner.older systems;
In addition, new service offerings may not be widely accepted by our customers. If our new service offerings are not widely accepted by our customers, we may terminate those service offerings and we may be required to impair any assets
theft or technology used to develop or offer those services.
If we are not able to successfully complete the development and introduction of new services in a timely manner, our business could be materially adversely affected.
Our future results will suffer if we do not effectively manage expansions to our operations.
We may continue to expand our operations through new product and service offerings and through additional strategic investments, acquisitions or joint ventures, some of which may involve complex technical and operational challenges. Our future success depends, in part, upon our ability to manage our expansion opportunities, which pose numerous risks and uncertainties, including the need to integrate new operations into our existing business in an efficient and timely manner, to combine accounting and data processing systems and management controls and to integrate relationships with customers, vendors and business partners. In addition, future acquisitions or joint ventures may involve the issuance of additional sharesfailure of our common stock, which may dilute our stockholders’ ownership.
Any future acquisitions of businesses or facilities could entail a number of risks, including:

40
Table of Contents

problems with the effective integration of operations;
inability to maintain key pre-acquisition business relationships;
increased operating costs;
exposure to unanticipated liabilities; and
difficulties in realizing projected efficiencies, synergies and cost savings.equipment;

We continually evaluate potential investments and strategic opportunities to expand, enhance connectivity and add traffic to our network. In the future, we may seek additional investments, strategic alliancessoftware or similar arrangements, which may expose us to risks such as:
the difficulty of identifying appropriate investments, strategic allieshardware obsolescence, defects or opportunities on terms acceptable to us;malfunctions;

the possibility that senior management may be required to spend considerable time negotiating agreements and monitoring these arrangements;power losses or power surges;

potential regulatory issues applicable to the telecommunications industry;physical damage, whether caused by fire, flood, adverse weather conditions, terrorism, sabotage, vandalism or otherwise;

the lossdeficiencies in our processes or reduction in value of the capital investment;controls;

our inability to capitalize onhire and retain personnel with the opportunities presented by these arrangements;requisite skills to adequately maintain or improve our systems;

programming, processing and other human error; and

the possibilityinadequate building maintenance by third-party landlords or other service failures of insolvency of a strategic ally.our third-party vendors.



Due to these factors, from time to time in the ordinary course of our business we experience disruptions in our service. We cannot assure you thatcould experience more significant disruptions in the future, especially if network traffic continues to increase and we continue to assume greater responsibility for managing our future expansion or acquisition opportunities will be successful, or that we will realize expected operating efficiencies, cost savings, revenue enhancements, synergiescustomers’ critical systems and networks.

Disruptions, security breaches and other significant failures of the above-described networks and systems could:

disrupt the proper functioning of these networks and systems, which could in turn disrupt (i) our operational, billing or other benefits.administrative functions or (ii) the operations of certain of our customers who rely upon us to provide services critical to their operations;

result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive, classified 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 us to notify customers, regulatory agencies or the public of data breaches;

require us to provide credits for future service under certain service level commitments we have provided contractually to our customers or to offer expensive incentives to retain customers;

subject us to claims for damages, fines, penalties, termination or other remedies under our customer contracts or service standards set by regulators, which in certain cases could exceed our insurance coverage;

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 prolonged litigation; or

require significant management attention or financial resources to remedy the resulting damages or to change our systems, including expenses to repair systems, add new personnel or develop additional protective systems.

Any or all of the foregoing developments could have a negative impact on our business, results of operations, financial condition and cash flows.

Negative publicity may adversely impact us.

Our ability to attract and retain customers depends in part upon external perceptions of our products, services management integrity and financial performance. Customer complaints, governmental investigations, outages, or other service failures of networks operated by us could cause substantial adverse publicity affecting us. Similar events impacting other operators could indirectly harm us by causing substantial adverse publicity affecting our industry in general. In either case, press coverage, social media messaging or other public statements that insinuate improper actions by us or other operators, regardless of their factual accuracy or truthfulness, may result in negative publicity, litigation, governmental investigations or additional regulations. Addressing negative publicity and any resulting litigation or investigations may distract management, increase costs and divert resources. Negative publicity may have an adverse impact on our reputation and the morale of our employees. We could suffer similar adverse effects if shareholders, financial analysts or other financial professionals issue public statements that cast us or our industry in a negative light. Any of these developments could adversely affect our business, results of operations, financial condition, cash flows, prospects and the value of our securities.

Market prices for many of our services have decreased in the past, and any similar price decreases in the future will adversely affect our revenue and margins.

Over the past several years, a range of competitive and technological factors, including robust network construction and intense competition, have lowered market prices for many of our products and services. If these market conditions persist, we may need to continue to reduce prices to retain customers and revenue. If future price reductions are necessary, our operating results will suffer unless we are able to offset these reductions by reducing our operating expenses or increasing our sales volumes.



Our future growth depends uponpotential will depend in part on the continued development and expansion of the Internet as a communications medium and marketplace for the distribution and consumption of data and video by businesses, consumers and governments.Internet.
Achieving the anticipated benefits of our business operations
Our future growth potential will depend in part upon the continued development and expansion of the Internet as a communicationscommunication medium and marketplace for the distribution and consumption of data, video and videoother products by businesses, consumers, and governments. The use of the Internet for these purposes may not grow and expand at the rate that we anticipateanticipated by us or others, or may be restricted by such things as:
factors outside of our control, including (i) actions by ISPsother carriers or the owners of access networksgovernmental authorities that restrict us from delivering our customers’ traffic to the users of those networks;over other parties' networks, (ii) changes in regulations, (iii) technological stagnation, (iv) increased concerns regarding cyber threats or (v) changes in consumers' preferences or data usage.

future regulation;Our failure to hire and retain qualified personnel could harm our business.

Our future success depends on our ability to identify, hire, train and retain executives, managers and employees with technological, engineering, software, product development, operational, provisioning, marketing, sales, customer service, administrative, managerial and other key skills. There is a lackshortage of anticipated technology innovationqualified personnel in several of these fields, particularly in certain growth markets, such as the areas adjoining our Denver and adoption;Seattle offices. We compete with several other companies for this limited pool of potential employees. As our industry increasingly becomes more competitive, it could become especially difficult to attract and retain top personnel with skills in high demand. Our workforce reduction and integration initiatives over the past couple of years have further increased the challenges of attracting and retaining talented individuals. In addition, subject to limited exceptions, none of our executives or domestic employees have long-term employment agreements. For all these reasons, there is no assurance that our efforts to recruit and retain qualified personnel will be successful.

a lackIncreases in broadband usage may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower transmission speeds for our customers.

Video streaming services, gaming and peer-to-peer file sharing applications use significantly more bandwidth than other Internet activity such as web browsing and email. As use of continuedthese services continues to grow, our broadband penetration bothcustomers will likely use much more bandwidth than in the United Statespast. If this occurs, we could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions, service degradation or slower 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 elsewhere.attract customers in affected markets. Competitive or regulatory constraints may preclude us from recovering the costs of network investments designed to address these issues, which could adversely impact our operating margins, results of operations, financial condition and cash flows.


41
TableWe have been accused of Contents

Intellectualinfringing the intellectual property and proprietary rights of others and will likely face similar accusations in the future, which could prevent us from using necessary technology to provide our services or subject us to expensivecostly and time-consuming litigation or require us to seek third-party licenses.

Like other communications companies, we have increasingly in recent years received a number of notices from third parties or have been named in lawsuits filed by third parties claiming we have infringed or are infringing upon their intellectual property litigation.
If technology that is necessary forrights. We are currently responding to several of these notices and claims and expect this industry-wide trend will continue. Responding to these claims may require us to provideexpend significant time and money defending our services was determined by a court to infringe a patent held by another entity that is unwilling to grant us a license on terms acceptable to us, we could be precluded by a court order from using thatuse of the applicable technology, and divert management’s time and resources away from other business. In certain instances, we would likelymay be required to enter into licensing agreements requiring royalty payments. In the case of litigation, we could be required to pay a significant monetary damages award to the patent holder. The successful enforcement of these patents, or our inability to negotiate a license for these patents on acceptable terms, could force us to cease using the relevantapplicable technology. If we are required to take one or more of these actions, our profit margins may decline or our operations could be materially impaired. 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 our business, results of operations, financial condition and cash flows.

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 offering services incorporatingmay be prohibited, restricted, made more costly or delayed.



We may not be successful in protecting and enforcing our intellectual property rights.

We rely on various patents, copyrights, trade names, trademarks, service marks, trade secrets and other similar intellectual property rights, as well as confidentiality agreements and procedures, to establish and protect our proprietary rights. The steps we have taken, however, may not prevent unauthorized use or the reverse engineering of our technology. Others may independently develop technologies that are substantially equivalent, superior to, or otherwise competitive to the technologies we employ in our services or that infringe on our intellectual property. We may be unable to prevent competitors from acquiring proprietary rights that are similar to or infringe upon our proprietary rights, or to prevent our current or former employees from using or disclosing to others our proprietary information. Enforcement of our intellectual property rights may depend on initiating legal actions against parties who infringe or misappropriate our proprietary information, but these actions may not be successful, even when our rights have been infringed. If we are unsuccessful in protecting or enforcing our intellectual property rights, our business, competitive position, results of operations and financial condition could be adversely affected.

Our operations, financial performance and liquidity are materially reliant on various third parties.

Reliance on other communications providers. To offer certain services in certain of our markets, we must either purchase services or lease network capacity from, or interconnect our network with the infrastructure of, other communications carriers or cloud companies who typically compete against us in those markets. Our reliance on these supply or interconnection arrangements exposes us to multiple risks. Typically these arrangements limit our control over the quality of our services and expose us to the risk that our ability to market our services could be adversely impacted by changes in the plans or properties of the carriers upon which we are reliant. In addition, we are exposed to the risk that the other carriers may be unwilling or unable to continue or renew these arrangements in the future on terms favorable to us, or at all. This risk is heightened when the other carrier is a competitor who may benefit from terminating the agreement or imposing price increases, or a carrier who suffers financial distress or bankruptcy. If we lose these arrangements and cannot timely replace them, our ability to provide services to our customers and conduct our business could be materially adversely affected. Moreover, many of our arrangements with other carriers are regulated by domestic or foreign agencies, which subject us to the additional risk that changes in regulation could increase our costs or otherwise adversely affect our ability to provide services. Finally, even when another carrier agrees or is obligated to provide services to us to permit us to obtain new customers, it is frequently expensive, difficult and time-consuming to switch the new customers to our network, especially if the other carrier fails to provide timely and efficient cooperation.

Conversely, certain of our operations carry a significant amount of voice or data traffic for other communications providers. Their reliance on our services exposes us to the risk that they may transfer all or a portion of this traffic from our network to existing or newly-built networks owned or leased by them, thereby reducing our revenue.

Our operations and financial performance could be adversely affected if our relationships with any of these other communications companies are disrupted or terminated for any other reason, including if such other companies:

become bankrupt or experience substantial financial difficulties;

suffer work stoppages or other labor strife;

challenge our right to receive payments or services under applicable regulations or the terms of our existing contractual arrangements; or

are otherwise unable or unwilling to make payments or provide services to us.



Reliance on other key suppliers and vendors. We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure, including fiber optic cable, software, optronics, transmission electronics, digital switches and related components. 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 and may be adversely affected if third parties assert patent infringement claims against our suppliers or us. We also rely on a limited number of (i) software vendors to support our business management systems, (ii) content suppliers to provide programming to our video operations, and (iii) contractors to assist us in connection with our network construction and maintenance activities. In the event thatit becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement supplies, services, utilities or programming on economically attractive terms, on a claimtimely basis, or at all, which could increase costs or cause disruptions in our services.

Reliance on utility providers and landlords. Our energy costs can fluctuate significantly or increase for a variety of infringement was brought against us basedreasons, including changes in legislation and regulation. Several pending proposals designed to reduce greenhouse emissions could substantially increase our energy costs, which we may not be able to pass on the useto our customers.

We lease many of our technology or againstoffice facilities. Although the majority of these leases provide us with the opportunity to renew the lease, many of these renewal options provide that rent for the renewal period will be equal to the fair market rental rate at the time of renewal. Any resulting increases in our customers basedrent costs could have a negative impact on their use of our services for which we are obligated to indemnify, we could be subject to litigation to determine whether such use or sale is, in fact, infringing. This litigation could be expensive and distracting, regardless of the outcome of the suit.
While our own patent portfolio may deter other operating companies from bringing such actions, patent infringement claims are increasingly being asserted by patent holding companies, which do not use technology and whose sole business is to enforce patents against operators, such as us, for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counterclaim would be largely ineffective. We have already been the subject of time-consuming and expensive patent litigation brought by certain patent holding companies and we can reasonably expect that we will face further claims in the future.
Continued uncertainty in the global financial markets and the global economy may negatively affect our financial results.
Continued uncertainty
Reliance on governmental payments. We provide products or services to various federal, state and local agencies. Our failure to comply with complex governmental regulations and laws applicable to these programs, or the terms of our governmental contracts, could result in the global financial markets and economy may negatively affect our financial results. A prolongedus being suspended or disbarred from future governmental programs or contracts for a significant period of economic decline could have a material adverse effect ontime. Moreover, certain governmental agencies frequently reserve the right to terminate their contracts for convenience or if funding is unavailable. If our governmental contracts are terminated for any reason, or if we are suspended or debarred from governmental programs or contracts, our results of operations and financial condition and exacerbate some of the other risk factors we describe herein. Our operating results and financial condition could be negatively affected if, as a result of economic conditions:
customers cancel, defer or forgo purchases of our services;materially adversely affected.

customers are unable to make timely payments to us;
the demand for, and prices of,Violating our services are reduced as a result of actions by our competitors or otherwise;government contracts could have other serious consequences.

key suppliers upon whichWe provide services to various governmental agencies with responsibility for national security or law enforcement. These governmental contracts impose significant requirements on us relating to network security, information storage and other matters, and in certain instances impose on us additional heightened responsibilities, including requirements related to the composition of CenturyLink's Board of Directors. While we rely are unwilling or unable to provide us with the materials we need for our network on a timely basis or on terms that we find acceptable; or

our financial counterparties, insurance providers or other contractual counterparties are unable to, or do not meet, their contractual commitments to us.

Future expansion or adaptation of our network will require substantial resources, which may not be available at the time.
We will needexpect to continue to expandcomply fully with all of our obligations under these contracts, we cannot assure you of this. The consequences of violating these contracts could be severe, potentially including the revocation of our FCC licenses in the U.S. (in addition to being suspended or debarred from government contracting, as noted above.)

Portions of our property, plant and adaptequipment are located on property owned by third parties.

We rely on rights-of-way, colocation agreements, franchises and other authorizations granted by governmental bodies, railway companies, utilities, carriers and other third parties to locate our cable, conduit and other network equipment on or under their respective properties. A significant number of these authorizations are scheduled to lapse over the next five to ten years, unless we are able to extend or renew them. Our operations could be adversely affected if any of these authorizations terminate or lapse, or if the landowner requests price increases. Moreover, our ability to expand our network to remain competitive,could depend in part on obtaining additional authorizations, the receipt of which may require significant additional funding. Additional expansion and adaptations of our communications network’s electronic and software components will be necessary to respond to:
growing number of customers;is not assured.

the development and launching of new services;

42
Table of Contents


increased demands by customers to transmit larger amounts of data;

changes in customers’ service requirements;

technological advances by competitors; and

governmental regulations.

Future expansion or adaptation of our network will require substantial additional financial, operational and managerial resources, which may not be available at the time. We may be unable to expand or adapt our network to respond to these developments on a timely basis and at a commercially reasonable cost.
The market prices for many of our services have decreased in the past and may decrease in the future, resulting in lower revenue and margins than we anticipate.
Over the past few years, certain utilities, cooperatives and municipalities in certain of the market pricesstates in which we operate have requested significant rate increases for manyattaching 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.



Our subsidiaries currently are, and in the past have been, subject to lawsuits challenging the subsidiaries’ use of rights-of-way. Similar suits are possible in the future. Plaintiffs in these suits typically seek to have them certified as class action suits. These suits are typically complex, lengthy and costly to defend, and expose us to each of the other general litigation risks described elsewhere herein.

Our business customers may seek to shift risk to us.

We furnish to and receive from our business customers indemnities relating to damages caused or sustained by us in connection with certain of our services have decreased. These decreases resulted from downward market pressureoperations. Our customers’ changing views on risk allocation could cause us to accept greater risk to win new business or could result in us losing business if we are not prepared to take such risks. To the extent that we accept such additional risk, and seek to insure against it, our insurance premiums could rise.

Our international operations expose us to various regulatory, currency, tax, legal and other factors including:
technological changes and network expansions which have resulted in increased transmission capacity available for sale by us and by our competitors;risks.

some of our customer agreements contain volume based pricing; and

some of our competitors have been willing to accept smaller operating margins in the short term in an attempt to increase long-term revenue.

To retain customers and revenue, we often must reduce prices in response to market conditions and trends. As our prices for some of our services decrease, our operating results may suffer unless we are able to either reduce our operating expenses or increase traffic volume from which we can derive additional revenue.
The need to obtain additional capacity for our network from other providers increases our costs. In addition, the need to interconnect our network to networks that are controlled by others could increase our costs.
We use network resources owned by other companies for portions of our network. We obtain the right to use such network portions, including both telecommunications capacity and rights to use dark fiber, through operating leases and IRU agreements. In several of those agreements, the counter party is responsible for network maintenance and repair. If a counter party to a lease or IRU suffers financial distress or bankruptcy, we may not be able to enforce our rights to use these network assets or, even if we could continue to use these network assets, we could incur material expenses related to maintenance and repair. We could also incur material expenses if we were required to locate alternative network assets. We may not be successful in obtaining reasonable alternative network assets if needed. Failure to obtain usage of alternative network assets, if necessary, could have a material adverse effect on our ability to carry on business operations. In addition, some of our agreements with other providers require the payment of amounts for services whether or not those services are used.
In the normal course of business, we need to enter into interconnection agreements, including IP interconnection for voice and data services, with many domestic and foreign local telephone companies as well as the owners of networks that our customers desire to access to deliver their services. We are not always able to secure these interconnection agreements on favorable terms.

43
Table of Contents

Costs of obtaining service from other communications carriers comprise a significant proportion of the operating expenses of long distance carriers. Similarly, a large proportion of the costs of providingOur international service consists of payments to other carriers. Changes in regulation, particularly the regulation of local and international telecommunication carriers and local access network owners, could indirectly, but significantly, affect our competitive position. These changes could increase or decrease the costs of providing our services.
Our operations are subject to regulationU.S. and non-U.S. laws and regulations regarding operations in each of the countriesinternational jurisdictions in which we operateprovide services. These numerous and sometimes conflicting laws and regulations include anti-corruption laws, anti-competition laws, trade restrictions, tax laws, immigration laws, privacy laws and accounting requirements. Many of these laws are complex and change frequently. Regulations that require usthe awarding of contracts to obtainlocal contractors or the employment of local citizens may adversely affect our flexibility or competitiveness in these jurisdictions. Local laws and maintainregulations, and their interpretation and enforcement, differ significantly among those jurisdictions. There is a numberrisk that these laws or regulations may materially restrict our ability to deliver services in various international jurisdictions or could be breached through inadvertence or mistake, fraudulent or negligent behavior of governmental licenses and permits. If we failour employees or agents, failure to comply with those regulatorycertain formal documentation or technical requirements, or to obtainotherwise. Violations of these laws and maintain those licensesregulations could result in fines and permits, including paymentpenalties, criminal sanctions against us or our personnel, or prohibitions on the conduct of related fees, if any, we may not be able to conduct our business in that jurisdiction. Moreover, those regulatory requirements could change in a manner that significantly increasesor our costs or otherwise adversely affects our operations.
In the ordinary course of constructing our networks and providing our services, we are requiredability to obtain and maintain a variety of telecommunications and other licenses and authorizations in the countries in which we operate as well as rights-of-way from utilities, railroads, incumbent carriers and other persons. We also must comply with a variety of regulatory obligations. Due to the political and economic risks associated with the countries in which we operate, there can be no assurance that we will be able to maintain our licenses or that they will be renewed upon their expiration. Our failure to obtain or maintain necessary licenses, authorizations and rights-of-way, or to comply with the obligations imposed upon license holders including the payment of fees, in one or more countries, may result in sanctions or additional costs, including the revocation of authority to provide services in one or more countries.
In addition, our subsidiaries are defendants in several lawsuits that, among other things, challenge the subsidiaries’ use of rights-of-way. The plaintiffs have sought to have these lawsuits certified as class actions. It is possible that additional suits challenging use of our rights-of-way will be filed and that those plaintiffs also may seek class certification. The outcome of such litigation may increase our costs and adversely affect our operating results.
Our operations around the world are subject to regulation at the regional level (for example, the European Union), the national level (for example, the FCC) and, in many cases, at the state, provincial, and local levels. We also operate in some areas of the world without licenses, but only as permitted through relationships with locally licensed partners. The regulation of telecommunications networks and services around the world varies widely. In some countries, the range of services that we are legally permitted to provide may be limited, or may change. In other countries, existing telecommunications legislation is in the process of development, is unclear or inconsistent, or is applied in an unequal or discriminatory fashion, or inadequate judicial, regulatory or other forums are available to address these inadequacies or disputes. Changes to existing regulations or rules, or the failure to regulate going forward in areas which have historically been regulated on matters such as network neutrality, licensing fees, environmental, health and safety, privacy, intercarrier compensation, interconnection and other areas, in general or particular to our industry, may increase costs, restrict operations or decrease revenue. Our inability or failure to comply with the telecommunications and other laws and regulations of one or more of the countries in which we operate could result in the temporary or permanent suspension of operations in one or more countries. We also may be prohibited from entering certain countries at all or from providing all of our services in one or more countries. In addition, many of the countries in which we operate are conducting regulatory or other proceedings that will affect the implementation of their telecommunications legislation. We cannot be certain of the outcome of these proceedings. These proceedings may affect the manner in which we are permitted to provide our services in these countries as well as the level of fees and taxes payable to the government.



44
Table of Contents


Termination of relationships with key suppliers could cause delay and additional costs.
Our business is dependent on third-party suppliers for fiber, computers, software, optronics, transmission electronics and related components as well as providers of network colocation facilities and right of way rights that are integrated into our network, some of which are critical to the operation of our business. If any of these critical relationships is terminated, a supplier either exits or curtails its business as a result of economic conditions, a supplier fails to provide critical rights of use, services or equipment, or the supplier is forced to stop providing services due to legal constraints, such as patent infringement, and we are unable to reach suitable alternative arrangements quickly, we may experience significant additional costs or we may not be able to provide certain services to customers.
Our consolidated revenue is concentrated in a limited number of customers.
Approximately 16% of our consolidated revenue is concentrated among our top ten customers at year end 2015. If we lost one or more of our major customers, or, if one or more of them significantly decreased or terminated orders for our services, our business could be materially and adversely affected.
ILECs may not provide us local access services at prices that allow us to effectively compete.
We acquire a significant portion of our local access services, the connection between our owned network and the customer premises, from incumbent local exchange carriers or ILECs. The ILECs compete directly with our business and may have a tendency to favor themselves and their affiliates to our detriment. For instance, at the end of 2013, AT&T attempted to eliminate its longer term plans (and correspondingly larger discounts) used routinely by us to purchase certain local access services from AT&T. The price increases we would have seen as the result of the loss of these larger discounts, price increases we would have had little choice but to pass on to our customers, would have made competing with AT&T in its operating region more difficult. We and others objected to AT&T’s filings at the FCC, and following FCC intervention, AT&T withdrew these unilateral price increases. We are unable to predict what AT&T may try next, and what other incumbent telephone companies may pursue in this regard.
Network access represents a very large portion of our total costs and if we face less favorable pricing and provisioning timeframes, we may be at a competitive disadvantage to the ILECs.
In some instances it is expensive and difficult to switch new customers to our network, and lack of cooperation of incumbent carriers can slow the new customer connection process.
It is expensive, difficult and time-consuming for new customers to switch to our network if we require cooperation from the incumbent carrier in instances where there is no direct connection between the customer and our network. Many of our principal competitors, the domestic and international incumbent carriers, are already established providers of local telephone services to all or virtually all telephone subscribers within their respective service areas. Their physical connections from their premises to those of their customers are expensive and difficult to duplicate. To complete the new customer provisioning process for a customer’s location that is not located on our network, we rely on the incumbent carrier to process certain information. The incumbent carriers have a financial interest in retaining their customers, which could reduce their willingness to cooperate with our new customer provisioning requests, thereby adversely affecting our ability to compete and increase revenue. Further consolidation of incumbent carriers with other telecommunications service providers may make these problems more acute.

45
Table of Contents

We may be liable for the information that content owners or distributors distribute over our network.
The law relating to the liability of private network operators for information carried on or disseminated through their networks is still unsettled. While we disclaim any liability for third-party content in our services agreements, we may become subject to legal claims relating to the content disseminated on our network, even though such content is owned or distributed by our customers or a customer of our customers. For example, lawsuits may be brought against us claiming that material distributed using our network was inaccurate, offensive, or violated the law or the rights of others. Claims could also involve matters such as defamation, invasion of privacy and copyright infringement. In addition, the law remains unclear over whether content may be distributed from one jurisdiction, where the content is legal, into another jurisdiction, where it is not. Companies operating private networks have been sued in the past, sometimes successfully, based on the nature of material distributed, even if the content is not owned by the network operator and the network operator has no knowledge of the content or its legality. It is not practical for us to monitor all of the content that is distributed using our network. We may need to take costly measures to reduce our exposure to these risks or to defend ourselves against such claims.
We may not be able to efficiently and effectively integrate future acquired operations and thus may not fully realize the anticipated benefits from those future acquisitions.
Achieving the anticipated benefits of any acquisitions depends in part upon whether we can integrate our businesses in an efficient and effective manner. We may acquire businesses in accordance with our business strategy. The integration of any acquired businesses involves a number of risks, including, but not limited to:
demands on management related to any significant increase in size after the acquisition;

the disruption of ongoing business and the diversion of management’s attention from the management of daily operations to management of integration activities;

failure to fully achieve expected synergies and costs savings;

unanticipated impediments in the integration of departments, systems, including accounting systems, technologies, books and records, procedures and policies, as well as in maintaining uniform standards and controls, including internal control over financial reporting;

loss of customers or the failure of customers to order incremental services that we expect them to order;

failure to provision services that are ordered by customers during the integration period;

higher integration costs than anticipated; and

difficulties in the assimilation and retention of highly qualified, experienced employees, many of whom may be geographically dispersed.

Successful integration of acquired businesses or operations depends on our ability to manage these operations, realize opportunities for revenue growth presented by strengthened service offerings and expanded geographic market coverage, obtain better terms from our vendors due to increased buying power, and eliminate redundant and excess costs to fully realize the expected synergies. Because of difficulties in combining geographically distant operations and systems which may not be fully compatible, we may not be able to achieve these objectives.

46
Table of Contents

We cannot be certain that we will realize our anticipated benefits from our acquisitions, or that we will be able to efficiently and effectively integrate acquired operations as planned.
Changes in regulations affecting commercial power providers may increase our costs.
In the normal course of business, we need to enter into agreements with many providers of commercial power for our office, network, Gateway facilities, and colocation and data center facilities. Costs of obtaining commercial power comprise a significant component of our operating expenses. Changes in regulations that affect commercial power providers, particularly regulations related to the control of greenhouse gas emissions or other climate change related matters, could affect the costs of commercial power, which may increase the costs of providing our services.
Potential regulation of Internet service providers in the United States could adversely affect our operations.
In the United States, the FCC has, to date, treated Internet service providers as enhanced service providers. In addition, Congress has, to date, not sought to heavily regulate the provision of IP-based services. Both Congress and the FCC are considering proposals that involve greater regulation of IP-based service providers. Depending on the content and scope of any regulations, the imposition of such regulations could have a material adverse effect on our business, reputation, results of operations, financial condition or prospects.

Many non-U.S. laws and regulations relating to communications services are more restrictive than U.S. laws and regulations, particularly those relating to privacy rights and data retention. For example, all 28 current member states of the profitabilityEuropean Union have adopted new European data protection laws that we believe could impact our operations in Europe and could potentially expose us to an increased risk of our services.
The communications industry is highly competitivelitigation or significant regulatory fines. Moreover, national regulatory frameworks that are consistent with participants thatthe policies and requirements of the World Trade Organization have greater resourcesonly 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 greater number of existing customers.
The communications industry is highly competitive. Many of our existing and potential competitors have financial, personnel, marketing and other resources significantly greater than ours. Many of these competitors have the added competitive advantage of a larger existing customer base. In addition, significant new or increased competition could arise asliberalized telecommunications market. As a result, of:
in these markets we may encounter more protracted and difficult procedures to obtain licenses necessary to provide the consolidation in the industry;

allowing foreign carriersfull set of products and services we seek to more extensively compete in the U.S. market;

further technological advances; and

further deregulation and other regulatory initiatives.offer.

In addition future significant competitors could include new entrants to the communications industry such as content companies that have existing significant customer bases and substantial cash resources that are greater than ours. If we are unable to compete successfully, our business could be significantly affected.
Rapid technological changes can lead to further competition.
The communications industry is subject to rapid and significant changes in technology. In addition, the introduction of new services or technologies, as well as the further development of existing services and technologies, may reduce the cost or increase the supply of certain services similar to those that we provide. As a result, our most significant competitors in the future may be new entrants to the communications industry. These new entrants may not be burdened by an installed base of outdated equipment or obsolete technology. Our future success depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes.


47
Table of Contents

Ourthese international operations and investments expose us toregulatory risks, that could materially adversely affect the business.
We have operations and investments outsidesome of the United States, as well as rights to undersea cable capacity extending to other countries, that expose us to risks inherent in international operations. Theseconducting business internationally include:
general economic, social and political conditions;

the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems;

tax, rates in some countries may exceed those in the United States;

United States and other country tax laws may limit our ability to repatriate cash from non-U.S. affiliates without adverse tax consequences;

foreign currency exchange rates may fluctuate, which could adversely affect our results of operations and the value of our international assets and investments;

non-U.S. earnings may be subject to withholding requirements or the imposition of tariffs, exchange controlslicensing, political or other restrictions;

difficulties and costs of compliance with non-U.S. laws and regulations that imposebusiness restrictions on our investments and operations, with penalties for noncompliance, including loss of licenses and monetary fines;

difficulties in obtainingor requirements, which may render it more difficult to obtain licenses or interconnection arrangementsagreements on acceptable terms, if at all;

uncertainty concerning import and export restrictions, including the risk of fines or penalties assessed for violations;

longer payment cycles and problems collecting accounts receivable;

U.S. and non-U.S. regulation of overseas operations, including regulation under the U.S. Foreign Corrupt Practices Act "the "FCPA") and other applicable anti-corruption laws, including the U.K. Bribery Act of 2010 and the Brazilian Anti-corruption Law, (collectively with the FCPA, the “Anti-Corruption Laws”);

economic, social and political instability, with the attendant risks of terrorism, kidnapping, extortion, civic unrest and potential seizure or nationalization of assets;



currency and exchange controls, repatriation restrictions and fluctuations in currency exchange rates;

challenges in securing and maintaining the necessary physical and telecommunications infrastructure;

the inability in certain jurisdictions to enforce contract rights either due to underdeveloped legal systems or government actions that result in a deprivation of contract rights;

increased risk of cyber-attacks or similar events to our network as we expand our network or interconnect our network with other networks internationally;

the inability in certain jurisdictions to adequately protect intellectual property rights;

laws, policies or practices that restrict with whom we can contract or otherwise limit the scope of operations that can legally or practicably be conducted within any particular country;

potential submission of disputes to the jurisdiction of a non-U.S. court or arbitration panel;

reliance on third parties, including those with which we have limited experience;

limitations in the availability, amount or terms of insurance coverage;

the imposition of unanticipated or increased taxes, increased communications or privacy regulations or other forms of public or governmental regulation that increase our operating expenses; and

challenges in staffing and managing overseas operations.

Changes in multilateral conventions, treaties, tariffs or other arrangements between or among sovereign nations could impact us. Specifically, the British government is currently negotiating the terms of the United Kingdom’s exit from the European Union ("Brexit"). Brexit could potentially impact our supply chains, logistics, and human resources. Additionally, Brexit and other changes in lawsmultilateral arrangements may more broadly adversely affect our operations and regulations relatingfinancial results

Many of these risks are beyond our control, and we cannot predict the nature or the likelihood of the occurrence or corresponding effect of any such events, each of which could have an adverse effect on our financial condition and results of operations.

Certain of our international operations are conducted in countries or regions experiencing corruption or instability, which subjects us to heightened legal and economic risks.

We do business and may in the future do additional business in certain countries or regions in which corruption is a serious problem. Moreover, in order to effectively compete in certain non-U.S. tradejurisdictions, it is frequently necessary or required to establish joint ventures, strategic alliances or marketing arrangements with local operators, partners or agents. In certain instances, these local operators, partners or agents may have interests that are not always aligned with ours. 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 Anti-Corruption Laws for actions taken by our strategic or local partners or agents. Any determination that we have violated any Anti-Corruption Laws could have a material adverse effect on our business, results of operations, reputation or prospects.



We conduct significant operations in regions that have historically experienced high levels of political, economic and investment.social instability, including the Latin American region. Various events in recent years have placed pressures on the stability of the currencies of several Latin American countries in which we operate, including Argentina, Brazil and Colombia. Pressures or volatility in local or regional currencies may adversely affect our customers in this region, which could diminish their ability or willingness to order products or services from us. Several Latin American countries have historically experienced high rates of inflation. Governmental actions taken to curb inflation, coupled with speculation about possible future actions, have in the past contributed to periodic economic uncertainty in many Latin American countries. Similar actions in the future, together with abrupt shifts in governmental administrations, could impede our ability to develop or implement effective business plans in the region. In addition, if high rates of inflation persist, we may not be able to adjust the price of our services sufficiently to offset our higher costs. A high inflation environment would also have negative effects on the level of economic activity and employment and adversely affect our business.

We are exposed to significant currency exchange rate risks and currency transfer restrictions and our results may suffer due to currency translations and remeasurements.re-measurements.
Certain of our current and prospective customers derive their revenue in currencies other than U.S. dollars but are invoiced by us in U.S. dollars. The obligations of customers with substantial revenue in foreign currencies may be subject to unpredictable and indeterminate increases in the event that such currencies depreciate in value relative to the U.S. dollar. Furthermore, these customers may become subject to exchange control regulations restricting the conversion of their revenue currencies into U.S. dollars. In either event, the affected customers may not be able to pay us in U.S. dollars. Similarly, declines
Declines in the value of foreignnon-U.S. currencies (such as the devaluation of the Brazilian real and the Argentine peso discussed below) relative to the U.S. dollar could adversely affect us in several respects, including hampering our ability to market our services to customers whose revenue is denominated in thosedepreciated currencies. In addition, where we issue invoices for our services in currencies other than U.S. dollars, our results of operations may suffer due to currency translations in the event thatif such currencies depreciate relative to the U.S. dollar and we cannot or do not elect to enter into currency hedging arrangements in respect ofregarding those payment obligations.
We conduct a significant portion of our business using Similarly, the British pound, the euro and the Brazilian real. Appreciationstrengthening of the U.S. dollar adversely affectsand exchange control regulations could negatively impact the ability of overseas customers to pay for our consolidated revenue. Since we tend to incur costsservices in the same currency in which those operations realize revenue, the effect on operating income and operating cash flow is largely mitigated. However, if the U.S. dollar appreciates significantly, future revenue, operating income and operating cash flows could be materially affected. In addition, thedollars.

48
Table of Contents

appreciation of the U.S. dollar relative to foreign currencies reduces the U.S. dollar value of cash balances held in those currencies.
Certain Latin American economies have experienced shortages in foreignnon-U.S. currency reserves and have adopted restrictions on the use of certain mechanisms to expatriate local earnings and convert local currencies into U.S. dollars. Any of these shortages or restrictions may limit or impede our ability to transfer or to convert those currencies into U.S. dollars and to expatriate those funds. In addition, currency devaluations in one country may have adverse effects in another country.
Economic and political conditions in Latin America pose numerous risks to our operations.
Our business operations in the Latin American region constitute a significant portion of our business. As events in the Latin American region have demonstrated, negative economic or political developments in one country in the region can lead to or exacerbate economic or political instability elsewhere in the region. Furthermore, events in recent years in other developing markets have placed pressures on the stability of the currencies of a number of countries in Latin America in which we operate, including Argentina, Brazil and Colombia. While certain areas in the Latin American region have experienced economic growth, this recovery remains fragile. Pressures on local currencies are likely to have an adverse effect on our customers in this region. Volatility in regional currencies and capital markets could also have an adverse effect on our ability and that of our customers to gain access to international capital markets for necessary financing, refinancing and repatriation of earnings.
In addition, any changes to the political and economic conditions in certain Latin American countries could materially and adversely affect our business.
Inflation and certain government measures to curb inflation in some Latin American countries may have adverse effects on their economies and our business and operations in those locations.
Some Latin American countries, including Brazil and Argentina, have historically experienced high rates of inflation. Inflation and some measures implemented to curb inflation have had significant negative effects on the economies of these countries. Governmental actions taken in an effort to curb inflation, coupled with speculation about possible future actions, have contributed to economic uncertainty at times in most Latin American countries. These countries may experience high levels of inflation in the future that could lead to further government intervention in the economy, including the introduction of government policies that could adversely affect our results of operations in those locations. In addition, if any of these countries experience high rates of inflation, weWe may not be able to adjustdispose of assets or asset groups on terms that are attractive to us, or at all.

In the pricepast, we have disposed of assets or asset groups for a variety of reasons, and we may consider disposing of other assets or asset groups from time to time in the future. We may not be able to divest any such assets on terms that are attractive to us, or at all. In addition, if we agree to proceed with any such divestitures of assets, we may experience operational difficulties segregating them from our retained assets and operations, which could impact the execution or timing for such dispositions and could result in disruptions to our operations or claims for damages, among other things.

Unfavorable general economic conditions could negatively impact our operating results and financial condition.

Unfavorable general economic conditions, including unstable economic and credit markets, could negatively affect our business. While it is difficult to predict the ultimate impact of these general economic conditions, they could adversely affect demand for some of our products and services sufficientlyand could cause customers to offset the effectsshift to lower priced products and services or to delay or forego purchases of inflation on our cost structuresproducts 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 operating under budgetary constraints. Any one or more of these circumstances could continue to depress our revenue. 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 locations. A high inflation environment would also have negative effects on the level offrom which we previously benefited, at terms that are acceptable to us, or at all. For these reasons, among others, weak economic activity and employment andconditions could adversely affect our business.operating results, financial condition, and liquidity.



Our agreementsconsolidated revenue is concentrated in a relatively small number of customers.

A relatively small number of customers account for a significant percentage of our revenue. Our top ten customers accounted for approximately 20 percent of our revenue for the year ended December 31, 2018. If we lost any or all of these customers, or any such customer materially decreased its orders for our services, our business would be adversely affected.

For additional information about our business and operations, see "Business" in Item 1 of this report.

Risks Relating to Our November 2017 Combination with certain agenciesCenturyLink

We cannot assure you that our ultimate parent company, CenturyLink, will timely realize the anticipated benefits of the U.S. Government impose significant requirements onbusiness combination with us. A violation

Our ultimate parent company, CenturyLink, expects to attain substantial benefits from its November 1, 2017, business combination with us, including enhanced scale, cost savings and the receipt of those agreements could have severe consequences.our net operating loss carryforwards for tax purposes. We cannot assure you that CenturyLink will be able to attain these anticipated benefits.
We are a party
The combination poses various risks to an agreementCenturyLink and us.

CenturyLink and we incurred substantial expenses in connection with completing the U.S. Departmentsacquisition of Homeland Security, Justice and Defense addressing the U.S. government’s national security and law enforcement concerns. This agreement imposes significant requirements on us related to information storage and management; traffic management; physical, logical, and network security arrangements; personnel screening and training; and other matters. We are also party to an agreement with the U.S. Department of Defense addressing the U.S. government’s national security concerns. This agreement imposes significant requirements on us related to the composition and qualifications of the Level 3 Communications, Inc. board of directors; the limitation of the influence or control over us of non-U.S. persons; physical, logical,on November 1, 2017, and network security arrangements;both they and other matters.

49
Table of Contents

While we expect to continue to comply fullyincur substantial expenses in connection with integrating its operations with our obligationsoperations. For a variety of reasons, the integration process may not be successful. Moreover, in connection with the combination, CenturyLink incurred and assumed a substantial amount of indebtedness. Under the agreements that govern such indebtedness, CenturyLink is bound by various covenants and other provisions that impose restrictions on its ability to operate, and Level 3 Parent's immediate parent has guaranteed CenturyLink's debt and has secured such guaranty with a first priority interest in substantially all of its assets.

CenturyLink's combination with us raises other risks.

CenturyLink's combination with us raises additional risks not described above. For additional information, see CenturyLink's (i) Definitive joint proxy statement/prospectus filed with the SEC on February 13, 2017 and (ii) CenturyLink's most recently filed annual report on Form 10-K, as updated by its subsequent Exchange Act reports.

Risks Relating to Legal and Regulatory Matters

We operate in a highly regulated industry and are therefore exposed to restrictions on our operations and a variety of risks relating to such regulation.

General. Our domestic operations are regulated by the FCC, various state utility commissions and occasionally by local agencies. Our non-domestic operations are regulated by supranational groups (such as the European Union), national agencies and, frequently state, provincial or local bodies.

Generally, we must obtain and maintain operating licenses from these bodies in most territories where we offer regulated services. We cannot assure you that we will be successful in obtaining or retaining all licenses necessary to carry out our business plan. Even if we are, the prescribed service standards and conditions imposed on us under boththese licenses may increase our costs and limit our operational flexibility. We also operate in some areas of the above-mentioned agreements, it is impossible to eliminate completely the risk of a violation of either. The consequences of a violation of these agreements could be severe, potentially including the revocation of our FCCworld without licenses, in the U.S., which would result in the cessation of our U.S. operations, and/or the loss of permissions required to do businessas permitted through relationships with the U.S. Government.locally-licensed partners.



We are subject to numerous requirements and interpretations under various international, federal, state and local laws, rules and regulations, which are often quite detailed and occasionally in conflict with each other. The regulation of telecommunications networks and services around the U.S. Foreign Corrupt Practices Act (the “FCPA”) andworld varies widely. In some countries, the range of services we are legally permitted to provide may be limited or may change. As noted above, in other anticorruption laws, and ourcountries existing telecommunications legislation is in development, is subject to currently ongoing proceedings, is unclear or inconsistent, or is applied in an unequal or unpredictable fashion, often in the absence of adjudicative forums that are adequate to address disputes. Accordingly, we cannot ensure that we will always be considered to be in compliance with all these requirements at any single point in time (as discussed further elsewhere herein). Our inability or failure to comply therewithwith the telecommunications and other laws of one or more countries in which we operate could result in penalties whichprevent us from commencing or continuing to provide service therein.

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. Even if we are ultimately found to have complied with applicable regulations, such actions or inquiries could harmcreate adverse publicity that negatively impacts our reputationbusiness.

Domestic regulation of the telecommunications industry continues to change, and the regulatory environment varies substantially from jurisdiction to jurisdiction. In addition, from time to time carriers or other third parties refuse to pay for certain of our services or challenge our rights to receive certain service payments. Our future revenue, costs, and capital investment could be adversely affected by material changes to or decisions regarding the applicability of government requirements, and we cannot assure you that future regulatory, judicial or legislative activities will not have a material adverse effect on our operations.

Changes in the composition and leadership of the FCC, state commissions and other agencies that regulate our business could have significant impacts on our revenue, expenses, competitive position and prospects. Changes in the composition and leadership of these agencies are often difficult to predict, and make future planning more difficult.

Risks associated with changes in regulation. Changes in regulation can have a material impact on our business, revenue or financial performance. Changes over the past couple of decades in federal regulations have substantially impacted our operations, including recent orders or laws overhauling intercarrier compensation, revamping universal service funding and increasing our responsibilities to assist various governmental agencies and safeguard customer data. These changes have significantly impacted various aspects of our operations, financial results and capital expenditures, including the amount of revenue we collect from our wholesale customers. We expect these impacts will continue in the future. For more information, see "Business-Regulation" in Item 1 of this report, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report.

Many of the FCC’s regulations adopted in recent years remain subject to judicial review and additional rulemakings, thus increasing the difficulty of determining the ultimate impact of these changes on us and our competitors.

Risks of higher costs. Regulations continue to create significant operating and capital costs for us. Regulatory challenges to our business practices 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 our operations.

Our business also may be impacted by legislation and regulation imposing new or greater obligations related to regulations or laws related to regulating broadband services, storing records, fighting crime, bolstering homeland security or cyber security, increasing disaster recovery requirements, minimizing environmental impacts, enhancing privacy, restricting data collection, protecting intellectual property rights of third parties, or addressing other issues that impact our business. We expect our compliance costs to increase if future laws or regulations continue to increase our obligations.



Risks posed by other regulations. All of our operations are also subject to a variety of environmental, safety, health and other governmental regulations. In connection with our current operations, we use, handle and dispose of various hazardous and non-hazardous substances and wastes. In prior decades, certain of our current or former subsidiaries owned or operated, or are alleged to have owned or operated, former manufacturing businesses for which we have been notified of certain potential environmental liabilities. We monitor our compliance with applicable regulations or commitments governing these current and past activities. Although we believe that we are in compliance with these regulations in all material respects, our use, handling and disposal of environmentally sensitive materials, or the prior operations of our predecessors, could expose us to claims or actions that could potentially have a material adverse effect on our business, financial condition and operating results.

For a discussion of regulatory risks associated with our international operations, see “Risk Factors-Risks Affecting Our Business-Our international operations expose us to various regulatory, currency, tax, legal and other risks."

Regulation of the Internet could limit our ability to operate our broadband business profitably and to manage our broadband facilities efficiently.

Since the creation of the Internet, there has been extensive debate about whether and how to regulate Internet service providers. A significant number of congressional leaders, state elected officials and various consumer interest groups have long advocated in favor of extensive regulation. In 2015, the FCC adopted new regulations that regulated broadband services as a public utility under Title II of the Communications Act of 1934. Although the FCC voted to repeal most of those regulations in December 2017, opponents of the rescission have judicially challenged this action and continue to advocate in favor of re-instituting extensive regulation. Depending on the scope of any such future federal or state regulations, the imposition of heightened regulation of our Internet operations could hamper our ability to operate our data networks efficiently, restrict our ability to implement network management practices necessary to ensure quality service, increase the cost of network extensions and upgrades, and otherwise negatively impact our current operations. As the significance of the Internet expands, state, local or foreign governments may adopt new laws or regulations, or apply existing laws and regulations to the Internet. We cannot predict the outcome of any such changes.

We may be liable for the material that content providers or distributors distribute over our network.

The liability of private network operators for information stored or transmitted on their networks is impacted both by changing technology and evolving legal principles that remain unsettled in many jurisdictions. While we disclaim any liability for third-party content in our service contracts, as a private network provider we could be exposed to legal claims relating to third party content stored or transmitted on our networks. Such claims could involve, among others, allegations of defamation, invasion of privacy, copyright infringement, or aiding and abetting restricted activities such as online gambling or pornography. Although we believe our liability for these types of claims is limited, suits against other carriers have been successful and we cannot assure you that our defenses will prevail. If we decide to implement additional measures to reduce our exposure to these risks, or if we are required to defend ourselves against these kinds of claims, our operations and financial results could be negatively affected.

Our pending legal proceedings could have a material adverse impact on our financial condition and operating results and our ability to access the capital markets.

There are several material proceedings pending against CenturyLink and its affiliates, and certain material proceedings pending against us, as described in Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements included in Item 8 of this report. Results of these legal proceedings cannot be predicted with certainty. Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. For each of these reasons, any of the proceedings described in Note 16, as well as current litigation not described therein or future litigation, could have a material adverse effect on our business, reputation, financial position, operating results, and our ability to access the capital markets. We can give you no assurances as to the ultimate impact of these matters on us.



We are subject to franchising requirements that could impede our expansion opportunities or result in potential fines or penalties.

We may be required to obtain from municipal authorities operating franchises to install or expand certain facilities related to our fiber transport operations and certain of our other services. Some of these franchises may require us to pay franchise fees, and may require us to pay fines or penalties if we violate or terminate our related contractual commitments. In some cases, certain franchise requirements could delay us in expanding our operations or increase the FCPA, which generally prohibits companiescosts of providing these services.

We are exposed to risks arising out of recent legislation affecting U.S. public companies.

Changing laws, regulations and their intermediaries from making improper paymentsstandards relating to foreign officialscorporate 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, have increased our legal and financial compliance costs and made 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 our reputation with investors, lenders or others.

Changes in any of the above-described laws or regulations may limit our ability to plan, and could subject us to further costs or constraints.

From time to time, the laws or regulations governing us or our customers, or the government’s policy of enforcing those laws or regulations, have changed frequently and materially. The variability of these laws could hamper the ability of us and our customers to plan for the purposefuture or establish long-term strategies. Moreover, future changes in these laws or regulations could further increase our operating or compliance costs, or further restrict our operational flexibility, any of obtaining or keeping business and/or other benefits. Although we have policies and procedures designed to ensure that we, our employees and agents comply with the FCPA and other anticorruption laws, there can be no assurance that such policies or procedures will work effectively all of the time or protect us against liability for actions taken by our agents, employees and intermediaries with respect to our business or any businesses that we acquire.
We currently operate and in the future may operate in a number of jurisdictions that pose a high risk of potential anticorruption violations. If we are not in compliance with the FCPA and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures. Any investigation of any potential violations of the FCPA or other anticorruption laws by U.S. or foreign authoritieswhich could have ana material adverse effect on our business.results of operations, competitive position, financial condition or prospects.
The U.K. Bribery Act 2010 (the “Bribery Act”) reformed
For a more thorough discussion of the United Kingdom (“U.K.”) law in relation to bribery and corruption. As well as containing provisions concerning bribery of public officials, the Bribery Act includes a criminal offense of failing to prevent bribery by relevant commercial organizations. This offense applies when any person associated with the organization offers or accepts bribery anywhere in the world intending to obtain or retain a business advantage for the organization or in the conduct of business. The Bribery Act has wide ranging implications in particular for business in the U.K., including our subsidiaries. However, it should be notedregulatory issues that it also has a wide-ranging extra-territorial effect. The Bribery Act is broader in scope than the FCPA in that it directly addresses commercial bribery in addition to bribery of government officials and it does not recognize certain exceptions, notably facilitation payments that are permitted by the FCPA. Under the Bribery Act, it is a defense to the accusation of failure to prevent bribery for a commercial organization to show that it had in place “adequate procedures” designed to prevent such acts.
As with the FCPA, if we are not in compliance with the Bribery Act as well as similar laws in the U.K. or elsewhere, such as The Federal Law n. 12.846/13, which is known as the “Brazilian Anti-corruption Law” that became effective on February 2, 2014, that are applicable tomay affect our business, we may be subject to criminal and civil penalties and other remedial measures.see "Business-Regulation" in Item 1 of this report.

Risks Related toAffecting Our Liquidity and FinancialCapital Resources
Disruptions in
Our high debt levels expose us to a broad range of risks.

We continue to carry significant debt. As of December 31, 2018, the financial markets could affect our ability to obtain debt or equity financing or to refinance our existing indebtedness on reasonable terms (or at all), and have other adverse effects on us.
Disruptions in the commercial credit markets could result in a tightening of credit markets. The effects of recent credit market disruptions were widespread, and it is impossible to predict whether the improvement in the global credit markets will continue. As a result of credit market turmoil, we may not be able to obtain debt or equity financing or to refinance our existing indebtedness on favorable terms (or at all), which could affect our strategic operations and our financial performance and force modifications to our operations.

50
Table of Contents

If we are unable to comply with the restrictions and covenants in our debt agreements, there would be a default under the terms of these agreements, and this could result in an acceleration of payment of funds that have been borrowed.
If we were unable to comply with the restrictions and covenants in any of our debt agreements, there would be a default under the terms of those agreements. As a result, borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable. If any of these events occur, there can be no assurance that we would be able to make necessary payments to the lenders or that we would be able to find alternative financing. Even if we were able to obtain alternative financing, there can be no assurance that it would be on terms that are acceptable.
If we experience a change in control or certain other events, we may be unable to satisfy our obligations to repurchase our outstanding notes as required under our outstanding debt agreements.
Upon the occurrence of certain events defined in the various debt agreements relating to our outstanding debt, we are required to make an offer to purchase all of our outstanding notes at a purchase price generally equal to 101% of theaggregate principal amount of our consolidated long-term debt was $10.5 billion, excluding unamortized premiums, net, and capital lease and other obligations. As of such date, $640 million aggregate principal amount of this long-term debt was scheduled to mature prior to December 31, 2021. While we currently believe we will have the notes, plus accrued and unpaid interest thereon (if any). In addition,financial resources to meet or refinance our obligations when they come due, we cannot fully anticipate our future performance or financial condition, the extent that we are required to make an offer to purchase onefuture condition of the outstanding issues of our notes,credit markets or the debt agreements relating to our other issues of notes may require us to repurchase that other debt upon a change in control or termination of trading. We may not have or be able to borrow sufficient funds to pay the purchase price for all the notes tendered by holders seeking to accept the offer to purchase.economy generally.
We have substantial debt, which may hinder our growth and put us at a competitive disadvantage.
Our substantialsignificant levels of debt may have important consequences, including the following:can adversely affect us in several other respects, including:
the
limiting our ability to obtain additional financing for acquisitions, working capital, investments and capital expenditures, acquisitions, refinancings or other expenditures could be impairedgeneral corporate purposes, particularly if, as discussed further in the risk factor disclosure below, (i) the ratings assigned to our debt securities by nationally recognized credit rating organizations are revised downward or financing may not be available on acceptable terms;(ii) we seek capital during periods of turbulent or unsettled market conditions;

requiring us to dedicate a substantial portion of our cash flows will be usedflow from operations to makethe payment of interest and principal and interest payments on outstandingour debt, thereby reducing the funds otherwise available to us for operationsother purposes, including acquisitions, capital expenditures, strategic initiatives, distributions, marketing and future business opportunities;other potential growth initiatives;

a substantial decrease in cash flowshindering our ability to capitalize on business opportunities and to plan for or react to changing market, industry, competitive or economic conditions;



increasing our future borrowing costs;

limiting or precluding us from operating activitiesentering into commercial, hedging or an increase in expenses could make it difficultother financial arrangements with vendors, customers or other business partners;

making us more vulnerable to meet debt service requirements and force modifications to operations;economic or industry downturns, including interest rate increases;
having more debt than certain of our competitors may place
placing us at a competitive disadvantage; anddisadvantage compared to less leveraged competitors;

increasing the risk that we will need to sell securities or assets, possibly on unfavorable terms, or take other unfavorable actions to meet payment obligations; or

increasing the risk that we may not meet the financial covenants contained in our debt agreements or timely make all required debt payments, either of which could result in the acceleration of some or all of our outstanding indebtedness.

The effects of each of these factors could be intensified if we increase our borrowings.

A substantial portion of our indebtedness bears interest at variable rates. If market interest rates increase, our variable-rate debt maywill have higher debt service requirements, which could adversely impact our cash flows and financial condition.

Any failure to make required debt payments could, among other things, adversely affect our ability to conduct operations or raise capital.

Subject to certain limitations, our current debt agreements and the debt agreements of our subsidiaries allow us more vulnerable to a downturnincur additional debt, which could exacerbate the other risks described in businessthis report.

Subject to certain limitations and restrictions, the current terms of our debt instruments and the debt instruments of our subsidiaries permit us or them to incur additional indebtedness. Incremental borrowings that impose additional financial risks could exacerbate the economy generally.other risks described in this report.

We had a ratio of earningsexpect to fixed charges of 1.4 for the year ended December 31, 2015periodically require financing, and 1.3 for the year ended December 31, 2014. We had substantial deficiencies of earnings to cover fixed charges of approximately $71 million and $374 million for the years ended December 31, 2013 and 2012, respectively.


51
Table of Contents

We may not be able to repay our existing debt; failure to do so or refinance the debt could prevent us from implementing our strategy and realizing anticipated profits.
If we were unable to refinance our debt or to raise additional capital on acceptable terms, our ability to operate our business would be impaired. As of December 31, 2015, we had an aggregate of approximately $11.025 billion of current and long-term debt on a consolidated basis (excluding debt discounts and fair value adjustments), and approximately $10.126 billion of stockholders’ equity. Of the long-term debt, approximately $15 million is due to mature in 2016, $7 million is due to mature in 2017, $307 million is due in 2018 and $822 million is due in 2019, in each case excluding debt discounts and fair value adjustments.
Our ability to make interest and principal payments on our debt and borrow additional funds on favorable terms depends on the future performance of the business. If we do not have enough cash flow in the future to make interest or principal payments on its debt, we may be required to refinance all or a part of our debt or to raise additional capital. We cannot be sureassure you that we will be able to obtain such financing on terms that are acceptable to us, or at all.

We have a significant amount of indebtedness that we intend to refinance over the next several years, principally through the issuance of debt by Level 3 Financing, Inc. We may also need to obtain additional financing under a variety of other circumstances, including if:

we engage in additional acquisitions or undertake substantial capital projects or other initiatives that increase our cash requirements;

we become subject to significant judgments or settlements, including in connection with one or more of the matters discussed elsewhere herein; or

we otherwise require cash to fund our cash requirements described elsewhere herein.

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. Global financial markets continue to be unpredictable and volatile. Prevailing market conditions could be adversely affected by (i) general market conditions, such as disruptions in domestic or overseas sovereign or corporate debt markets, geo-political instabilities, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad and (ii) specific conditions in the communications industry. Volatility in the global markets 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.
In addition, our ability to borrow funds in the future will depend in part on the satisfaction of the covenants in our credit facilities and other debt instruments, which are discussed further below.



For all the reasons mentioned above, we can give no assurance that additional financing for any of these purposes will be available on terms that are acceptable to us, or at all.

If we are unable to make required debt payments or refinance our debt, we would likely have to consider other options, such as selling assets, issuing additional securities, reducing or raise additional capitalterminating distributions, cutting or delaying costs or otherwise reducing our cash requirements, or negotiating with our lenders to restructure our applicable debt. Our current and future debt instruments may restrict, or market or business conditions may limit, our ability to do some of these things on acceptable terms.favorable terms, or at all. For these and other reasons, we cannot assure you that we could implement these steps in a sufficient or timely manner, or at all. Moreover, any steps taken to strengthen our liquidity, such as cutting costs, could adversely impact our business or operations.
Restrictions
We have a complex debt structure, and our various debt agreements include restrictions and covenants in our debt agreementsthat could (i) limit our ability to conduct operations or borrow additional funds, (ii) restrict our businessability to engage in inter-company transactions and could prevent us(iii) lead to the acceleration of our repayment obligations in certain instances.

CenturyLink, Inc. and various of its subsidiaries (including Embarq Corporation, Qwest Corporation, Qwest Capital Funding, Inc., Level 3 Financing, Inc. and Level 3 Parent, LLC) have borrowed substantial amounts of money from obtaining needed funds infinancial institutions or investors. Under the future.
Ourassociated debt and financing arrangements, we are subject to various covenants and restrictions, the most restrictive of which pertain to the debt of CenturyLink, Inc. and the Level 3 entities.

CenturyLink, Inc.’s revolving and term loan debt arrangements contain a number ofseveral significant limitations that restrictrestricting our ability to, among other things:

borrow additional money or issue guarantees;

pay dividends or other distributions to stockholders;our member;

make loans, advances or other investments;

create liens on assets;

sell assets;

enter into sale-leaseback transactions;

enter into transactions with affiliates; and

engage in mergers or consolidations.

Risks RelatedThe debt and financing arrangements of Level 3 Parent, LLC and its subsidiary Level 3 Financing, Inc. contain substantially similar limitations that restrict our operations on a standalone basis as a separate restricted group. Consequently, certain of these covenants may significantly restrict our ability to Our Common Stockdistribute cash to our affiliated entities, or to enter into other transactions among our affiliated entities.

CenturyLink, Inc.’s above-referenced debt arrangements also contain financial covenants that require it to maintain certain financial ratios, and the term loan debt of Qwest Corporation includes a similar financial covenant. The ability of CenturyLink, Inc. and Qwest Corporation to comply with these provisions may be affected by events beyond their control.

Increasingly in recent years, certain debt investors have sought to financially benefit themselves by identifying and seeking to enforce defaults under borrowers’ debt agreements. This development could increase the risk of claims made under our debt agreements.



The unpredictabilityfailure of CenturyLink, Inc. or any of its subsidiaries to comply with the above-described restrictive or financial covenants could result in an event of default, which, if not cured or waived, could accelerate their respective debt repayment obligations. Certain of our quarterly results maydebt instruments have cross-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. As noted elsewhere herein, we cannot assure you that we could adequately address any such defaults, cross-defaults or acceleration of our debt payment obligations in a sufficient or timely manner, or at all. We expect to periodically require financing, and we cannot assure you that we will be able to obtain such financing on terms that are acceptable to us, or at all. For additional information, see “Risks Affecting Our Liquidity and Capital Resources” and Note 5—Long-Term Debt.

Any downgrade in the credit ratings of us or our affiliates could limit our ability to obtain future financing, increase our borrowing costs and adversely affect the tradingmarket price of our common stock.
Our revenue and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause the price of our common stock to fluctuate. The primary factors, among other things, that may affect our quarterly results include the following:
the timing of costs associated with the operation ofexisting debt securities or otherwise impair our business, financial condition and integration activities with respect to any completed acquisitions;results of operations.

demandNationally recognized credit rating organizations have issued credit ratings relating to our long-term debt and the long-term debt of Level 3 Financing, Inc. Most of these ratings are below “investment grade”, which results in higher borrowing costs than "investment grade" debt as well as reduced marketability of our debt securities. There can be no assurance that any rating assigned to any of these debt securities will remain in effect for our services;

52
Tableany given period of Contentstime or that any such ratings will not be lowered, suspended or withdrawn entirely by a rating agency if, in that rating agency’s judgment, circumstances so warrant.


lossA downgrade of customersany of these credit ratings could:

adversely affect the market price of some or all of our outstanding debt or equity securities;

limit our access to the abilitycapital markets or otherwise adversely affect the availability of other new financing on favorable terms, if at all;

trigger the application of restrictive covenants or adverse conditions in our current or future debt agreements;

increase our cost of borrowing; and

impair our business, financial condition and results of operations.

For more information on the credit ratings of our secured and unsecured debt, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt and Other Financing Arrangements” in Item 7 of this report.

Our business requires us to attract new customers;incur substantial capital and operating expenses, which reduces our available free cash flow.

Our business is capital intensive. We expect to continue to require significant cash to maintain and expand our network infrastructure as a result of several factors, including:

changes in pricing policies or the pricing policiescustomers' service requirements, including increased demands by customers to transmit larger amounts of data at faster speeds;

our above-described need to (i) consolidate and simplify our various legacy systems, (ii) strengthen our customer support systems and (iii) support our development and launch of new products and services; and

technological advances of our competitors;

costs related to acquisitions of technology or businesses;

changes in regulatory rulings; and

general economic conditions as well as those specific to the communications and related industries.

A delay in generating revenue or the timing of recognizing revenue and expenses could cause significant variations in our operating results from quarter to quarter. It is possible that in some future quarters our results may be below analysts’ and investors’ expectations. In these circumstances, the price of our common stock will likely decrease.
If certain transactions occur with respect to our capital stock, weWe may be unable to fully utilizeexpand or adapt our network infrastructure to respond to these developments in a timely manner, at a commercially reasonable cost or on terms producing satisfactory returns on our investment.



In addition to investing in expanded networks, new products or new technologies, we must from time to time invest capital to convert older systems to simplify and modernize our network. While we believe that our currently 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 growth initiatives. We may be unable to sufficiently manage or reduce these costs, even if revenue in some of our lines of business are decreasing. If so, our operating margins will be adversely impacted.

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 cash flows in amounts sufficient to fund our obligations, including the payment of our long-term debt. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts owed by us, except to the extent they have guaranteed such payments. Similarly, subject to limited exceptions for tax-sharing or cash management purposes, our affiliates have no obligation to make any funds available to us to repay our obligations, whether by dividends, loans or other payments. As discussed in greater detail elsewhere herein, restrictions imposed by credit instruments or other agreements applicable to certain of our subsidiaries limit the amount of funds that our subsidiaries are permitted to transfer to us, including 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. In addition, the laws under which our subsidiaries were organized typically restrict the amount of dividends that they may pay. The ability of our subsidiaries to transfer funds could be further restricted under applicable tax laws or orders imposed by state regulators (either in connection with obtaining necessary approvals for our acquisitions or in connection with our regulated operations). For all these reasons, you should not assume that our subsidiaries will be able in the future to generate and distribute to us cash in amounts sufficient to fund our cash requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” included elsewhere in this report for further discussion of these matters.

Our current distribution practices could limit our ability to deploy cash for other beneficial purposes.

The current practice of our Board of Directors to pay distributions to our member reflects a current intention to distribute to our member 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 member or debtholders, including 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 may depend more than it otherwise would on our ability to obtain third party financing.

We cannot assure you whether, when or in what amounts we will be able to use our net operating loss carry forwards,carryforwards, or NOLs, to reduce our U.S. federal income taxes.when they will be depleted.

As of December 31, 2015,2018, we had NOLsapproximately $9.5 billion of approximately $9.8 billionfederal net operating loss carryforwards, (“NOLs”), which for U.S. federal income tax purposes (after taking into account the effects of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”)). If certain transactions occur with respectcan be used to our capital stock that result in a cumulative ownership change of more than 50 percentage points by 5% stockholders over a three-year period as determined under rules prescribed by the Code and applicable regulations, annual limitations would be imposed with respect to our ability to utilize our NOLs and certain current deductions against anyoffset future taxable income we achieve in future periods.
We have entered into transactions over the applicable three-year period that, when combined with other changes in ownership that are outside of our control, have resulted in cumulative changes in the ownership of our capital stock. Additional transactions that we enter into, as well as transactions by existing 5% stockholders and transactions by holders that become new 5% stockholders that we do not participate in, could cause us to incur a 50 percentage point ownership change by 5% stockholders and, if we trigger the above noted Code imposed limitations, such transactions would prevent us from fully utilizing NOLs and certain current deductions to reduce our U.S. federal income taxesand could result in a substantial income tax expense to our consolidated statement of operations. In addition, these limitations could cause us not to pursue otherwise favorable acquisitions and other transactions involving our capital stock, or could reduce the net benefits to be realized from any such transactions.
In April 2011, we entered into the rights agreement in an effort to deter acquisitions of our common stock that might reduce our ability to use our NOLs. Under the rights agreement, from and after the record date of April 21, 2011, each share of our common stock carries with it one preferred share purchase right that could discourage a third-party from proposing a change of control or other strategic transaction concerning Level 3 or otherwise have the effect of delaying or preventing a change of control of Level 3 that other stockholders may view as beneficial.
In July 2014, the rights agreement was amended to provide that the rights issued under the rights agreement will expire at or prior to the earliest of:
October 31, 2017;

the time at which the rights are redeemed;

the time at which the rights are exchanged;

53
Table of Contents


the time at which our board of directors determines that theincome. These NOLs are utilized in all material respects or that an ownership changesubject to limitations under Section 382 of the Internal Revenue Code (“Code”) and related Treasury regulations. It should be noted that issuances or sales of 1986, as amended, would not adversely effectCenturyLink stock (including certain transactions outside of our control) could result in any material respect the time period inan ownership change of CenturyLink under Section 382, which we couldmay further limit our use the NOLs, or materially impair the amount of the NOLs. For these and other reasons, you should be aware that these limitations could restrict our ability to use these NOLs thatin the amounts we project or could use in any particular time period, for applicable tax purposes; orlimit our flexibility to pursue otherwise favorable transactions.



At December 31, 2018, we had state NOL carryforwards of approximately $10 billion. A significant portion of the state NOL carryforwards are generated in states where separate company income tax returns are filed and our subsidiaries that generated the losses may not have the ability to generate income in sufficient amounts to realize these losses. In addition, certain of these state NOL carryforwards will be limited by state laws related to ownership changes. As a determination byresult, we expect to utilize only a small portion of the state NOL carryforwards, and consequently have determined that as of December 31, 2018, these state NOL carryforwards, net of federal benefit, had a net tax benefit (after giving effect to our boardvaluation allowance) of directors, prior$283 million.

Additionally, we have foreign NOL carryforwards of $6 billion. A significant portion of the foreign NOL carryforwards are generated in subsidiaries that do not have a history of earnings and may not have the ability to generate income in sufficient amounts to realize the losses. As of December 31, 2018, we have determined that these foreign NOL carryforwards had net benefit of $296 million.

Other Risks

We have lent money to CenturyLink, which exposes us to certain risks.

We have lent $1.8 billion to CenturyLink. Developments that adversely impact CenturyLink could adversely impact our ability to collect this debt.

We face risks from natural disasters, 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 date that the rights are distributed, that the rights agreementrisks associated with severe tropical storms, hurricanes and the rights are no longer intornadoes, 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 property (excluding our above ground outside plant) and our stockholders’ best interests.

Under our certificate of incorporation, we are able to issue more shares of our common stock than are currently outstanding. Such future issuances of our common stock may, have a dilutive effect on the earnings per share and voting power of our stockholders.
Our certificate of incorporation, as currently in effect, authorizes us to issue to up to 433,333,333 shares of our common stock, which is a greater number of shares of common stock than are outstanding. If our Board of Directors elects to issue additional shares of common stock in the future, whether in public offerings, in connection with mergers and acquisitions or otherwise, these additional issuances may dilute the earnings per share and voting power of our stockholders. Depending on the number of shares being issued and the particularunder certain circumstances, involved, the Board of Directors may be able to completeseek recovery of some additional costs through increased rates, only a particular issuance without further stockholder action.
Anti-takeover provisions in our charter and by-laws could limit the share price and delay a change of management.
Our restated certificate of incorporation and by-laws contain provisions that could make it more difficult or even prevent a third-party from acquiring us without the approvalportion of our incumbent Board of Directors. These provisions, among other things:
prohibit stockholder action by written consent in place of a meeting;

limit the right of stockholdersadditional costs directly related to call special meetings of stockholders;

limit the right of stockholders to present proposals or nominate directors for election at annual meetings of stockholders; and

authorize our board of directors to issue preferred stock in one or more series without any action on the part of stockholders.

In addition, the terms of most of our long-term debt require that upon a “change in control,” as defined in the agreements that contain the terms and conditions of the long-term debt, we make an offer to purchase the outstanding long term debt at either 100% or 101% of the aggregate principal amount of that long term debt.
These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock and significantly impede the ability of the holders of our common stock to change management. Provisions and agreements that inhibit or discourage takeover attempts could reduce the market value of our common stock.
If a large number of shares of our common stock is sold in the public market, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.
such natural disasters have historically been recoverable. We cannot predict what effect,whether we will continue to be able to obtain insurance for catastrophic hazard-related damages or, if any, future issuances by us ofobtainable and carried, whether this insurance will be adequate to cover our common stock will have on the market price of our common stock.losses. In addition, shareswe expect any insurance of our common stock that we issue in

54
Table of Contents

connection with an acquisition may notthis nature to be subject to resale restrictions. The market price ofsubstantial deductibles, retentions and coverage exclusions, and the premiums to be based on our common stockloss experience. For all these reasons, any future hazard-related costs and work interruptions could drop significantly if certain large holders ofadversely affect our common stock, or recipients of our common stock in connection with an acquisition, sell all or a significant portion of their shares of common stock or are perceived by the market as intending to sell these shares other than in an orderly manner. In addition, these sales could impair our ability to raise capital through the sale of additional common stock in the capital markets.
The market price of our common stock has been volatile and, in the future, the market price of our common stock may fluctuate substantially due to a variety of factors.
The market price of our common stock has been subject to volatility and, in the future, the market price of our common stock may fluctuate substantially due to a variety of factors, including:
the depth and liquidity of the trading market for our common stock;

variations in actual or anticipated operating results;

changes in estimated results by securities analysts;

market conditions in the communications and information services industries;

announcement and performance by competitors;

regulatory actions; and

general economic conditions.

In addition, market fluctuations could have a material adverse effect on the market price or liquidity of our common stock.
Other Risks
We have environmental liabilities from our historical operations.
There could be environmental liabilities arising from historical operations of our predecessors, for which we may be liable. Our operations and properties are subject to a wide variety of laws and regulations relating to environmental protection, human health and safety. These laws and regulations include those concerning the use and management of hazardous and non-hazardous substances and wastes. We have made and will continue to make significant expenditures relating to our environmental compliance obligations. Despite our best efforts, we may not at all times be in compliance with all of these requirements.financial condition.
In connection with certain historical operations, we have responded to or been notified of potential environmental liability at approximately 171 properties as of January 11, 2016. We are engaged in addressing or have liquidated environmental liabilities at 87 of those properties. Of these: (a) we have formal commitments or other potential future costs at 23 sites; (b) there are eight sites with unknown future costs; and (c) there are 56 sites with no likely future costs. The remaining properties have been dormant for several years. We could potentially be held liable, jointly or severally, and without regard to fault, for the costs of investigation and remediation of these sites. The discovery of additional environmental liabilities related to historical operations or changes in existing environmental requirements could have a material adverse effect on our business.

55
Table of Contents

We are exposed to legal proceedings and contingent liabilities that could result in material losses that we have not reserved against.
We are party to various legal proceedings and are subject to certain important contingent liabilities described more fully in Note 16, “Commitments, Contingencies and Other Items,” to our consolidated financial statements included in this Form 10-K. If one or more of these legal proceedings or contingent liabilities were to be resolved in a manner adverse to us, we could suffer material losses. Certain of these contingent liabilities could have a material adverse effect on our business in addition to the effect of any potential monetary judgment or sanction against us. Furthermore, any legal proceedings, regardless of the outcome, could result in substantial costs and diversion of resources. Assets and entities that we have acquired may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse to the entity from which the business was acquired (or its stakeholders).
Terrorist attacks and other acts of violence or war may adversely affect the financial markets and our business.
There can be no assurance that there will not be future
Future terrorist attacks. These attacks or armed conflicts may directly affect our physical facilities or those of our customers. These events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and world financial markets and economy. Any of these occurrences could materially adversely affect our business.

If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies or forward-looking statements, our consolidated financial statements and related disclosures could be materially affected.

The pension plans previously maintained by Global Crossingpreparation of financial statements and related disclosures in conformity with respectU.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, including the judgments, assumptions and estimates applied pursuant to our operations before 1997critical 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. If future events or assumptions differ significantly from the judgments, assumptions and estimates applied in connection with preparing our historical financial statements, our future financial statements could be materially impacted.



While frequently presented with numeric specificity, the guidance and other forward-looking statements that we disseminate from time to time is based on numerous variables and assumptions (including, but not limited to, those related to industry performance and competition and general business, economic, market and financial conditions and additional matters specific to our business, as applicable) that are inherently subjective and speculative and are largely beyond our control. As a result, actual results may requirediffer materially from our guidance or other forward-looking statements. Similarly, for a variety of reasons, we may change our intentions, strategies or plans at any time, which could materially alter our actual results from those previously anticipated. For additional funding and negatively affects cash flows.information, see "Special Note Regarding Forward-Looking Statements" preceding Item 1 of this report.
Certain North American and European hourly and salaried employees
We identified material weaknesses in our internal control over financial reporting as of Global Crossing are covered by defined benefit pension plans. On December 31, 1996,2018, and the North American plan was frozenoccurrence of this or any other future material weakness or significant deficiencies could have a material adverse effect on us.

Our management recently concluded that, as described under the heading Item 9A. Controls and all employees hired thereafter areProcedures, we had material weaknesses as of December 31, 2018 and therefore as of that date did not eligiblemaintain effective internal control over financial reporting, which is a requirement of the Securities Exchange Act of 1934. As a result of that evaluation, management concluded that two material weaknesses existed as described below.

Ineffective design and operation of process level internal controls over the fair value measurement of certain assets acquired and liabilities assumed in CenturyLink's acquisition of us.

These deficiencies arose because (i) CenturyLink did not conduct an effective risk assessment to participateidentify and assess changes needed to make to our financial reporting and process level controls, related to fair value measurement of assets acquired and liabilities assumed in the plan. The U.K.transaction with CenturyLink, (ii) CenturyLink did not clearly assign responsibility for the design, implementation, and operation of controls over the fair value measurements and (iii) CenturyLink did not maintain effective information and communication processes to ensure the right information was available to personnel on a timely basis so they could fulfill their control responsibilities related to the fair value measurements.

Ineffective design and operation of certain process level internal controls over the existence and accuracy of revenue transactions.

These deficiencies arose because we did not conduct an effective risk assessment to identify risks of material misstatement related to the existence and accuracy of revenue transactions.

We plan to execute our plans were closed to new employeesremediate the material weaknesses identified above as soon as feasible. However, the remedial measures we take may not be adequate to avoid other control deficiencies in the future. There can be no assurance that any system of internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. As a result, it is possible that CenturyLink’s or our current or future financial statements may not comply with generally accepted accounting principles, will contain a material misstatement or will not be available on December 31, 1999. The pension expensea timely basis, any of which could cause investors to lose confidence in CenturyLink or us and lead to, among other things, unanticipated legal, accounting and other expenses, delays in filing required contributionsfinancial disclosures, enforcement actions by regulatory authorities, fines, penalties, the delisting of CenturyLink’s or our securities and liabilities arising from litigation.

Lapses in disclosure controls and procedures or internal control over financial reporting could materially and adversely affect our operations, profitability or reputation.

There can be no assurance that our disclosure controls and procedures will be effective in the future or that we will not experience a material weakness or significant deficiency in internal control over financial reporting. Any such lapses or deficiencies may materially and adversely affect our business, operating results or financial condition, restrict our ability to these pension plans are directly affectedaccess the capital markets, require us to expend significant resources to correct the lapses or deficiencies, expose us to regulatory or legal proceedings, including litigation brought by the value of planprivate individuals, subject us to fines, penalties or judgments, harm our reputation, or otherwise cause a decline in investor confidence and our stock price.



If our goodwill or other intangible assets the projected rate of return on plan assets, the actual rate of return on plan assetsbecome impaired, we may be required to record a significant charge to earnings and the actuarial assumptions used to measure the defined benefit pension plan obligations. reduce our member's equity.

As of December 31, 2015,2018, approximately 59% of our total consolidated assets reflected on the projected benefit obligation underconsolidated balance sheet included in this report consisted of goodwill, customer relationships and other intangible assets. Under U.S. generally accepted accounting principles, most of these pension plans andintangible assets must be tested for impairment on an annual basis or more frequently whenever events or circumstances indicate that their carrying value may not be recoverable. From time to time, including in the pension plansfourth quarter of 2018, CenturyLink has recorded large non-cash charges to earnings in connection with respect to non-Global Crossing operations prior to 1997 was approximately $158 million ($72 million for U.S. plans and $86 million for U.K. plans) andrequired reductions of the value of planits intangible assets. If our intangible assets was approximately $142 million (approximately $69 million for U.S. plans and $73 million for U.K. plans), resultingare determined to be impaired in these pension plans being underfunded by $16 million. If plan assets perform below expectations,the future, pension expense and funding obligations will increase,we may be required to record additional significant, non-cash charges to earnings during the period in which wouldthe impairment is determined to have occurred. Any such charges could, in turn, have a negativematerial adverse effect on our cash flowsresults of operation, financial condition or ability to comply with financial covenants in our debt instruments.

The Tax Cuts and Jobs Act will have a substantial impact on us.

The Tax Cuts and Jobs Act (the "Act") enacted in December 2017 significantly changed U.S. tax law by reducing the U.S. corporate income tax rate and making certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items. The net impact of this Act, as applied to date, has been unfavorable to us. However, the Act is quite complex and the impacts could potentially change as additional regulatory guidance is received from operations.the Internal Revenue Service. As a result, our views on the Act’s ultimate impact on us could change.

Additional changes in tax laws or tax audits could adversely affect us.

Like all large multinational businesses, we are subject to multiple sets of complex and varying tax laws and rules. Legislators and regulators at all levels of government may from time to time change existing tax laws or regulations or enact new laws or regulations. In many cases, the application of existing, newly enacted or amended tax laws (such as the U.S. Tax Cuts and Jobs Act of 2017) may be uncertain and subject to differing interpretations that could negatively impact our operating results or financial condition. We are also subject to frequent and regular audits by a broad range of foreign, federal, 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.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.



ITEM 2. PROPERTIES

Our headquarters are located on 46 acres in the Interlocken Advanced Technology Environment within the Cityproperty, plant and Countyequipment consists principally of Broomfield, Colorado. The campus facility, which we own, encompasses approximately 850,000 square feetland, fiber, conduit and other outside plant, central office and other network electronics and support assets. Our gross values of office space.
We also lease or own significant corporate office space inproperty, plant and equipment consisted of the following cities and lease smaller sales, administrative, and support offices around the world:components:

56
 Successor
 December 31, 2018 December 31, 2017
Land4% 4%
Fiber, conduit and other outside plant (1)
50% 50%
Central office and other network electronics (2)
19% 22%
Support assets (3)
22% 21%
Construction in progress (4)
5% 3%
Gross property, plant and equipment100% 100%

Table of Contents

North America: Atlanta, Georgia; Littleton, Colorado; Miami, Florida; Montreal, Canada; New York, New York; Phoenix, Arizona; Pittsburgh, Pennsylvania; Southfield, Michigan; and Tulsa, Oklahoma

Europe: Basingstoke, England; Crewe, England; Dublin, Ireland; London, England; Naarden, The Netherlands; and Paris, France

Latin America: Bogota, Colombia; Buenos Aires, Argentina; Caracas, Venezuela; Lima, Peru; Quito, Ecuador; Santiago, Chile; and Sao Paulo, Brazil

Asia/Pacific: Hong Kong, China; Singapore and Tokyo, Japan
(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, cable landing stations, data centers, 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 or lease numerous cable landing stations and telehouses throughout the world related to undersea and terrestrial cable systems. Furthermore, we own or lease properties to house and operate our fiber optic backbone and distribution network facilities, our point-to-point distribution capacity, as well as our switching equipment and connecting lines between other carriers’ equipment and facilities and the equipment and facilities of our customers. Our Gateway facilities are designed to house local sales staff, operational staff, our transmission and IP routing/switching facilities and technical space to accommodate colocation of equipment by high-volume Level 3 customers. We operate approximately eleven12.4 million square feet of space for our Gateway and technical or transmission facilities. Our Gateway space is either owned by and other properties relating to our network operations, see Item 1, “Business -- Our Communications Network.”

We have entered into various agreements regarding our unused office and technical space to reduce our ongoing operating expenses regarding such space.
Our existing properties are in good condition and are suitable for the conduct of our business.

ITEM 3. LEGAL PROCEEDINGS

For information regarding legal proceedings in which we are involved, see Note 16, "Commitments,16—Commitments, Contingencies and Other Items" to our Consolidated Financial Statementsconsolidated financial statements included in this Form 10-K.


ITEM 4. MINING SAFETY DISCLOSURES

Not applicable.

57

Table of Contents


Part II

Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. As part of the completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.

Unless context requires otherwise, references to the "predecessor" periods, or the period ended October 31, 2017, covers the predecessor period from January 1, 2017 through October 31, 2017, and to "2017 successor" period, or the period ended December 31, 2017 covers the successor period from November 1, 2017 through December 31, 2017.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information.

Our common stock is traded on the New York Stock Exchange under the symbol "LVLT." As of February 24, 2016, there were approximately 5,573 holders of record of our common stock, par value $.01 per share. The table below sets forth, for the calendar quarters indicated, the high and low per share closing sales prices of our common stock as reported by the NYSE Composite Tape for the quarters and the years indicated.

Year Ended December 31, 2015 High Low
First Quarter $55.46
 $47.02
Second Quarter 56.90
 52.11
Third Quarter 54.16
 41.57
Fourth Quarter 54.45
 43.00

Year Ended December 31, 2014 High Low
First Quarter $39.21
 $31.01
Second Quarter 45.60
 36.37
Third Quarter 47.50
 41.17
Fourth Quarter 50.05
 38.05

Equity Compensation Plan Information.

We have one equity compensation plan under which we may issue shares of our common stock to employees, officers, directors and consultants, which is called The Level 3 Communications, Inc. Stock Incentive Plan. In addition, in connection with our acquisition of Global Crossing, we assumed sponsorship of the 2003 Global Crossing Limited Stock Incentive Plan. Options outstanding under the 2003 Global Crossing Limited Stock Incentive Plan at the closing of the acquisition were automatically exchanged for options to purchase shares of our common stock. Since this plan’s term has expired, no shares remain for future issuances under this plan, but shares do remain for awards outstanding as of the expiration of the term. The following table provides information about the shares of our common stock that may be issued upon exercise of awards under the Level 3 Communications, Inc. Stock Incentive Plan (in the ‘‘Equity compensation plans approved by stockholders’’ category) and the 2003 Global Crossing Limited Stock Incentive Plan (in the ‘‘Equity compensation plans not approved by stockholders’’ category) as of December 31, 2015.


58
Table of Contents

Plan Category 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
   
Weighted-average
exercise price of
outstanding options,
warrants and rights
   
Number of securities
remaining available for
future issuance under
equity compensation plans
 
Equity compensation plans approved by stockholders 5,181,749
 (1) $22.75
 (2) 22,270,028
 
Equity compensation plans not approved by stockholders 415,629
 (3) $22.85
 (2) —
 

(1) Includes, among other awards, awards of outperform stock appreciation units (‘‘OSOs’’), and performance restricted stock units (‘‘PRSUs’’). For purposes of this table, each OSO was considered to use a single share of our common stock and each PRSU was also assumed to use a single share of our common stock (which would be target performance) from the total number of shares reserved for issuance under the Level 3 Communications, Inc. Stock Incentive Plan even though the actual payout multiplier may range from zero to four and performance may be less than or greater than target, as described below.

(2) At December 31, 2015, the only type of award outstanding that included an ‘‘exercise price’’ was the OSOs. The weighted-average exercise price indicated was for the outstanding OSOs at the date of grant. The exercise price of an OSO is subject to change based upon the performance of our common stock relative to the performance of the S&P 500 Index from the time of the grant of the award until the award has been exercised.

(3) The 2003 Global Crossing Limited Stock Incentive Plan provided for the granting of (i) stock options, (ii) stock appreciation rights and (iii) other stock based awards, including, without limitation, restricted share units, to eligible participants. Amounts shown indicate the number of awards outstanding under the 2003 Global Crossing Limited Stock Incentive Plan at December 31, 2015. Includes awards of outperform stock appreciation units (‘‘OSOs’’). For purposes of this table, each OSO was considered to use a single share of our common stock from the total number of shares reserved for issuance even though the actual payout multiplier may range from zero to four, as described below.

OSOs were awarded through the end of 2013, and will continue to be outstanding through 2016. OSOs were designed to provide recipients of the awards with the incentive to maximize stockholder value and to reward recipient employees only when the price of our common stock outperforms the S&P 500® Index between the date of grant and the date that the OSO is settled. OSOs have a three-year life and vest 100% on the third anniversary of the date of the award and fully settle on that date. In other words, recipients of OSOs are not able to voluntarily exercise the OSOs as they will settle automatically with value on the third anniversary of the date of the award or expire without value on that date. This type of instrument is sometimes referred to as a "European style option."

The OSOs initial exercise price is equal to the closing market price of our common stock on the trading day immediately prior to the date of grant. This initial exercise price is referred to as the "Initial Price." On the settlement date, the Initial Price is adjusted as of that date by a percentage that is equal to the aggregate percentage increase or decrease in the S&P 500® Index over the period beginning on the date of grant and ending on the trading day immediately preceding the settlement date. The Initial Price, however, cannot be adjusted below the closing price of our common stock on the day that the OSO was granted.

The value of all OSOs increase as the price of our common stock increases relative to the performance of the S&P® 500 Index over time. This increase in value is attributable in part to the use of a "success multiplier."

The mechanism for determining the value of an individual OSO award is described as follows. The Initial Price is adjusted over time (the "Adjusted Strike Price") until the settlement date. The adjustment represents an

59
Table of Contents

amount equal to the percentage appreciation or depreciation in the value of the S&P 500® Index from the date of grant to the settlement date. The value of the OSO would increase for increasing levels of outperformance.

OSOs include a multiplier range from zero to four depending upon the performance of our common stock relative to the S&P 500® Index as shown in the following table.

If Level 3 Stock Outperforms the S&P 500® Index by:
Then the Pre-multiplier Gain Is Multiplied by
a Success Multiplier of:
0% or Less—
More than 0% but Less than 11%Outperformance percentage multiplied by 4/11
11% or More4

The pre-multiplier gain is our common stock price minus the Adjusted Strike Price on the settlement or exercise date.

Beginning in 2014, outperform stock appreciation rights, or OSOs, were no longer awarded. Instead, we awarded performance-based restricted stock unit awards, which use a two-year performance measurement period, with the specific performance criteria to be determined by the Compensation Committee of the Board of Directors for each annual award cycle, and vest 50% on the second anniversary of the grant date (after the relevant performance has been measured) and the second 50% vest on the third anniversary of grant date to serve as a retention tool.

Dividend Policy.

Our current dividend policy, in effect since April 1, 1998, is to retain future earnings for use in our business. As a result, our directors and management do not anticipate paying any cash dividends on shares of our common stock in the foreseeable future. In addition, under certain of our debt covenants we may be restricted from paying cash dividends on shares of our common stock.

Performance Graph.

The following performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this annual report on Form 10-K into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates such information by reference, and shall not otherwise be deemed filed under such acts.

The performance graph compares the cumulative total return of our common stock for the five year period from 2011 through 2015 with the S&P® 500 Index and the Nasdaq Telecommunications Index. The performance graph assumes that the value of the investment was $100 on December 31, 2010, and that all dividends and other distributions were reinvested.


60
Table of Contents

Comparison of Five Year Cumulative Total Return
Among Our Common Stock, the S&P® 500 Index
and the Nasdaq Telecommunications Index

Not Applicable.


 12/10 12/11 12/12 12/13 12/14 12/15
Level 3 common stock$100.00
 $115.58
 $157.21
 $225.65
 $335.92
 $369.80
S&P 500® Index100.00
 100.00
 113.40
 146.97
 163.71
 162.52
NASDAQ Telecommunications100.00
 87.38
 89.13
 110.54
 120.38
 111.36




61
Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

The Selected Financial Data of Level 3 Communications, Inc. and its subsidiaries appear below.

 Year Ended December 31,
 2015 2014 2013 2012 2011
 (dollars in millions, except per share amounts)
Results of Operations:         
Revenue (1)$8,229
 $6,777
 $6,313
 $6,376
 $4,333
Income (Loss) from Continuing Operations (2)3,433
 314
 (109) (422) (827)
Income from Discontinued Operations, Net (1)—
 —
 —
 —
 71
Net Income (Loss)3,433
 314
 (109) (422) (756)
Per Common Share:         
Income (Loss) from Continuing Operations - Basic9.71
 1.23
 (0.49) (1.96) (6.03)
Income from Discontinued Operations, Net - Basic—
 —
 —
 —
 0.52
Net Income (Loss) - Basic (2)9.71
 1.23
 (0.49) (1.96) (5.51)
Income (Loss) from Continuing Operations - Diluted9.58
 1.21
 (0.49) (1.96) (6.03)
Income from Discontinued Operations, Net - Diluted—
 —
 —
 —
 0.52
Net Income (Loss) - Diluted (2)9.58
 1.21
 (0.49) (1.96) (5.51)
Dividends (3)—
 —
 —
 —
 —
          
Financial Position:         
Total Assets$24,145
 $20,947
 $12,874
 $13,307
 $13,188
Current portion of long-term debt (4)15
 349
 31
 216
 65
Long-Term Debt, less current portion (4)10,994
 10,984
 8,331
 8,516
 8,385
Stockholders' Equity (5)10,126
 6,363
 1,411
 1,171
 1,193

(1)On October 4, 2011, the Company purchased Global Crossing Limited ("Global Crossing") (the "Amalgamation"). During 2011, the Company recorded revenue attributable to Global Crossing of approximately $654 million.

On November 14, 2011, the Company completed the sale of its coal mining businessOmitted pursuant to Ambre Energy Limited as part of its long-term strategy to focus on core business operations. Revenue attributable to the coal mining business totaled approximately $54 million in 2011 through the date of sale. As a result of the transaction, the Company recognized a gain on the transaction of approximately $72 million, which is included in its Consolidated Statements of Operations within "Income from Discontinued Operations, Net." The financial results of the coal mining business are included in the Company's consolidated results of operations through the date of sale, and all periods have been revised to reflect the presentation within discontinued operations.General Instruction I(2).

On October 31, 2014, the Company completed the acquisition of tw telecom inc. ("tw telecom"). During 2014, the Company recorded revenue attributable to tw telecom of approximately $285 million.

62
Table of Contents


(2)In 2011, the Company recognized a loss of $100 million related to the redemption and repurchase of the 3.5% Convertible Senior Notes due in June 2012 and prepayment of the Tranche B Term Loan that was outstanding under the existing Senior Secured Term Loan, the conversion of certain of the 15% Convertible Senior Notes due 2013, the retirement of a portion of the 9.25% Senior Notes due 2014, the redemption of the 5.25% Convertible Senior Notes due 2011 and exchange of the 9% Convertible Senior Discount Notes due 2013. As a result of a change in the estimated useful lives of certain of the Company’s property, plant and equipment, the Company recognized a reduction of approximately $74 million in depreciation expense during the fourth quarter of 2011. The change in accounting estimate was accounted for on a prospective basis effective October 1, 2011.

In 2012, the Company recognized a $160 million loss on modification and extinguishment of debt as a result of the refinancing of the $650 million Tranche B II Term Loan and $550 million Tranche B III Term Loan in October 2012, the refinancing of the $1.4 billion Tranche A Term Loan in August 2012 and the repayment of existing vendor financing obligations, the redemption of the 8.75% Senior Notes due 2017 in August 2012, the redemption of the 9.25% Senior Notes due 2014 in February 2012 and the exchange of a portion of the 15% Convertible Senior Notes due 2013 in March 2012. The Company also recognized $34 million of restructuring charges. The Company completed an updated analysis and revised its estimated future cash flows of its asset retirement obligations as a result of a strategic review of the Company's real estate portfolio in the fourth quarter of 2012. As a result, the Company reduced its asset retirement obligations liability by $73 million with an offsetting reduction to property, plant and equipment of $24 million, selling, general and administrative expenses of $47 million and depreciation and amortization of $2 million. In addition, as a result of the refinancing of the Tranche A Term Loan in 2012, two interest rate swap agreements maturing in early 2014 that had effectively hedged changes in the interest rate on a portion of the Tranche A Term Loan were deemed "ineffective" under GAAP. The Company recognized a non-cash loss on the agreements of approximately $60 million (excluding accrued interest), which represented the cumulative loss recorded in Accumulated Other Comprehensive Income (Loss) ("AOCI") at the date the instruments ceased to qualify as hedges.

In 2013, the Company recognized an $84 million loss on modification and extinguishment of debt as a result of refinancing its $815 million Tranche B 2019 Term Loan and $595.5 million Tranche B 2016 Term Loan in August 2013, its $1.2 billion Tranche B-II 2019 Term Loan in October 2013 and its $640 million 10% Senior Notes due 2018 and $300 million Floating Rate Senior Notes due 2015 in December 2013. Additionally, the Company incurred $47 million of restructuring charges.

In 2014, the Company issued $600 million aggregate principal amount of its 5.75% Senior Notes due 2022. The net proceeds from the offering of the notes, together with cash on hand, were used to redeem the $605 million aggregate principal amount outstanding of the Company's 11.875% Senior Notes due 2019. The company recognized a debt extinguishment loss of $53 million associated with this transaction during the fourth quarter of 2014.

In 2014, the Company also recognized a $100 million income tax benefit primarily related to the release of a foreign deferred tax valuation allowance.

In 2015, Level 3 redeemed Level 3 Financing's 9.375% Senior Notes due 2019 together with cash on hand, from the issuance on January 29, 2015 of its 5.625% Senior Notes due 2023. Level 3 recognized a loss on extinguishment of debt of $36 million associated with this transaction in the second quarter of 2015. Level 3 Financing also issued $700 million aggregate principal amount of its 5.125% Senior Notes due 2023 and $800 million aggregate principal amount of its 5.375% Senior Notes due 2025. The net proceeds from the offering of these notes together with cash on hand, were used to redeem all $1.2 billion aggregate principal amount of Level 3 Financing's 8.125% Senior Notes due 2019 and all $300 million aggregate principal amount of Level 3's 8.875% Senior Notes due 2019. In the second quarter 2015, Level 3 recognized a loss on extinguishment of debt of

63
Table of Contents

$100 million as a result of these redemptions. Level 3 Financing completed the refinancing of its $2 billion senior secured Tranche B Term Loan due 2022 with an aggregate $2 billion principal amount of a new senior secured Tranche B-II 2022 Term Loan. In the second quarter of 2015, Level 3 recognized a loss on modification and extinguishment of debt of $27 million as a result of this refinancing. In the fourth quarter 2015, Level 3 Financing issued $900 million aggregate principal amount of its 5.375% Senior Notes due 2024. The net proceeds from the offering of the 5.375% Senior Notes due 2024, together with cash on hand, were used to redeem all $900 million aggregate principal amount of the Company’s 8.625% Senior Notes due 2020. Level 3 recognized a loss on modification and extinguishment of debt of approximately $55 million associated with this transaction during the fourth quarter of 2015.

Effective September 30, 2015, Level 3 deconsolidated its Venezuelan subsidiary from its consolidated financial statements. This change resulted in a one-time charge of $171 million, which includes $83 million of bolivar denominated cash and $40 million of intercompany receivables from its Venezuelan subsidiary during the third quarter 2015.

In the fourth quarter of 2015, with the continued expectation of generating income before taxes in the United States, the Company released a significant portion of its valuation allowance against its net U.S. federal and state deferred tax asset position. The release of the valuation allowance benefited income tax expense and net income by approximately $3.3 billion.


(3)The Company's current dividend policy, in effect since April 1998, is to retain future earnings for use in the Company's business. As a result, management does not anticipate paying cash dividends on shares of common stock in the foreseeable future. In addition, the Company is restricted under certain debt-related covenants from paying cash dividends on shares of its common stock.

(4)In 2011, the Company issued approximately $605 million of 11.875% Senior Notes due 2019 in two separate transactions, as well as $500 million of its 9.375% Senior Notes due 2019. Proceeds from the first 11.875% Senior Note offering were used to redeem $196 million of 5.25% Convertible Senior Notes. In the second offering, the Company exchanged $295 million of 9% Convertible Senior Discount Notes for the 11.875% Senior Notes. Level 3 Escrow, Inc., an indirect wholly owned subsidiary of the Company, issued $600 million in aggregate principal amount of 8.125% Senior Notes due 2019. Level 3 Escrow, Inc. issued an additional $600 million in aggregate principal amount of its 8.125% Senior Notes due 2019 under the same indenture as the 8.125% Senior Notes previously issued, which were treated as a single series of notes under the indenture. In connection with the Amalgamation, all of the 8.125% Senior Notes due 2019 were assumed by Level 3 Financing, Inc., a direct wholly owned subsidiary of the Company, and the proceeds were used to refinance certain existing indebtedness of Global Crossing. The Company exchanged approximately $128 million of its 15% Convertible Senior Notes due 2013 for approximately 5 million shares of its common stock. The Company also paid approximately $29 million in cash, representing interest due from the conversion through the 2013 maturity date. The Company also repurchased approximately $20 million of its 3.5% Convertible Senior Notes due 2012. The Company borrowed $550 million aggregate principal amount of its Tranche B III Term Loan. The net proceeds in addition to cash on hand were used to redeem the remaining $274 million aggregate principal amount of 3.5% Convertible Senior Notes due 2012 and prepay the $280 million Tranche B Term Loan that was outstanding under the existing Senior Secured Term Loan. Also in connection with the closing of the Amalgamation, the Company amended its existing credit agreement to incur an additional $650 million of borrowings through an additional Tranche B II Term Loan. The net proceeds from the Tranche B II Term Loan were used to consummate the Amalgamation, to refinance certain existing indebtedness of Global Crossing in connection with the consummation of the Amalgamation and for general corporate purposes.


64
Table of Contents

In 2012, the Company refinanced its existing $650 million Tranche B II Term Loan and $550 million Tranche B III Term Loan under its existing senior secured credit facility through the creation of a new term loan in the aggregate principal amount of $1.2 billion (the "Tranche B-II 2019 Term Loan") along with cash on hand. The Company also fully repaid the outstanding principal amount of its Commercial Mortgage due 2015 along with accrued interest which was approximately $63 million. Also in 2012, the Company completed the offering of $300 million aggregate principal amount of its 8.875% Senior Notes due 2019 in a private offering. The net proceeds from that offering were used for general corporate purposes, including the repurchase, redemption, repayment or refinancing of the Company's and its subsidiaries' existing indebtedness. Additionally in 2012, the Company completed the offering of $775 million aggregate principal amount of its 7% Senior Notes due 2020 in a private offering. The net proceeds from the offering of the notes, along with cash on hand, were used to redeem all of the Company's outstanding 8.75% Senior Notes due 2017, including the payment of accrued and unpaid interest and applicable premiums. The Company refinanced its existing $1.4 billion Tranche A Term Loan under its existing senior secured credit facility through the creation of new term loans in the aggregate principal amount of $1.415 billion (the "New Term Loans") along with cash on hand and used the remaining net proceeds to repay $15 million in principal amount plus a premium for existing vendor financing obligations. Further in 2012, the Company exchanged approximately $100 million aggregate principal amount of its outstanding 15% Convertible Senior Notes due 2013 for approximately 5.4 million shares of its common stock, including an inducement premium. Also in 2012, the Company issued $900 million aggregate principal amount of its 8.625% Senior Notes due 2020. A portion of the net proceeds from the offering were used to redeem all of the Company's outstanding 9.25% Senior Notes due 2014 in aggregate principal amount of $807 million.

In 2013, the Company repaid at maturity approximately $172 million of its 15% Convertible Senior Notes due 2013. The Company also refinanced its existing $815 million Tranche B 2019 Term Loan through the creation of the $815 million Tranche B-III 2019 Term loan. The Company also refinanced its $595.5 million Tranche B 2016 Term Loan and $1.2 billion Tranche B-II 2019 Term Loan through the creation of a new term loan in the aggregate principal amount of $1.796 billion (the "Tranche B 2020 Term Loan"). Additionally, the Company completed the offering of $640 million aggregate principal amount of its 6.125% Senior Notes due 2021. The proceeds from the offering, together with cash on hand, were used to redeem all of the outstanding 10% Senior Notes due 2018. Also in 2013, the Company completed the offering of $300 million aggregate principal amount of its Floating Rate Senior Notes due 2018. The net proceeds of these notes, together with cash on hand, were used to redeem all of the outstanding Floating Rate Notes due 2015. Finally in 2013, the holders of approximately $200 million aggregate principal amount of the Company's outstanding 6.5% Convertible Senior Notes due 2016 converted these notes for approximately 10.8 million shares of the Company's common stock. The remaining $1 million principal amount of the Company's 6.5% Convertible Senior Notes due 2016 was redeemed with cash on hand.

In 2014, Level 3 Escrow II, Inc. issued$1.0 billion in aggregate principal amount of its 5.375% Senior Notes due 2022 (the “5.375% Senior Notes due 2022”). The 5.375% Senior Notes due 2022 were assumed by Level 3 Financing, Inc., a direct wholly owned subsidiary of the Company, and the proceeds were used to refinance certain existing indebtedness of tw telecom. Additionally, the Company entered into a ninth amendment agreement to the Existing Credit Agreement to incur $2.0 billion in aggregate borrowings under the Existing Credit Agreement through the creation of a new Tranche B 2022 Term Loan (the "Tranche B 2022 Term Loan"). The net proceeds from both the 5.375% Senior Notes due 2022 and the Tranche B 2022 Term Loan were used to finance the cash portion of the merger consideration payable to tw telecom stockholders and to refinance certain existing indebtedness of tw telecom, including fees and premiums, in connection with the closing of the Merger. Further, in 2014, the Company issued a total of $600 million aggregate principal amount of its 5.75% Senior Notes due 2022 (the “5.75% Senior Notes”). The net proceeds from the offering of the 5.75% Senior Notes, together with cash on hand were used to redeem all of the Company's outstanding 11.875% Senior Notes due 2019.

65
Table of Contents


Refer to Note 11 - Long-Term Debt in the notes to the Consolidated Financial Statements for the Company's offerings and refinancings in 2015.

Long-term debt, less current portion includes capital lease obligations. Refer to "Contractual Obligations" within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the Company's total obligations.

(5)In 2011, the Company issued approximately 4.7 million shares of common stock in exchange for $128 million aggregate principal amount of its 15% Convertible Senior Notes. The Company also issued approximately 89 million shares of common stock, valued at approximately $1.9 billion, as the stock portion of the purchase price to acquire Global Crossing.

In 2012, the Company issued approximately 5.4 million shares of common stock, including an inducement premium, in exchange for approximately $100 million aggregate principal amount of its outstanding 15% Convertible Senior Notes due 2013.

In 2013, the Company issued approximately 10.8 million shares of common stock when holders of approximately $200 million of its 6.5% Convertible Senior Notes due 2016 converted these notes.

In 2014, the Company issued approximately 5 million shares of common stock when holders of approximately $142 million of its 7% Convertible Senior Notes due 2015 converted these notes.

In 2014, as a result of the Merger, the Company issued approximately 96.9 million shares of Level 3 common stock to former holders of tw telecom common shares, stock options, restricted stock unit awards and restricted stock units.

In 2015, the Company issued approximately 12 million shares of common stock when holders of the remaining $333 million of its 7% Convertible Senior Notes due 2015 converted these notes.


66
Table of Contents

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.

Unless context requires otherwise, references to the period ended October 31, 2017 covers the predecessor period from January 1, 2017 through October 31, 2017, and the period ended December 31, 2017 covers the successor period from November 1, 2017 through December 31, 2017.

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" preceding 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 international facilities-based communications company engaged in providing a broad array of integrated communication services to our business customers. We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.

As discussed in Note 2—CenturyLink Merger, on November 1, 2017, we became a wholly-owned subsidiary of CenturyLink.

Results of Operations

Our analysis presented below is organized to provide the information we believe will be useful for understanding the relevant trends affecting our business. The followingdiscussion in MD&A is presented on a combined basis for the successor and predecessor periods in 2017. We believe that the discussion on a combined basis is more meaningful as it allows our 2018 results of operations to be more readily compared to our aggregate 2017 results of operations. This discussion should be read in conjunction with the Company's Consolidated Financial Statements (includingour consolidated financial statements and the notes thereto) included elsewhere herein and the description of its businessthereto in Item 1, "Business".

Executive Summary

Overview8 of this report.

The Company is afollowing table summarizes our results of our consolidated operations for the years ended December 31, 2018 and 2017:
 Successor  Predecessor Combined Increase / (Decrease) % Change
 Year Ended December 31, 2018 Period Ended December 31, 2017  
Period Ended
October 31, 2017
 Year Ended December 31, 2017 2018 v Combined 2017 2018 v Combined 2017
 (Dollars in millions)  
Operating revenue$8,220
 1,407
  6,870
 8,277
 (57) (1)%
Operating expenses7,252
 1,249
  5,719
 6,968
 284
 4 %
Operating income968
 158
  1,151
 1,309
 (341) (26)%
Other expense(431) (65)  (458) (523) 92
 (18)%
Income tax expense(196) (234)  (268) (502) 306
 (61)%
Net income (loss)$341
 (141)  425
 284
 57
 20 %



Operating Revenue

We categorize our products, services and revenue among the following five categories:

IP and Data Services, which include primarily VPN data networks, Ethernet, IP, video (including our facilities-based provider of a broad range of communications services. Revenue for communicationsvideo services, is generally recognized on a monthly basis as theseCDN services are provided. For contracts involvingand Vyvx broadcast services) and other ancillary services;

Transport and Infrastructure, which includes private line wavelength and dark fiber services, Level 3 may receive upfront payments for services to be delivered for a period of generally up to 25 years. In these situations, Level 3 defers the revenue and amortizes it on a straight-line basis to earnings over the term of the contract. At December 31, 2015, for contracts where upfront payments were received for services to be delivered in the future, the Company's weighted average remaining contract period was approximately 12 years.

On October 31, 2014, the Company completed the acquisition of tw telecom inc. (“tw telecom”) and tw telecom became an indirect, wholly owned subsidiary of the Company through a tax-free, stock and cash reorganization (the "Merger").

As of September 30, 2015, the Company deconsolidated its Venezuelan subsidiary and began accounting for its investment in that subsidiary using the cost method of accounting in the fourth quarter of 2015. This change resulted in a one-time charge of $171 million to adjust the Venezuelan subsidiary's assets and liabilities to estimated fair value in the third quarter of 2015. The Company's financial results do not include the operating results of its Venezuelan subsidiary subsequent to September 30, 2015. Any dividends from the Company's Venezuelan subsidiary are recorded as other income upon receipt of the cash. Please see Note 1 to the accompanying Consolidated Financial Statements and additional discussion in this Management's Discussion and Analysis of Financial Condition and Results of Operations under "Venezuela Effects" in Results of Operations.

The Company pursues the strategies discussed in Item 1. Business, "Business Overview and Strategy." In particular, with respect to strategic financial objectives, the Company focuses its attention on the following:

growing revenue by increasing sales generated by its Core Network Services;

focusing on its Enterprise customers, as this customer group has the largest potential for growth;

continually improving the customer experience to increase customer retention and reduce customer churn;

launching new products and services to meet customer needs, in particular for enterprise customers;

improving profitability by reducing network costs and operating expenses;

achieving and maintaining sustainable generation of positive cash flows from operations;

continuing to show improvement in Adjusted EBITDA (as defined in this Item below) as a percentage of revenue;


67

localizing certain decision-making and interaction with its mid-market enterprise customers, including leveraging its existing network assets;

concentrating its capital expenditures on those technologies and assets that enable the Company to develop its Core Network Services;

managing Wholesale Voice Services for profit contribution; and

refinancing its future debt maturities.

The Company's management continues to review all existing lines of(including business and service offerings to determine how they enhance the Company's focus on the delivery of communications services and meeting its financial objectives. To the extent that certain lines of business or service offerings are not considered to be compatible with the delivery of the Company's services or with meeting its financial objectives, Level 3 may exit those lines of business or stop offering those services in part or in whole.

The Company has also been focused on improving its liquidity and financial condition, and extending the maturity dates of certain debt. See Note 11 - Long-Term Debt in the notes to the Consolidated Financial Statements.

The Company will continue to look for opportunities to improve its financial position and focus its resources on growing revenue and managing costs for the business.

As a result of the Merger, the Company was comprised of the following four reportable segments for financial reporting purposes for the fourth quarter of 2014: 1) North America; 2) Europe, the Middle East and Africa (EMEA); 3) Latin America; and 4) tw telecom, which represents the standalone operations of the former tw telecom business. As a result of the integration of financial information of tw telecom in North America in the first quarter of 2015, the Company reorganized its management reporting structure to reflect the way in which it allocates resources and assesses performance. As a result of the change, the Company's reportable segments now consist of: 1) North America; 2) EMEA; and 3) Latin America.

Total Revenue consists of:

Core Network Services revenue fromdata services), wavelength, colocation and data center services; transportfacilities and fiber; Internet Protocol ("IP")services, including cloud, hosting and dataapplication management solutions professional services, dark fiber services and other ancillary services;

Voice and Collaboration, which includes primarily TDM voice services, VoIP and other ancillary services;

Other, which includes sublease rental income and information technology services and managed services, which may be purchased in conjunction with our other network services; and local

Affiliate Services, we provide to our affiliates telecommunication services that we also provide to external customers.

From time to time, we may change the categorization of our products and enterprise voice services.

Wholesale Voice Services revenue from salesFor more information, see "Products and Services" in Item I of long distance voice services to wholesale customers.this report.

Core Network ServicesThe following tables summarize our consolidated operating revenue represents higher profit services and Wholesale Voice Servicesrecorded under our five revenue represents lower profit services. Core Network Servicescategories
 Successor  Predecessor Combined Increase / (Decrease) % Change
 Year Ended December 31, 2018 Period Ended December 31, 2017  
Period Ended
October 31, 2017
 Year Ended December 31, 2017 2018 v Combined 2017 2018 v Combined 2017
 (Dollars in millions)  
IP and Data Services$3,945
 668
  3,284
 3,952
 (7) — %
Transport and Infrastructure2,699
 464
  2,272
 2,736
 (37) (1)%
Voice and Collaboration1,464
 258
  1,308
 1,566
 (102) (7)%
Other Revenue5
 1
  6
 7
 (2) (29)%
Affiliate Revenue107
 16
  —
 16
 91
 nm
Total Revenue$8,220
 1,407
  6,870
 8,277
 (57) (1)%

nmPercentages greater than 200% and comparison between positive and negatives values or to/from zero values are considered not meaningful.

Our total operating revenue requires different levels of investment and focus and provides different contributionsdecreased by $57 million, or 1%, for the successor year ended December 31, 2018 as compared to the Company'scombined year ended December 31, 2017. The decrease in our total operating results than Wholesale Voice Servicesrevenue was primarily due to decreases in voice and collaboration services of $102 million and transport and infrastructure services of $37 million, partially offset by an increase in affiliate revenue. Management believes that growth in

Our operating revenue from its Core Network Services is critical to the long-term success of its business. The Company also believes it must continue to effectively manage the profitabilityfor our products and services consisted of the Wholesale Voice Services revenue. The Company believes that performance in its communications business is best gauged by analyzing revenue changes in Core Network Services.

Core Network Services

following categories:

IP and data services primarily includerevenue decreased by $7 million, or less than 1%, for the Company's Internet services, Virtual Private Network ("VPN"), Content Delivery Network ("CDN"), media delivery, Vyvx broadcast and Managed Services. Level 3'ssuccessor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease in IP and high speed IP service is high quality and is offered in a variety of capacities. The

68
Table of Contents

Company's VPN service permits businesses of any size to replace multiple networks with a single, cost-effective solution that greatly simplifies the converged transmission of voice, video, and data. This convergencedata services revenue was primarily due to a single platform can be obtained without sacrificing the quality of service or security levels of traditional ATMdecrease in Ethernet and frame relay offerings. VPN service also permits customers to prioritize network application traffic so that high priority applications, such as voice and video, are not compromisedVyvx, partially offset by an increase in performance by the flow of low priority applications such as email.CDN.

Growth

Transport and infrastructure services revenue decreased by $37 million, or 1%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease in transport (such asand infrastructure revenue was primarily due to a decrease in private line, and wavelengths) and fiber revenue is largely dependent on increased demand for bandwidth services and available capital of companies requiring communications capacity for their own use orpartially offset by an increase in providing capacity as a service provider to their customers. These expenditures may be in the form of monthly payments or, in the case of private line, wavelength or dark fiber, professional services, either monthly payments or upfront payments. The Company is focused on providing end-to-end transportmanaged security and fiber services to its customers to directly connect customer locations with a private network. Pricing for end-to-end metropolitan transport services have been relatively stable. For intercity transport and fiber services, the Company continues to experience pricing pressure in locations where a large number of carriers co-locate their facilities. An increase in demand may be offset by declines in unit pricing.wavelength.

Voice and collaboration services compriserevenue decreased by $102 million, or 7%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease in voice and collaboration revenue was primarily due to a broad range of local and enterprisedecline in voice services, using Voice over Internet Protocol ("VoIP") and traditional circuit-switch based technologies, including VoIP enhanced local service, SIP Trunking, local inbound service, Primary Rate Interface service, long distance service and toll-free service. The Company's voice services also include its comprehensive suite of audio, Web and video collaboration services.partially offset by an increase in VoIP.

ColocationOther revenue remained essentially flat for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017.

Affiliate revenue increased by $91 million for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The increase in affiliate revenue was due to our acquisition by CenturyLink on November 1, 2017. Since CenturyLink's acquisition of us, we have recorded revenue from telecommunications and data center services allow customerswe bill to place theirCenturyLink and certain of its subsidiaries as affiliate revenue. In the predecessor periods, since they were not affiliates, revenue associated with CenturyLink and its subsidiaries was recorded in the other operating revenue categories.

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; costs incurred for universal service funds (which are federal and serversstate 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); certain legal expenses associated with our operations; and other expenses directly related to our operations; and

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; property and other operating taxes and fees; external commissions; legal expenses associated with general matters; bad debt expense; and other selling, general and administrative expenses.

These expense classifications may not be comparable to those of other companies.

As discussed in suitable environments maintainedNote 1—Background and Summary of Significant Accounting Policies in Item 8 of this report, in conjunction with the acquisition we now classify certain 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.



The following table summarizes our operating expenses:
 Successor  Predecessor Combined Increase / (Decrease) % Change
 Year Ended December 31, 2018 Period Ended December 31, 2017  
Period Ended
October 31, 2017
 Year Ended December 31, 2017 2018 v Combined 2017 2018 v Combined 2017
 (Dollars in millions)  
Cost of services and products (exclusive of depreciation and amortization$3,937
 690
  3,493
 4,183
 (246) (6)%
Selling, general and administrative1,354
 253
  1,208
 1,461
 (107) (7)%
Operating expenses - affiliates257
 24
  —
 24
 233
 nm
Depreciation and amortization1,704
 282
  1,018
 1,300
 404
 31 %
Total operating expenses$7,252
 1,249
  5,719
 6,968
 284
 4 %

nmPercentages greater than 200% and comparison between positive and negatives values or to/from zero values are considered not meaningful.

Cost of Services and Products (Exclusive of depreciation and amortization)

Cost of services and products (exclusive of depreciation and amortization) decreased by $246 million, or 6%, for the Companysuccessor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease in our cost of services and products for the successor period was primarily due to our acquisition by CenturyLink on November 1, 2017. In the predecessor period, since they were not affiliates, the expense associated with high-speed links providing on-net accessCenturyLink and its subsidiaries was recorded as cost of services and products in the amount of $116 million for the period ended October 31, 2017. The remaining decrease is primarily due to moredeclines in voice and collaboration revenue and network optimization.

Selling, General and Administrative

Selling, general and administrative decreased by $107 million, or 7%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease was primarily due to a decrease in employee-related expense primarily due to lower retention bonuses and headcount and a decrease in stock-based compensation expense as a result of accelerated vesting for certain restricted stock awards associated with the CenturyLink acquisition in 2017, partially offset by an increase in facilities-based expenses primarily resulting from impaired leases.

Operating Expenses - Affiliates

Operating expenses - affiliates increased by $233 million for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The increase in our operating expenses - affiliates was due to our acquisition by CenturyLink on November 1, 2017. In the predecessor period, since they were not affiliates, the expense associated with CenturyLink and its subsidiaries was recorded as cost of services and products and selling, general and administrative expenses.



Depreciation and Amortization
The following table provides detail regarding depreciation and amortization expense:
 Successor  Predecessor Combined Increase / (Decrease) % Change
 Year Ended December 31, 2018 Period Ended December 31, 2017  
Period Ended
October 31, 2017
 Year Ended December 31, 2017 2018 v Combined 2017 2018 v Combined 2017
   (Dollars in millions)
Depreciation$906
 143
  850
 993
 (87) (9)%
Amortization798
 139
  168
 307
 491
 160 %
Total depreciation and amortization$1,704
 282
  1,018
 1,300
 404
 31 %

Depreciation expense decreased by $87 million, or 9%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. As of November 1, 2017, our property, plant and equipment were recorded at fair value and as a result net property, plant and equipment decreased $1 billion due to CenturyLink's acquisition of us. This decrease in asset value resulted in lower depreciation expense for the year ended December 31, 2018 than 60 countries. These services are secure, redundantwould have been recorded had the acquisition not occurred.

Amortization expense increased by $491 million, or 160%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The accounting for CenturyLink's acquisition of us resulted in an additional $8.4 billion in amortizable intangible customer relationship assets, which resulted in additional amortization expense for the successor year ended December 31, 2018. In addition, trade names and flexibledeveloped technology were recorded at a fair value of $378 million, which resulted in additional amortization expense for the successor year ended December 31, 2018.

Other Consolidated Results

The following table summarizes other (expense) income and income tax expense:
 Successor  Predecessor Combined Increase / (Decrease) % Change
 Year Ended December 31, 2018 Period Ended December 31, 2017  
Period Ended
October 31, 2017
 Year Ended December 31, 2017 2018 v Combined 2017 2018 v Combined 2017
 (Dollars in millions)  
Interest income$—
 1
  13
 14
 (14) (100)%
Interest income - affiliate67
 11
  —
 11
 56
 nm
Interest expense(509) (80)  (441) (521) 12
 (2)%
Loss on modification and extinguishment of debt—
 —
  (44) (44) 44
 (100)%
Other income (expense), net11
 3
  14
 17
 (6) (35)%
Total other expense, net$(431) (65)  (458) (523) 92
 (18)%
Income tax expense$(196) (234)  (268) (502) 306
 (61)%

nmPercentages greater than 200% and comparison between positive and negatives values or to/from zero values are considered not meaningful.



Interest Income

Interest income decreased by $14 million, or 100%, for the successor year ended December 31, 2018 as compared to fit the varying needscombined year ended December 31, 2017. The decrease in interest income was primarily due to the decrease in our cash and cash equivalents balance.

Interest Income - Affiliate

Interest income - affiliate increased by $56 million for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The increase in interest income - affiliate was due to a full year of the Company's customers. Services, which vary by location, include hosting network equipment usedinterest associated with our $1.8 billion loan made to transport high speed data and voice over Level 3's global network; providing managed IT services, installation, maintenance, storage and monitoringCenturyLink in connection with the closing of enterprise services; and providing comprehensive IT outsource solutions.the Merger Agreement in 2018.

The Company believes that a source of future incremental demandInterest Expense

Interest expense decreased by $12 million, or 2%, for the Company's Core Network Services will be from customers that are seekingsuccessor year ended December 31, 2018 as compared to distribute their feature rich content or video over the Internet. Revenue growthcombined year ended December 31, 2017. The decrease in this area is dependentinterest expense was due to lower interest expense associated with the repayment of our $300 million Floating rate Notes due in 2018, partially offset by a higher LIBOR on the continued$4.6 billion Tranche B 2024 Term Loan.

Loss on Modification and Extinguishment of Debt

Loss on modification and extinguishment of debt decreased by $44 million, or 100%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. During the predecessor period ended October 31, 2017, we refinanced all of our then outstanding $4.6 billion senior secured term loans.

Other Income (Expense)

Other income decreased by $6 million, or 35%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease in other income was due to an increase in demand from customersforeign currency loss in thesuccessor year ended December 31, 2018 as compared to the combined year ended December 31, 2017.

Income Tax Expense

Income tax expense decreased by $306 million, or 61%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. For the year ended December 31, 2018 and the pricing environment. An increase incombined year ended December 31, 2017, our effective income tax rate was 36.5% and 63.7%, respectively. The effective tax rate for the reliability and security of information transmitted over the Internet and declines in the cost to transmit data have resulted in increased utilization of e-commerce or Web-based servicescombined year ended December 31, 2017 was significantly impacted by businesses. Although the pricing for data services is currently relatively stable, the IP market is generally characterized bypurchase price compression and high unit growth rates depending upon the type of service. The Company has continued to experience price compression in the high-speed IP and voice services markets.

The following provides a discussion of the Company's Core Network Services revenue in terms of the enterprise and wholesale channels.

The enterprise channel includes large, multi-national enterprises requiring large amounts of bandwidth to support their business operations, such as financial services companies, healthcare companies, content providers, and portal and search engine companies. It also includes medium sized enterprises, regional service providers, as well as government markets, the U.S. federal government, the systems integrators supporting the U.S. federal government, U.S. state and local governments, academic consortia, and certain academic institutions.


69
Table of Contents

The wholesale channel includes revenue from incumbent and alternative carriers in each of the regions, global carriers, wireless carriers, cable companies, satellite companies and voice service providers.

The Company believes that the alignment of Core Network Services around channels should allow it to drive growth while enabling it to better focus on the needs of its customers. Each of these channels is supported by dedicated employees in sales. Each of these channels is also supported by non-dedicated, centralized service delivery and management, product management and development, corporate marketing, global network services, engineering, information technology, and corporate functions, including legal, finance, strategy and human resources.

Wholesale Voice Services

The Company offers wholesale voice services that target large and existing markets. The revenue potential for wholesale voice services is large; however, pricing is expected to continue to decline over timeadjustments as a result of the CenturyLink merger and the enactment of the Tax Cuts and Jobs Act legislation in December 2017 which resulted in a remeasurement of our deferred tax assets and liabilities at the new low-cost IPfederal corporate tax rate. For the year ended December 31, 2018, the impact from purchase accounting adjustments resulted in a 17.2% increase in the effective rate. See Note 1—Background and optical-based technologies. In addition, the market for wholesale voice services is being targeted by many competitors, severalSummary of which are larger and have more financial resources than the Company.Significant Accounting Policies.

Seasonality and Fluctuations

The Company continues to expect business fluctuations to affect sequential quarterly trends in revenue, costs and cash flow. This includes the timing, as well as any seasonality of sales and service installations, usage, rate changes and repricing for contract renewals. Historically, the Company's revenue and expense in the first quarter has been affected by the slowing of our customers' purchasing activities during the holidays and the resetting of payroll taxes in the new year. The Company conducts a portion of its business in currencies other than the U.S. dollar, the currency in which the Company's Consolidated Financial Statements are reported. Accordingly, the Company's operating results could also be adversely affected by foreign currency exchange rate volatility relative to the U.S. dollar. The Company's historical experience with quarterly fluctuations may not necessarily be indicative of future results.
Because revenue subject to billing disputes where collection is uncertain is not recognized until the dispute is resolved, the timing of dispute resolutions and settlements may positively or negatively affect the Company's revenue in a particular quarter. The timing of disconnection may also affect the Company's results in a particular quarter, with disconnection early in the quarter generally having a greater effect. The timing of capital and other expenditures may affect our costs or cash flow. The convergence of any of these or other factors such as fluctuations in usage, increases or decreases in certain taxes and fees or pricing declines upon contract renewals in a particular quarter may result in the Company's revenue growing more or less than previous trends, may affect the Company's profitability and other financial results and may not be indicative of future financial performance.The Company also establishes appropriate reserves for disputes of incorrect network access cost billings from its suppliers of network services, which may include disputes for circuits that are not disconnected by the supplier on a timely basis, charges from suppliers for circuits that were not timely installed and incorrect rate or other inadequate information needed to determine the appropriate billing from the supplier. The network access costs reserves for disputed supplier billings are based on an analysis of the Company's historical experience in resolving disputes with its suppliers and regulatory analysis regarding certain specific supplier billing matters. The timing and ultimate outcome of the dispute resolution process could differ from the Company's initial estimates and these differences could be material.






70
Table of Contents

Critical Accounting Policies and Estimates

The Company's discussion and analysis of itsOur consolidated financial condition and results of operationsstatements are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these consolidated financial statements requires the Companymanagement to make estimates and judgmentsassumptions that affect the reported amounts of our assets, liabilities, equity, revenue expenses and related disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company evaluates these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

While the Company has other accountingexpenses. We have identified certain policies that involve estimates such as the allowance for doubtful accounts and unfavorable contracts recognized in acquisition accounting, management has identified the policies below, which require the most significant judgments and estimates to be made in the preparation of the Consolidated Financial Statements, as critical to itsour business operations and the understanding of itsour past or present results of operations.

Revenue

Revenue is recognized monthly asoperations related to (i) business combinations; (ii) loss contingencies and litigation reserves; (iii) affiliate transactions; and (iv) income taxes. These policies and estimates are considered critical because they had a material impact, or they have the services are provided basedpotential to have a material impact, on contractual amounts expected to be collected. Communications services are provided either on a usage basis, which can vary period to period, or at a contractually committed amount.

For certain sale and long-term indefeasible right of use ("IRU") contracts involving private line, wavelengths and dark fiber services, the Company may receive upfront payments for services to be delivered for a period of up to 25 years. In these situations, the Company defers the revenue and amortizes it on a straight-line basis to earnings over the term of the contract.

Termination revenue is recognized when a customer disconnects service prior to the end of the contract period and for which Level 3 had previously received consideration and for which revenue recognition was deferred. Termination revenue also is recognized when customers make termination penalty payments to Level 3 to settle contractually committed purchase amounts that the customer no longer expects to meet or when a customer and Level 3 renegotiate a contract under which Level 3 is no longer obligated to provide product or services for consideration previously received and for which revenue recognition has been deferred. Termination revenue is reported in the same manner as the original product or service provided.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which amended the existing accounting standards for revenue recognition and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. Early adoption is permitted using the original effective date of annual reporting periods beginning after December 15, 2016, and interim reporting periods within those periods. The new guidance may be applied retrospectively to each prior period presented or prospectively with the cumulative effect recognized as of the date of initial application. The Company does not expect to adopt the ASU early and is currently evaluating the effect of adopting this ASU on itsour consolidated financial statements and related disclosures includingbecause they require us to make significant judgments, assumptions or estimates. We believe that the transition methodestimates, judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time they were made. However, there can be no assurance that itactual results will elect.
not differ from those estimates.




71
Table of Contents

Revenue ReservesBusiness Combinations

The Company establishes appropriate revenue reserves atWe have accounted for CenturyLink's acquisition of us under the time services are rendered based on an analysisacquisition method of historical credit activity to address, where significant, situations in which collection is not reasonably assured as a result of credit risk, potential billing disputes or other reasons. The Company's significant estimates are based on assumptionsaccounting, whereby the tangible and other considerations, including payment history, credit ratings, customer financial performance and history of billing disputes.

Network Access Costs Reserves

The Company disputes incorrect billings from its suppliers of network services. The most prevalent types of disputes include disputes for circuits that are not disconnected by the supplier on a timely basis, charges from suppliers for circuits that were not timely installed and incorrect rate or other inadequate information needed to determine the appropriate billing from the supplier. Depending on the type and complexity of the issues involved, it may and often does take several quarters to resolve the disputes. The Company establishes appropriate network access costs reserves for disputed supplier billings based on an analysis of its historical experience in resolving disputes with its suppliers and regulatory analysis regarding certain supplier billing matters. Judgment is required in estimating the ultimate outcome of the dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.

Valuation of Long-Lived Assets

The Company performs an assessment of its long-lived assets, including finite-lived acquisition-relatedseparately identifiable intangible assets for impairment when events or changes in circumstances indicate that the carrying value of assets or asset groupings may not be recoverable. This review requires the identification of the lowest level of identifiable cash flows for purposes of grouping assets subject to review. The estimate of undiscounted cash flows includes long-term forecasts of revenue growthacquired and operating expenses. All of these items require significant judgment and assumptions. An impairment loss may exist when the estimated undiscounted cash flows attributable to the assetsliabilities assumed are less than their carrying amount. If an asset is deemed to be impaired, the amount of the impairment loss recognized represents the excess of the long-lived asset's carrying value as compared to its estimated fair value, based on management's assumptions and projections.

The Company conducted a long-lived asset impairment analysis in the fourth quarter of 2015 and 2014 and in each case concluded that its long-lived assets, including its finite-lived acquisition-related intangible assets, were not impaired. To the extent that future changes in assumptions and estimates cause a change in estimates of future cash flows that indicate the carrying amount of the Company's long-lived assets, including finite-lived acquisition-related intangible assets, may not be recoverable, the Company may incur impairment charges in the future to write-down the carrying amount of the Company's long-lived assets toat their estimated fair value.

Useful Lives of Long-Lived Assets

values at the acquisition date. The Company performs internal reviews to evaluate the depreciable lives of its property, plant and equipment annually or more frequently if new facts and circumstances arise that may affect management's original estimates. Due to the rapid changes in technology and the competitive environment, selecting the estimated economic life of telecommunications property, plant, and equipment requires a significant amount of judgment. The Company's internal reviews take into account input from the Company's global engineering and network services personnel, actual usage, the physical conditionportion of the Company's property, plant, and equipment, industry data, and other relevant factors.


72
Tablepurchase price in excess of Contents

The Company extended the lives associated with IP equipment and certain of its facility equipment in the first quarter of 2014. This change in estimate was accounted for prospectively.

Goodwill and Acquired Indefinite-Lived Intangible Assets

The Company performs an annual impairment assessment of its goodwill and purchased intangible assets with indefinite useful lives during the fourth quarter, or more frequently if the Company determines that indicators of impairment exist. The Company's impairment review process considers the fair value of each reporting unit relative to its carrying value. The Company assesses the fair value of each of its reporting units using an income approach (also known as a discounted cash flow) and a market multiple approach. The income approach utilizes cash flow projections discounted using an appropriate Weighted Average Cost of Capital (WACC) rate for each reporting unit. The market multiple approach uses a multiple of a company’s Earnings Before Interest, Taxes, and Depreciation and Amortization expenses (EBITDA).

If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is performed. If the carrying value of the reporting unit exceeds its fair value, then a second step must be performed, and the implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded. In accordance with applicable accounting guidance, prior to performing the two step evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value. If it is determined that it is unlikely that the carrying value exceeds the fair value, the Company is not required to complete the two step goodwill impairment evaluation. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment.

In 2015, the Company's reporting units consist of its three regional operating units in: North America; Europe, the Middle East and Africa ("EMEA"); and Latin America. Goodwill assigned to the North America, EMEA and Latin America reporting units at December 31, 2015 totaled $7.749 billion and was $7.024 billion, $0.129 billion and $0.596 billion, respectively. Following the acquisition of tw telecom during the fourth quarter of 2014, goodwill was assigned to the North America, EMEA, Latin America and tw telecom reporting units at December 31, 2014 and totaled $7.689 billion and was $1.832 billion, $0.138 billion, $0.595 billion and $5.124 billion, respectively.

As a result of the deconsolidation of the Company's Venezuelan subsidiary, the Company completed an assessment of the Latin American and other reporting units' goodwill as of September 30, 2015 and concluded there was no impairment in 2015. In 2014, the Company conducted its qualitative goodwill impairment analysis and determined that it was more likely than not that the fair value of its reporting units exceeded the carrying value and concluded that goodwill was not impaired. As a result, the Company did not perform the two step goodwill impairment evaluation.

To the extent that future changes in the Company's assumptions and estimates cause a change in the related fair value estimates that indicate the carrying amount of the Company's goodwill may exceed its fair value, the Company may incur impairment charges in the future to write-down the carrying amount of the Company's goodwill to its estimated fair value.

The Company's indefinite-lived intangible assets impairment review process compares the estimated fair value of the indefinite-livednet tangible and separately identifiable intangible assets acquired represents goodwill. The allocation of the purchase price related to their respective carrying values. IfCenturyLink's acquisition of us involves estimates and judgments by CenturyLink's management. The fair values recorded are made based on management's best estimates and assumptions. In arriving at the fair valuevalues of the indefinite-lived intangible assets exceeds their carrying values, then the indefinite-lived intangible assets are not impaired. If the carrying value of the indefinite-lived intangible assets exceeds their fair value, then an impairment loss equal to the difference will be recorded. In accordance with applicable accounting standards, an entity may assess qualitative factors to determine whether it is more likely than not that the

73
Table of Contents

fair value exceeds the carrying value prior to performing the two step evaluation. If it is determined that it is unlikely the carrying value exceeds the fair value, then the entity is not required to perform the two step indefinite-lived intangible assets impairment evaluation.

During the fourth quarter of 2015 and 2014, the Company conducted its indefinite-lived intangible assets impairment analysis and concluded that there was no impairment in 2015 and there was impairment of $17 million in its trade name indefinite-lived intangible asset in 2014.

Asset Retirement Obligations

The Company's asset retirement obligations consist of legal requirements to remove certain of its network infrastructure at the expiration of the underlying right-of-way ("ROW") term and restoration requirements for leased facilities. The initial and subsequent measurement of the Company's asset retirement obligations require the Company to make significant estimates regarding the eventual costs and probability or likelihood that the Company will be required to remove certain of its network infrastructure and restore certain of its leased properties. In addition, the Company must estimate the periods over which these costs will be incurred and the present value of such costs using the Company's estimate of its credit-adjusted risk-free interest rate upon initial recognition.

The Company periodically evaluates its asset retirement obligations to determine if the amount and timing of its cash flow estimates continue to be appropriate based on current facts and circumstances.

Assessment of Loss Contingencies

The Company has legal, tax and other contingencies that could result in significant losses upon the ultimate resolution of such contingencies. The Company has provided for losses in situations where it has concluded that it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. Further, with respect to loss contingencies, where it is probable that a liability has been incurred and there is a range in the expected loss and no amount in the range is more likely than any other amount, the Company accrues at the low end of the range. A significant amount of judgment is involved in determining whether a loss is probable and reasonably estimable due to the uncertainty involved in predicting the likelihood of future events and estimating the financial impact of such events. Accordingly, it is possible that upon the further development or resolution of a contingent matter, a significant charge could be recorded in a future period related to an existing contingent matter. For additional information, see Note 16 - Commitments, Contingencies and Other Items in the notes to the Consolidated Financial Statements.

Business Combinations

The accounting guidance for business combinations requires an acquiring entity to recognize all of the assets acquired and liabilities assumed, atCenturyLink considered the following generally accepted valuation approaches: the cost approach, income approach and market approach. CenturyLink's estimates 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.

Since November 1, 2017, our results of operations have been included in the consolidated results of operations of CenturyLink. CenturyLink has accounted for its acquisition of us under the acquisition date fair value. The allocationmethod of accounting, which resulted in the assignment of the purchase price to the assets acquired and liabilities assumed from tw telecombased on 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 and amortizable tangible and identifiable intangible assets), required a significant amountjudgment. CenturyLink completed its final fair value determinations during the fourth quarter of judgment2018. CenturyLink's final fair value determinations were different than those preliminary values reflected in our consolidated financial statements as of and is considered a critical estimate. Such allocation of certain aspects offor the purchase price to items that are more complex to value was performed by management, taking into consideration information provided to management by an independent valuation firm.

Income Taxes

successor period ended December 31, 2017. The Company recognizes deferred tax assets and liabilities for its United States and non-U.S. operations, for operating loss and other credit carry forwards and the expected tax consequences of temporary differences between the tax basisrecognition of assets and liabilities at fair value is reflected in our financial statements and their reported amounts using enacted tax ratestherefore has resulted in effecta new basis of accounting for the year"successor period" beginning on November 1, 2017. This new basis of accounting means that our financial statements for the successor periods are not comparable to our previously reported financial statements, including the predecessor period financial statements in this report.

Loss Contingencies and Litigation Reserves

We are involved in several material legal proceedings, as described in more detail in Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report. We periodically assess potential losses for 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 expected to reverse. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in

74
Table of Contents

which those temporary differences become deductible. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company'smaterial, our consolidated financial statements orcould be materially impacted.

For matters related to income taxes, if we determine in our judgment that the impact of an uncertain tax returns, and future profitabilityposition is more likely than not to be sustained upon audit by tax jurisdiction. The Company has historically providedthe relevant taxing authority, then we recognize in our financial statements a valuation allowance to reduce its U.S federal, state and foreign deferred tax assets tobenefit for the largest amount that is more likely than not to be realized. The Company monitorssustained. No portion of an uncertain tax position will be recognized if we determine in our judgment that 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.

Affiliate Transactions
We provide and receive from CenturyLink and its cumulative losssubsidiaries ("our affiliates") various communications and other services. We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates.
Because of the significance of the services we provide to our affiliates and our other affiliate transactions, the results of operations, financial position and other evidence each quarter to determine the appropriateness of its valuation allowance. Although the Company believes its estimatescash flows presented herein are reasonable, the ultimate determinationnot necessarily indicative of the appropriate amountresults of valuation allowance involves significant judgment.

Inoperations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the fourth quarter 2015, the Company released the majorityperiods presented. See Note 14—Affiliate Transactions to our consolidated financial statements in Item 8 of its valuation allowance against its U.S. federal and state deferred tax assets, resulting in a non-cash benefit to income tax expensePart II of approximately $3.3 billion, $3.1 billion of which was related to future years’ earnings. In making the determination to release the valuation allowance against U.S. federal and state deferred tax assets, the Company took into consideration its movement into a cumulative income positionthis annual report for the most recent three-year period, including pro forma adjustments for acquired entities, its eight out of nine consecutive quarters of pre-tax operating income, and forecasts of future earnings for its U.S. business. The Company expects to continue to generate income before taxes in the United States in future periods. In 2014 the Company released approximately $100 million of its deferred tax valuation allowance primarily related to its business in the United Kingdom due to consolidation of legal entities whereby one U.K. entity with a full valuation allowance was merged with an entity that had no valuation allowance against its deferred tax assets.


Results of Operations 2015 vs. 2014 and 2014 vs. 2013

Year Ended December 31,      
(dollars in millions) 2015 2014 2013
Revenue $8,229
 $6,777
 $6,313
Network Access Costs 2,833
 2,529
 2,471
Network Related Expenses 1,432
 1,246
 1,214
Depreciation and Amortization 1,166
 808
 800
Selling, General and Administrative Expenses 1,467
 1,181
 1,162
Total Costs and Expenses 6,898
 5,764
 5,647
Operating Income 1,331
 1,013
 666
Other Income (Expense):      
Interest Income 1
 1
 —
Interest Expense (642) (654) (649)
Loss on Modification and Extinguishment of Debt (218) (53) (84)
Venezuela Deconsolidation Charge (171) —
 —
Other, net (18) (69) (4)
Total Other Expense (1,048) (775) (737)
Income (Loss) Before Income Taxes 283
 238
 (71)
Income Tax (Expense) Benefit 3,150
 76
 (38)
Net Income (Loss) $3,433
 $314
 $(109)
additional information.



Income Taxes

Until November 1, 2017, we filed a consolidated federal income tax return of Level 3 Communications, Inc. Since CenturyLink's acquisition of us on November 1, 2017, we have been included in the consolidated federal income tax return of CenturyLink. Under CenturyLink's tax allocation policy, CenturyLink treats our consolidated results as if we were a separate taxpayer. The policy requires us to pay our tax liabilities to CenturyLink in cash based upon our separate return taxable income. We are also included in the combined state tax returns filed by CenturyLink and the same payment and allocation policy applies.

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 credit carryforwards and differences between the financial statement carrying value of assets and liabilities, the tax bases of those assets and liabilities, and tax net operating loss carryforwards, or NOLs. 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. 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.

In connection with recording deferred income tax assets and liabilities, we establish valuation allowances when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be realized. 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. We also rely on our forecasts of future earnings and the nature and timing of future deductions and benefits represented by the deferred tax assets, all of which involve the exercise of significant judgment. As of the successor date of December 31, 2018, we have recorded a valuation allowance of $0.9 billion primarily related to state and foreign NOLs, as it is more likely than not that these NOLs will expire unused. 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.

Liquidity and Capital Resources

Overview

As of November 1, 2017, we became a wholly owned subsidiary of CenturyLink. As such, factors relating to, or affecting, CenturyLink's liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market's perception of us.

In connection with the closing of the Merger Agreement, we loaned $1.8 billion to CenturyLink in exchange for an unsecured demand note that bears interest at 3.5% per annum. The principal amount of such note is payable upon demand by Level 3 Parent but no later than November 1, 2020 and is prepayable by CenturyLink at any time.

A significant component of our liquidity is dependent upon CenturyLink's ability to repay its obligation to us.

We anticipate that any future liquidity needs will be met through (i) our cash provided by operating activities (ii) amounts due to us from CenturyLink (iii) our ability to refinance our debt obligations at maturity and (iv) capital contributions, advances or loans from CenturyLink or its affiliates if and to the extent they have available funds or access to funds that they are willing and able to contribute, advance or loan.




75
Table of Contents

Discussion of all significant variances:Debt and Other Financing Arrangements

Revenue by Channel:

Year Ended December 31,    
(dollars in millions) 2015 2014 2013
Core Network Services:      
North America - Wholesale Channel $1,734
 $1,522
 $1,478
North America - Enterprise Channel 4,474
 3,003
 2,471
EMEA - Wholesale Channel 275
 328
 354
EMEA - Enterprise Channel 560
 563
 534
Latin America - Wholesale Channel 154
 165
 160
Latin America - Enterprise Channel 560
 614
 594
Total Core Network Services 7,757
 6,195
 5,591
Wholesale Voice Services 472
 582
 722
Total Revenue $8,229
 $6,777
 $6,313

Revenue by Service Offering:

Year Ended December 31,      
(dollars in millions) 2015 2014 2013
Core Network Services:      
Colocation and Datacenter Services $605
 $590
 $585
Transport and Fiber 2,345
 2,087
 1,935
IP and Data Services 3,586
 2,530
 2,133
Voice Services (Local and Enterprise) 1,221
 988
 938
Total Core Network Services $7,757
 $6,195
 $5,591
Wholesale Voice Services 472
 582
 722
Total Revenue $8,229
 $6,777
 $6,313

Revenue increased 21% in 2015As of the successor date of December 31, 2018, our long-term debt (including current maturities and capital leases) totaled $10.8 billion, compared to 2014 and increased 7% in 2014 compared to 2013. The increase in total revenue in 2015 compared to 2014 was primarily driven by a full year of additional revenue in 2015 associated with acquisition of tw telecom in the fourth quarter of 2014, compared to $285 million representing two months of revenue from the tw telecom acquisition included in the 2014 results.  Assuming the tw telecom revenue was included for the full year of 2014, the total revenue would have increased from $8,123 million (see Note 2 - Events Associated with the Merger of tw telecom inc. in the Notes to the Consolidated Financial Statements) in 2014 to $8,229 million in 2015, or a 1% increase.  This increase was primarily driven by enterprise channel growth of $341 million in North America, offset by declines in Latin America revenue of $69 million and EMEA revenue of $67 million due primarily to the strengthening of the U.S. dollar against local currencies in 2015, as well as declines of $99 million in Wholesale Voice Services revenue and the effect of the deconsolidation of the Company's Venezuelan subsidiary as of September 30, 2015.   

The increase in 2014 compared to 2013 was driven by growth in Core Network Services revenue from enterprise customers and the inclusion of $285 million of revenue from tw telecom subsequent to the

76
Table of Contents

completion of the Merger on October 31, 2014, partially offset by a decline in Wholesale Voice Services revenue.

The Company experienced continued growth in its IP and data services of $1,056 million, transport and fiber services of $258 million and voice services of $233 million during 2015 compared to 2014 driven primarily by the acquisition of tw telecom and end user customer demand for VPN and bandwidth in the enterprise channel. The increase in IP and Data Services was predominantly driven by the Company’s VPN and Managed Services and revenue from the tw telecom acquisition.  The Company also experienced increases in Transport and Fiber driven by Dark Fiber, Wavelengths and Professional Services and in Colocation and Datacenter Services and Voice Services, which also benefited from the tw telecom acquisition, offset by the adverse effect of the weakening of currencies in EMEA and Latin America against the U.S. dollar.

The Company experienced growth in its IP and Data services, Transport and Fiber and Voice Services during 2014 compared to 2013 driven primarily by end user customer demand for enterprise bandwidth and content delivery over the Internet as well as the acquisition of tw telecom.

Core Network Services revenue increased in the North America region in 2015 compared to 2014 as a result of the full year of results from the tw telecom acquisition and growth in services provided to the existing enterprise customer base. These increases were partially offset by decreases in EMEA and Latin America for 2015 due to the appreciation of the U.S. dollar against currencies in EMEA and Latin America.

Core Network Services revenue increased in the North America and Latin America regions in 2014 compared to 2013, as a result of growth in services provided to the existing enterprise customer base, the acquisition of new customers in the enterprise channel and the acquisition of tw telecom, which contributed $285 million to Core Network Services revenue for the period subsequent to the completion of the Merger. Additionally, the Company's revenue from the EMEA region's enterprise channel increased over 2013. These increases were partially offset by decreases in the North America and EMEA regions' wholesale channel revenue.

Wholesale Voice Services revenue decreased in all regions in 2015 compared to 2014 and in 2014 compared to 2013. In 2015 compared to 2014, Wholesales Voice Services revenue decreased in North America and EMEA and remained flat in Latin America. The changes during the periods are primarily due to competitive pressures and the Company's focus on maintaining the Wholesale Voice Services profitability.

Wholesale Voice Services revenue decreased in 2014 compared to 2013 primarily as a result of declines in usage as customers transition to IP voice services. The Company continues to manage its combined wholesale voice services platform for profitability.

Network Access Costs includes leased capacity, right-of-way costs, access charges, satellite transponder lease costs and other third party costs directly attributable to providing access to customer locations from the Level 3 network, but excludes Network Related Expenses and depreciation and amortization. Network Access Costs do not include any employee expenses or impairment expenses; these expenses are allocated to Network Related Expenses or Selling, General and Administrative Expenses.

Network Access Costs as a percentage of total revenue was 34% in 2015 compared to 37% in 2014 and 39% in 2013. The decrease is primarily due to an improving mix of higher profit on-net Core Network Services and a decline in lower profit Wholesale Voice Services. Additionally, the Company continues to implement initiatives to reduce both fixed and variable network access costs, which resulted in a decrease in Network Access Costs. The increase in total Network Access Costs in 2014 compared to

77
Table of Contents

2013 is primarily related to the addition of tw telecom's results of operations for November and December 2014.

Network Related Expenses includes certain expenses associated with the delivery of services to customers and the operation and maintenance of the Level 3 network, such as facility rent, utilities, maintenance and other costs, each related to the operation of its communications network, as well as salaries, wages and related benefits (including non-cash stock-based compensation expenses) associated with personnel who are responsible for the delivery of services, operation and maintenance of its communications network, and accretion expense on asset retirement obligations, but excludes depreciation and amortization.

Network Related Expenses increased 15% in 2015 from 2014 and increased 3% in 2014 from 2013. The increase in 2015 was primarily related to an increase in employee related expense of $106 million and an increase in facilities and rent expense of $62 million resulting from the acquisition of tw telecom. Additionally, in the third quarter of 2015, the Company implemented certain workforce reductions, resulting in approximately $8 million of restructuring charges recorded in Network Related Expenses.

The increase in 2014 compared to 2013 is primarily attributable to the acquisition of tw telecom by an increase in employee related expense of $64 million and an increase in facilities and rent expense of $16 million offset by an increase in capitalized labor and related costs of $21 million and a decrease in non-cash stock-based compensation of $27 million. Additionally in 2014 and 2013, the Company implemented certain workforce reductions in its operations staff. Restructuring charges in 2014 and 2013 of $11 million and $12 million, respectively, were recorded in Network Related Expenses.

Depreciation and Amortization expense increased44% in 2015 from 2014 and increased 1% in 2014 from 2013. The increase in 2015 compared to 2014 is primarily attributable to $312 million of depreciation and amortization charges associated with the assets acquired from tw telecom and increased capital expenditures, partially offset by the impact of foreign currency exchange rate changes in EMEA and Latin America of $17 million. The increase in 2014 compared to 2013 is primarily related to $63 million of depreciation and amortization on tangible and intangible assets acquired from tw telecom and $150 million of additional capital expenditures in 2014, partially offset by $84 million of the effect of a change in useful lives of certain asset categories in the first quarter of 2014.

Selling, General and Administrative Expenses ("SG&A Expenses") includes the salaries, wages and related benefits (including non-cash, stock-based compensation expenses) and the related costs of corporate and sales personnel, travel, insurance, non-network related rent, advertising, and other administrative expenses.

SG&A Expenses increased24% in 2015 compared to 2014 and increased 2% in 2014 compared to 2013. The increase in 2015 compared to 2014 was primarily related to $199 million of additional employee related expenses and an increase in professional services and non-network rent of $51 million, primarily associated with the acquisition of tw telecom. The increase in 2014 compared to 2013 is primarily related to $33 million of additional employee related expenses and $29 million of additional professional fees resulting from the acquisition of tw telecom and acquisition-related expenses incurred in connection with the Merger offset by a decrease in non-cash, stock-based compensation of $51 million. The Company incurred $32 million and $81 million in expenses related to the acquisition of tw telecom in 2015 and 2014, respectively.

From time to time, the Company has implemented certain workforce reductions in its administrative staff. Restructuring charges in 2015, 2014 and 2013 of $16 million, $34 million and $35 million, respectively, were recorded in SG&A Expenses.

Non-cash, stock-based compensation expense of $141 million, $73 million and $151 million was recorded in 2015, 2014 and 2013, respectively, related to grants of outperform stock appreciation rights,

78
Table of Contents

performance restricted stock units, restricted stock units, accruals for the Company’s annual discretionary bonus, a portion of which was paid in stock for 2013, incentive and retention plans and shares issued for the Company’s matching contribution to the 401(k) plan. Approximately $121 million, $64 million and $115 million of non-cash stock-based compensation expense was recorded in SG&A Expenses in 2015, 2014 and 2013, respectively, and $20 million, $9 million and $36 million was recorded in Network Related Expenses in 2015, 2014 and 2013, respectively. The increase in 2015 compared to 2014 was primarily related to additional grants of restricted stock units, performance restricted stock units ("PRSUs") and increased matching contributions for the Company's 401(k) plan due to the additional headcount from the tw telecom acquisition. The total decrease in non-cash, stock-based compensation expense in 2014 compared to 2013 is primarily due to the 2014 annual discretionary bonus being accrued for as a cash bonus rather than a partial cash, partial equity bonus as in previous years. In addition, the $23 million charge recorded in 2013 related to the vesting of long-term incentive awards in connection with the Company's former CEO's departure from the Company, as described below, did not recur in 2014.

On April 11, 2013, the Board of Directors appointed Jeff K. Storey to be the Company's President and Chief Executive Officer. As a result of the related departure of James Q. Crowe, the Company incurred a charge of approximately $23 million in the second quarter of 2013, which was recorded in SG&A Expenses, consisting of $6 million of additional cash compensation expense and $17 million in non-cash compensation expense related to the vesting of certain of Mr. Crowe's long-term incentive awards payable under the terms of his employment agreement.

Adjusted EBITDA, as defined by the Company, is net income (loss) from the Consolidated Statements of Operations before (1) income tax benefit (expense), (2) total other income (expense), (3) non-cash impairment charges included within selling, general and administrative expenses and network related expenses, (4) depreciation and amortization expense and (5) non-cash stock-based compensation expense included within selling, general and administrative expenses and network related expenses and (6) discontinued operations.

Adjusted EBITDA is not a measurement under generally accepted accounting principles ("GAAP") and may not be used in the same way by other companies. Management believes that Adjusted EBITDA is an important part of the Company’s internal reporting and is a key measure used by management to evaluate profitability and operating performance of the Company and to make resource allocation decisions. Management believes such measurement is especially important in a capital-intensive industry such as telecommunications. Management also uses Adjusted EBITDA to compare the Company’s performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure from period to period its ability to fund capital expenditures, fund growth, service debt and determine bonuses.

Adjusted EBITDA excludes non-cash impairment charges and non-cash stock-based compensation expense because of the non-cash nature of these items. Adjusted EBITDA also excludes interest income, interest expense and income tax benefit (expense) because these items are associated with the Company’s capitalization and tax structures. Adjusted EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the effect of capital investments which management believes are better evaluated through cash flow measures. Adjusted EBITDA excludes net other income (expense) because these items are not related to the primary operations of the Company.

There are limitations to using non-GAAP financial measures such as Adjusted EBITDA, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from the Company’s calculations. Additionally, this financial measure does not include certain significant items such as interest income, interest expense, income tax benefit (expense), depreciation and amortization expense, non-cash impairment charges, non-cash stock-based compensation expense and net other income (expense). Adjusted EBITDA should not be considered a substitute for other measures of financial performance reported in accordance with GAAP.


79
Table of Contents

The following information provides a reconciliation of Net Income (Loss) to Adjusted EBITDA as defined by the Company along with Adjusted EBITDA by reportable segment:

  Year Ended December 31,
(dollars in millions) 2015 2014 2013
Net Income (Loss) $3,433
 $314
 $(109)
Income Tax Expense (Benefit) (3,150) (76) 38
Interest Expense 642
 654
 649
Loss on Modification and Extinguishment of Debt 218
 53
 84
Venezuela Deconsolidation Charge 171
 —
 —
Other, net 17
 68
 4
Depreciation and Amortization Expense 1,166
 808
 800
Non-Cash Stock Compensation Attributable to Stock Awards 141
 73
 151
Non-Cash Impairment —
 1
 7
Adjusted EBITDA $2,638
 $1,895
 $1,624
       
North America $3,048
 $2,065
 $1,799
EMEA 235
 214
 226
Latin America 302
 348
 313
Unallocated Corporate Expenses (947) (732) (714)
Consolidated Adjusted EBITDA $2,638
 $1,895
 $1,624

Consolidated Adjusted EBITDA was $2.638$10.9 billion in 2015 compared with $1.895 billion in 2014 and $1.624 billion in 2013. The increase in Adjusted EBITDA is attributable to the acquisition of tw telecom, growth in the Company’s higher incremental profit Core Network Services revenue and continued improvements in network access costs and lower Network Related Expenses as a percentage of revenue. See Note 15 - Segment Information in the notes to Consolidated Financial Statements for additional information on Adjusted EBITDA by region.

Adjusted EBITDA increased in the North America region in 2015 compared to 2014 primarily as a result of the tw telecom acquisition, growth in Core Network Services revenue and initiatives resulting in reduced network access costs.

Adjusted EBITDA increased in the EMEA region in 2015 compared to 2014 as a result of initiatives that reduced network access costs, which were partially offset by the effect of the stronger U.S. dollar against European currencies. Consolidated Adjusted EBITDA for 2015 was negatively affected by approximately 1% versus the comparable prior period as a result of the changes in foreign currency rates.
Adjusted EBITDA decreased in the Latin American region in 2015 compared to 2014 primarily as a result of the effect of the stronger U.S. dollar against Latin American currencies. Consolidated Adjusted EBITDA for 2015 was negatively affected by approximately 2% versus the comparable prior period, as a result of the changes in foreign currency rates. The decrease was partially offset by initiatives resulting in reduced network access costs.

Prior to 2014, the Company paid a portion of employee annual bonuses with shares of its common stock. Beginning in 2014, the Company accrued the entire bonus compensation within SG&A Expenses and Network Related Expenses as cash compensation, which is paid in the first quarter of the following year.

80
Table of Contents


Adjusted EBITDA increased in North America and Latin America in 2014 compared to 2013 primarily resulting from (i) growth in core network services revenue and (2) initiatives resulting in reduced network access costs. The results of operations from acquisition of tw telecom contributed $105 million to Adjusted EBITDA in 2014. These increases were partially offset by a decrease in wholesale channel revenue, primarily in North America and EMEA.

Interest Expensedecreased $12 million in 2015 from 2014 and increased $5 million in 2014 from 2013. Interest expense decreased in 2015 compared to 2014 by $72 million due to a lower weighted average interest cost of debt of 4.9% at December 31, 2015 compared to 5.9% at December 31, 2014 due to refinancing activities and a $30 million reduction in interest expense as a result of the conversion of the 7% Convertible Senior Notes due 2015 and 7% Convertible Senior Notes due 2015, Series B into common stock, partially offset by $89 million of interest expense on additional borrowings used to fund the tw telecom merger. Interest expense increased in 2014 compared to 2013 by $47 million as a result of additional borrowings to finance the tw telecom merger, partially offset by $45 million due to a lower weighted average interest cost of debt of 5.9% at December 31, 2014 compared to 6.8% at December 31, 2013 due to refinancing activities.

The Company expects annual interest expense in 2016 to approximate $570 million based on current interest rates on the Company's debt outstanding as of the predecessor date of December 31, 2015. See Note 11 - Long-Term Debt in2017. On September 29, 2017, the notes to Consolidated Financial Statements for additional information on Level 3's financing activities.

Loss on Modification$300 million aggregate principal amount plus accrued and Extinguishment of Debt was $218 million in 2015 compared to a loss of $53 million in 2014 and a loss of $84 million in 2013. See Note 11 - Long-Term Debt in the notes to the Consolidated Financial Statements for more details regarding the Company’s financing activities.

The loss recorded during 2015 was related to a charge of approximately $36 million related to the redemption of the 9.375% Senior Notesunpaid interest due 2019 in April 2015, $100 million related to the redemptions of the 8.125% Senior Notes due 2019 and 8.875% Senior Notes due 2019 in April 2015, $27 million related to the refinancing of the $2 billion senior secured Tranche B Team Loan due 2022 in May 2015 and $55 million related to the redemption of the 8.625% Senior Notes due 2020.

The loss recorded during 2014 was related to the refinancing of the 11.875% Senior Notes due 2019.

The loss recorded during 2013 was related to a charge of approximately $1 million related to the refinancing ofunder the Floating Rate Senior Notes due 2015 in December 2013, $56 million related2018 was paid.

Subject to market conditions, from time to time we expect to continue to issue term debt or senior notes to refinance our maturing debt. The availability, interest rate and other terms of any new borrowings will be impacted by the refinancingratings assigned us by the three major credit rating agencies, among other factors. As of the 10% Senior Notesdate of this report, the credit ratings for the senior unsecured debt of Level 3 Parent, LLC and Level 3 Financing, Inc. were as follows:

BorrowerMoody's Investors Service, Inc.Standard & Poor'sFitch Ratings
Level 3 Parent, LLC:
UnsecuredB1B+BB-
Level 3 Financing, Inc.
UnsecuredBa3BBBB
SecuredBa1BBB-BBB-

We believe we were in compliance in all material respects with all provisions and financial covenants of our debt agreements as of December 31, 2018. See Note 5—Long-Term Debt to our consolidated financial statements in Item 8 of this report for additional information about our long-term debt.

Future Contractual Obligations

The following table summarizes our estimated future contractual obligations as of December 31, 2018:
 2019 2020 2021 2022 2023 2024 and thereafter Total
 (Dollars in millions)
Long-term debt (1)(2)
$6
 6
 648
 1,609
 1,209
 7,211
 10,689
Interest on long-term debt and capital leases (2)
552
 551
 522
 480
 386
 141
 2,632
Purchase commitments (3)
132
 74
 56
 27
 14
 36
 339
Operating leases396
 259
 219
 164
 137
 613
 1,788
Right-of-way agreements77
 51
 38
 37
 37
 225
 465
Asset retirement obligations16
 18
 9
 5
 4
 54
 106
Total future contractual obligations (4)
$1,179
 959
 1,492
 2,322
 1,787
 8,280
 16,019

(1)Includes current maturities and capital lease obligations, but excludes unamortized premium, net, unamortized debt issuance costs and intercompany debt.
(2)Actual principal and interest paid in all years may differ due to future refinancing of outstanding debt or issuance of new debt.
(3)Represent purchase commitments with third-party vendors for operating, installation and maintenance services for facilities. In addition, we 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 estimates of the level of services we expect to receive.
(4)The table is limited solely to contractual payment obligations and does not include:
contingent liabilities;
our open purchase orders as of December 31, 2018. 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;


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 purchase other goods and services;
service level commitments to our customers, the violation of which typically results in service credits rather than cash payments; 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.

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. CenturyLink and we evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment. The amount of CenturyLink's consolidated capital investment is influenced by, among other things, demand for CenturyLink's services and products, cash flow generated by operating activities and cash required for other purposes. For more information on our capital spending, see "Business" and "Risk Factors" in Items 1 and 1A, respectively, of Part I of this report.

Other Matters

We are subject to various legal proceedings and other contingent liabilities that individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. See Note 16—Commitments, Contingencies and Other Items for additional information.

CenturyLink is involved in several legal proceedings to which we are not a party that, if resolved against it, could have a material adverse effect on its business and financial condition. As a wholly owned subsidiary of CenturyLink, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink's quarterly and annual reports filed with the SEC. Because we are not a party to any of the matters, we have not accrued any liabilities for these matters.

On December 22, 2017, the Tax Act was signed into law. The Tax Act reduced the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.

As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we provisionally revalued our net deferred tax assets at December 31, 2017 and recognized a $195 million tax expense in our consolidated statement of operations for the year ended December 31, 2017. As a result of finalizing our provisional amount recorded in 2017, we recorded an additional expense of $92 million in 2018. Based on current circumstances, we do not expect to experience a material near term reduction in the amount of cash income taxes paid by us from the Act due 2018to utilization of net operating loss carryforwards. However, we anticipate that the provisions of the Act may reduce our cash income taxes in December 2013,future years.

The Act imposed a one-time repatriation tax on certain earnings of foreign subsidiaries. We have completed our analysis of the impact of the one-time repatriation tax and concluded that we do not have a tax liability under this provision. We have also completed our analysis of the impact of the global intangible low-taxed and base erosion provisions and have recorded a tax expense of $10 million related to the refinancing of the $1.2 billion Tranche B-II 2019 Term Loan in October 2013, $8 millionglobal intangible low-taxed income provisions. We do not have liability related to the refinancingbase erosion and anti-abuse tax provisions of the $595.5 million Tranche B 2016 Term LoanAct.


For a more detailed description of the Tax Act and its impact on us, please see Note 12—Income Taxes to the accompanying consolidated financial statements included in August 2013 and $9 million related to refinancing the $815 million Tranche B 2019 Term Loan in August 2013.Item 8.



Other, net is primarily comprised of gains and losses on the sale of non-operating assets, foreign currency gains and losses and other income and expense.

81
Table of Contents

  Year Ended December 31,
(dollars in millions) 2015 2014 2013
(Gain) Loss on Sale of Property, Plant, and Equipment and Other Assets $1
 $(3) $(1)
Foreign Currency Loss related to Venezuela 11
 43
 16
Other Foreign Currency (Gain) Loss 18
 18
 (19)
Impairment —
 17
 —
Other (12) (6) 8
Other, net $18
 $69
 $4

Other, net was $18 million of expense in 2015 compared to $69 million of expense in 2014 and $4 million of expense in 2013. The Other, net expense in 2015 was incurred primarily due to foreign currency losses attributable to the appreciation of the U.S. dollar for certain intercompany balances denominated in the local currency of foreign subsidiaries in North America, EMEA and Latin America that are not considered to be long-term in nature.

Other, net expense in 2014 and 2013 is primarily due to foreign currency fluctuations of local currencies relative to the U.S. dollar, including foreign currency losses attributable to the devaluation of the Venezuelan bolivar as discussed below, and the partial impairment of the Company's indefinite-lived intangible asset, partially offset by net foreign currency gains.

Effective February 13, 2013, the Venezuelan government devalued the Venezuelan bolivar by increasing the official rate from 4.30 Venezuelan bolivars to the U.S. dollar to 6.30 Venezuelan bolivars to the U.S. dollar. This devaluation reduced the Company's net monetary assets by $22 million based on the bolivar balances as of February 13, 2013, resulting in a charge of $22 million that was recognized in Other, net in the Consolidated Statement of Operations in 2013.

During the first quarter 2014, the Venezuelan government enacted additional changes to the country's foreign exchange system. The government expanded the types of transactions that may be allowed via the weekly auctions under the Complementary System of Foreign Currency Acquirement ("SICAD 1"). The Venezuelan government also announced the replacement of its existing foreign currency administration with the National Center for Foreign Commerce ("CENCOEX"). At this time, entities could seek approval to transact through CENCOEX at the official rate of 6.30 Venezuelan bolivars to the U.S. dollar; however, certain transactions could be approved at the latest SICAD 1 rate, depending on the entity's facts and circumstances.

During the second quarter of 2014, based on additional experience with the new foreign exchange mechanisms, the Company concluded that the most appropriate rate was SICAD 1. Accordingly, the Company recognized a loss of approximately $34 million in 2014, resulting from the devaluation of Venezuelan bolivar denominated monetary assets and liabilities from the official rate of 6.3 to the SICAD 1 rate. Based upon the further deterioration of the SICAD rate from 10.6 as of June 30, 2014 to 12.0 as of September 30, 2014, the Company recognized an additional loss of approximately $7 million in the third quarter of 2014. As of December 31, 2014, SICAD 1 was 12.0 Venezuelan bolivars to the U.S. dollar.

During the second quarter of 2015, the Company recognized a charge of $6 million related to the devaluation of the Venezuelan SICAD I exchange rate from 12.0 bolivars to the U.S. dollar to 12.8 bolivars to the U.S. dollar at June 30, 2015.

During the third quarter of 2015 prior to deconsolidation, the Company recognized a charge of $5 million related to the devaluation of the Venezuelan SICAD I exchange rate from 12.8 bolivars to the U.S. dollar to 13.5 bolivars to the U.S. dollar effective September 1, 2015.


82
Table of Contents

Income Tax (Expense) Benefit was $3,150 million of benefit in 2015 compared to $76 million of benefit in 2014 and $38 million of expense in 2013. During the fourth quarter of 2015, the Company released approximately $3.3 billion of its deferred tax valuation allowance related to its business in the United States. Income tax expense in prior periods was primarily related to taxes in foreign jurisdictions. In making the determination to release the valuation allowance against U.S. federal and state deferred tax assets, the Company took into consideration its movement into a cumulative income position for the most recent three-year period, including pro forma adjustments for acquired entities, its eight out of nine consecutive quarters of pre-tax operating income, and forecasts of future earnings for its U.S. business. The Company expects to continue to generate income before taxes in the United States in future periods. The release is reflected as an income tax benefit in 2015.Historical Information

During the fourth quarter of 2014, the Company released approximately $100 million of deferred tax valuation allowance primarily related to its business in the United Kingdom due to consolidation of legal entities whereby one U.K. entity with a full valuation allowance was merged with an entity that had no valuation allowance against its deferred tax assets. The release is reflected as an income tax benefit in 2014.following table summarizes cash flow activities:
 Successor  Predecessor Combined Increase / (Decrease)
 Year Ended December 31, 2018 Period Ended December 31, 2017  
Period Ended
October 31, 2017
 Year Ended December 31, 2017 2018 v Combined 2017
 (Dollars in millions)
Net cash provided by operating activities$2,397
 308
  1,914
 2,222
 175
Net cash used in investing activities(904) (2,032)  (1,118) (3,150) 2,246
Net cash used in financing activities(1,552) (253)  (345) (598) (954)
Net (decrease) increase in cash, cash equivalents, restricted cash and securities$(59) $(1,977)  451
 (1,526) 1,467

The Company incurs tax expense attributable to income in various subsidiaries that are required to file state or foreign income tax returns on a separate legal entity basis. The Company also recognizes accrued interest and penalties in income tax expense related to uncertain tax benefits. The Company's tax rate is volatile and may move up or down with changes in, among other things, the amount and source of income or loss, its ability to utilize foreign tax credits, changes in tax laws, its valuation allowance, and the movement of liabilities established for uncertain tax positions as statutes of limitations expire or positions are otherwise effectively settled.

Venezuela Effects

Effective September 30, 2015, the Company deconsolidated its Venezuelan subsidiary from its consolidated financial statements. Despite the Company's deconsolidation of its Venezuelan subsidiary, the Company continues to wholly own its Venezuelan subsidiary, operate in the region and remain committed to serving its Venezuelan customers.

There are a number of currency and other operating controls and restrictions in Venezuela, which have evolved over time and may continue to evolve in the future. These evolving conditions have resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar, and have restricted the Company's Venezuelan operations’ ability to pay dividends and settle intercompany obligations in U.S. dollars. The severe currency controls imposed by the Venezuelan government have significantly limited the ability to realize the benefits from earnings of the Company’s Venezuelan operations and access the resulting liquidity provided by those earnings in U.S. dollars. The Company expects that this condition will continue for the foreseeable future. Additionally, government regulations affecting the Company's ability to manage its Venezuelan subsidiary’s capital structure, purchasing, product pricing, customer invoicing and collections, and labor relations; and the current political and economic situation within Venezuela have resulted in an acute degradation in the ability to make key operational decisions. This lack of exchangeability and degradation in the Company's ability to control key operational decisions has resulted in a lack of control over the Company's Venezuelan subsidiary for U.S. accounting purposes. Therefore, in accordance with Accounting Standards Codification 810 -- Consolidation, the Company deconsolidated its Venezuelan subsidiary effective as of September 30, 2015 and began accounting for its investment in its Venezuelan subsidiary using the cost method of accounting. This change resulted in a one-time charge of $171 million, which includes $83 million of bolivar denominated cash and $40 million of intercompany receivables from its Venezuelan subsidiary. In future periods and unless events and circumstances would cause the Company to re-evaluate its decision to deconsolidate its Venezuelan subsidiary, the Company's financial results will not include the operating results of its Venezuelan subsidiary. Any dividends from the Company's Venezuelan subsidiaries will be recorded as other income upon receipt of the cash. While the Company does not expect to enter into

83
Table of Contents

material transactions with its subsidiary in Venezuela that would result in the creation of additional intercompany receivable balances, if any such transactions were completed the Company would evaluate collectability of the intercompany receivable balance at that time which could result in a charge negatively affecting its results of operations. Please see Note 1 to the accompanying Consolidated Financial Statements. Prior to the deconsolidation, the Company's operations in Venezuela accounted for approximately 1% of consolidated total revenue for the nine months ended September 30, 2015 and for the twelve months ended December 31, 2014, and approximately 3% and 4% of consolidated operating income for the same periods, respectively.

The $83 million value of the Company's bolivar denominated cash balance prior to deconsolidation as of September 30, 2015, reflects the foreign Venezuelan exchange loss that resulted from devaluing the Company's assets and liabilities from the official CENCOEX rate to the SICAD I exchange rate during the first quarter of 2014 and subsequent devaluations of the SICAD I rate against the U.S. dollar in 2015.

Financial Condition—December 31, 2015

Cash flows provided by operating activities, investing activities and financing activities for the years ended December 31, 2015 and 2014, respectively, are summarized as follows:
  Year Ended December 31,
(dollars in millions) 2015 2014 Change
Net Cash Provided by Operating Activities $1,855
 $1,161
 $694
Net Cash Used in Investing Activities (1,344) (1,086) (258)
Net Cash Used in Financing Activities (219) (82) (137)
Effect of Exchange Rates on Cash and Cash Equivalents (18) (44) 26
Net Change in Cash and Cash Equivalents $274
 $(51) $325

Operating Activities

Cash provided by operating activities increased to $1.855 billion in 2015 compared to $1.161 billion in 2014. The increase inNet cash provided by operating activities wasin the successor year ended December 31, 2018 compared to the combined year ended December 31, 2017 increased $175 million primarily due to growth in earnings driven by growth in the Company’s Core Network Services revenue, continued improvements in Network Access Costs and the acquisition of tw telecom. Partially offsetting cash provided by operating activities was an increase in cash used for working capital.accounts payable, affiliates. Cash provided by operating activities is subject to variability period over period as a result of the timing of the collection of receivables and payments related to interest expense, accounts payable, bonuses and capital expenditures.bonuses.

Investing Activities

Cash used in investing activities increased to $1.344 billion in 2015 compared to $1.086 billion in 2014, primarily as a result of additional capital expenditures, which totaled $1.229 billion in 2015 and $910 million in 2014. The increase in capital expenditures is primarily due to additional investment in the network and the additional capital expenditures after the acquisition of the tw telecom business. Also, contributing to the increase inNet cash used in investing activities wasdecreased $2.2 billion in the successor year ended December 31, 2018 compared to the combined year ended December 31, 2017 primarily due to the $1.8 billion we loaned to CenturyLink in exchange for an $83 million write-downunsecured demand note in connection with the closing of the Company's Venezuelan bolivar denominated cash balance, which was deconsolidated asMerger Agreement and a decrease in capital expenditures of September 30, 2015.
Financing Activities$288 million.

Cash used in financing activities of $219 million in 2015 compared toNet cash used in financing activities of $82 million in 2014 relatesthe successor year ended December 31, 2018 compared to the premiums paid upon refinancing. See Note 11 - Long-Term

84
Table of Contents

Debt in the notes to the Consolidated Financial Statements for more details regarding the Company's debt transactions during 2015 and 2014.

Effect of Exchange Rates on Cash and Cash Equivalents

The effect of exchange rates on cash and cash equivalents in 2015 and 2014 was a reduction in cash of $18combined year ended December 31, 2017 increased $954 million and $44 million, respectively. The effect of exchange rates on cash and cash equivalents in 2015 was primarily due to $1.5 billion of distributions to our member in 2018, partially offset by a $300 million debt repayment in 2017 compared to 2018. For additional information regarding our financing activities, see Note 5—Long-Term Debt to our consolidated financial statements in Item 8 of this report.

On February 22, 2017, we completed the appreciationrefinancing of all of our then outstanding $4.6 billion senior secured term loans through the issuance of a new Tranche B 2024 Term Loan in the principal amount of $4.6 billion. The term loans refinanced were our Tranche B-III 2019 Term Loan, Tranche B 2020 Term Loan, and the Tranche B-II 2022 Term Loan. The new Tranche B 2024 Term Loan bears interest at LIBOR plus 2.25 percent, with a zero percent minimum LIBOR, and will mature on February 22, 2024. The Tranche B 2024 Term Loan was priced to lenders at par, with the payment to the lenders at closing of an upfront 25 basis point fee. We recognized a charge of approximately $44 million for modification and extinguishment in the first quarter of 2017 related to this refinancing.

Certain Matters Related to CenturyLink's Acquisition of Level 3

Until November 1, 2017, we filed a consolidated federal income tax return of Level 3 Communications, Inc. Since CenturyLink's acquisition of us on November 1, 2017, we have been included in the consolidated federal income tax return of CenturyLink. Under CenturyLink's tax allocation policy, CenturyLink treats our consolidated results as if we were a separate taxpayer. The policy requires us to pay our tax liabilities to CenturyLink in cash based upon our separate return taxable income. We are also included in the combined state tax returns filed by CenturyLink and the same payment and allocation policy applies.

As of the U.S. dollar against currencies in EMEA and Latin America and the devaluation of the Venezuelan SICAD I exchange rate from 12.0 bolivars to the U.S. dollar at December 31, 2014 to 12.8 bolivars to the U.S. dollar at June 30, 2015 and to 13.5 bolivars to the U.S. dollar at September 30, 2015 and the effect in 2014 was the result of the devaluation of Venezuelan bolivar denominated monetary assets and liabilities from the official rate of 6.3 to the SICAD 1 rate in the second quarter of 2014.
Liquidity and Capital Resources

The Company had $854 million of cash and cash equivalents on hand at December 31, 2015. The Company also had $50 million of current and non-current restricted cash and securities used to collateralize outstanding letters of credit and certain performance and operating obligations of the Company and other deposits at December 31, 2015.

Free Cash Flow is defined by the Company as net cash provided by (used in) operating activities less capital expenditures as disclosed in the Consolidated Statements of Cash Flows. Management believes that Free Cash Flow is a relevant metric to provide to investors, as it is an indicator of the company’s ability to generate cash to service its debt. Free Cash Flow excludes cash used for acquisitions, principal repayments and the impact of exchange rate changes on cash and cash equivalents balances.

There are material limitations to using Free Cash Flow to measure the company’s performance as it excludes certain material items such as principal payments on and repurchases of long-term debt and cash used to fund acquisitions. Comparisons of Level 3’s Free Cash Flow to that of some of its competitors may be of limited usefulness since Level 3 does not currently pay a significant amount of income taxes due to net operating losses, and therefore, generates higher cash flow than a comparable business that does pay income taxes. Additionally, this financial measure is subject to variability quarter over quarter as a result of the timing of payments related to interest expense, accounts receivable and accounts payable and capital expenditures. Free Cash Flow should not be used as a substitute for net change in cash and cash equivalents on the Consolidated Statements of Cash Flows.

The following information provides a reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow as defined by the Company:

  Year Ended December 31,
(dollars in millions) 2015 2014 2013
Net Cash Provided by Operating Activities $1,855
 $1,161
 $713
Capital Expenditures (1,229) (910) (760)
Free Cash Flow $626
 $251
 $(47)

Free Cash Flow was $626 million in 2015 compared to $251 million in 2014, reflecting a $375 million improvement driven by $694 million of higher cash provided by operating activities offset by $319 million of higher spending on capital expenditures in 2015. For the full year 2016, the Company expects to generate Free Cash Flow of $1.0 to $1.1 billion.


85
Table of Contents

Capital expenditures for 2016 are expected to be approximately 15% of revenue, consistent with 15% of revenue in 2015 as the Company invests in base capital expenditures (estimated capital required to keep the network operating efficiently and support new service development) with the remaining capital expenditures expected to be partly success-based, which is tied to a specific customer revenue opportunity, and partly project-based where capital is used to expand the network based on the Company's expectation that the project will eventually lead to incremental revenue.

After the refinancing activity completed in 2015, net cash interest payments are expected to decrease to approximately $520 million in 2016 from $668 million in 2015 based on forecasted interest rates on the Company's variable rate debt outstanding assuccessor date of December 31, 2015. As2018, we had paid certain costs that were associated with the CenturyLink acquisition. These costs include compensation costs comprised of December 31, 2015, the Company had contractual debt obligations, including capital lease obligations,retention bonuses and excluding interest, discounts on debt issuanceseverance. The final amounts and fair value adjustments, of $15 million that mature in 2016, $7 million in 2017, and $307 million in 2018.

The Company currently has the ability to repatriate cash and cash equivalents into the United States without paying or accruing U.S. taxes. Level 3 does not currently intend to repatriate to the United States any of its foreign cash and cash equivalents from operating entities outside of Latin America. After the deconsolidation of Venezuela, the Company has no material restrictions on its ability to repatriate to the United States foreign cash and cash equivalents.

The Company believes that its current liquidity and anticipated future cash flows from operations will be sufficient to fund its business for at least the next twelve months.

The Company may need to refinance all or a portion of its indebtedness at or before maturity and cannot provide assurances that it will be able to refinance any such indebtedness on commercially reasonable terms or at all. In addition, the Company may elect to secure additional capital in the future, at acceptable terms, to improve its liquidity or fund acquisitions. In addition, in an effort to reduce future cash interest payments as well as future amounts due at maturity or to extend debt maturities, the Company may, from time to time, issue new debt, enter into debt for debt, debt for equity or cash transactions to purchase its outstanding debt securities in the open market or through privately negotiated transactions. In addition, the Company may consider other uses of capital or opportunities to return cash to stockholders. The Company will evaluate any such transactions in lighttiming of the existing market conditions andcompensation costs to be paid are partially dependent upon personnel decisions that continue to be made as part of the possible dilutive effect to stockholders. Thecontinuing integration. These amounts involved in any such transaction, individually or in the aggregate, may be material.

In addition to raising capital through the debt and equity markets, the Company may sell or dispose of existing businesses, investments or other non-core assets.

ConsolidationIn accounting for the CenturyLink's acquisition of us, we recorded our debt securities at their estimated fair values, which totaled $10.7 billion as of November 1, 2017. Our acquisition date fair value estimates were based primarily on inputs other than quoted market prices in active markets that are either directly or indirectly observable. The fair value of our debt securities exceeded their stated principal balances on the acquisition date by $190 million, which is being recognized as a reduction to interest expense over the remaining terms of the communications industry may continue. The Company will continuedebt.

Market Risk

We are exposed to evaluate consolidation opportunitiesmarket risk from changes in interest rates on our variable rate long-term debt obligations. We seek to maintain a favorable mix of fixed and could make additional acquisitionsvariable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.

As of the successor date of December 31, 2018, we have approximately $10.526 billion (excluding unamortized premiums and capital lease and other obligations) of long-term debt outstanding, 56% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We also held $4.6 billion of floating rate debt exposed to changes in the future.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 $46 million.

By operating internationally, we are exposed to the risk of fluctuations in the foreign currencies used by our international subsidiaries, including the British Pound, the Euro, the Brazilian Real and the Argentinian Peso, in each case as of December 31, 2017. Although the percentages of our consolidated revenue and costs that are denominated in these currencies are immaterial, our consolidated results of operations could be adversely impacted by volatility in exchange rates or an increase in the number of foreign currency transactions.

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 as of the successor date of December 31, 2018.

Off-Balance Sheet Arrangements

Level 3 has not entered intoWe have no special purpose or limited purpose entities that provide off-balance sheet arrangements.

Contractual Obligations

The following table summarizesfinancing, 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 contractual obligations and other commercial commitmentsface of the Company at December 31, 2015, as further describedconsolidated financial statements or in the Notes to Consolidated Financial Statements.





86
Table of Contents

Payments Due by Period

  Total 
Less than
1 Year
 
2 - 3
Years
 
4 - 5
Years
 
After 5
Years
(dollars in millions)
Contractual Obligations          
Long-Term Debt, including current portion $11,025
 $15
 $314
 $3,401
 $7,295
Interest Obligations 3,391
 520
 1,058
 926
 887
Asset Retirement Obligations 90
 13
 10
 8
 59
Operating Leases 1,590
 278
 454
 280
 578
Right of Way Agreements 700
 151
 141
 113
 295
Purchase and Other Obligations 1,741
 1,132
 460
 62
 87
Other Commercial Commitments          
Letters of Credit 46
 8
 5
 1
 32


The Company's debt instruments contain certain covenants which, among other things, limit additional indebtedness, dividend payments, certain investments and transactions with affiliates. If the Company should fail to comply with these covenants, amounts dueFuture Contractual Obligations table above or (ii) discussed under the instruments may be accelerated at the debt holder's discretion after the declaration of an event of default. The Company's debt instruments do not have covenants that require the Company or its subsidiaries to maintain certain levels of financial performance or other financial measures such as total leverage or minimum revenue. These types of covenants are commonly referred to as "maintenance covenants."

Long-term debt obligations exclude issue discounts.

Interest obligations assume interest rates on $4.9 billion of variable rate debt do not change from December 31, 2015. In addition, interest is calculated based on debt outstanding as of December 31, 2015.

The Company's asset retirement obligations consist of legal requirements to remove certain of its network infrastructure at the expiration of the underlying right-of-way ("ROW") term and restoration requirements for leased facilities. The initial and subsequent measurement of the Company's asset retirement obligations require the Company to make significant estimates regarding the eventual costs and probability or likelihood that the Company will be required to remove certain of its network infrastructure and restore certain of its leased properties.

Certain right of way agreements include provisions for increases in payments in future periods based on the rate of inflation as measured by various price indexes. The Company has not included estimates for these increases in future periods in the amounts includedheading "Market Risk" above.

Certain non-cancelable right of way agreements provide for automatic renewal on a periodic basis. The Company includes payments due during these automatic renewal periods given the significant cost to relocate the Company's network and other facilities.


87
Table of Contents

Certain other right of way agreements are currently cancelable or can be terminated under certain conditions by the Company. The Company includes the payments under such cancelable right of way agreements in the table above for a period of 1 year from January 1, 2016, if the Company does not consider it likely that it will cancel the right of way agreement within the next year.

Purchase and other obligations represent all outstanding purchase order amounts of the Company as of December 31, 2015 ($589 million), contractual commitments with third parties to purchase network access services ($930 million) and fixed maintenance payments for portions of the Company's network ($222 million).

The table above does not include other long-term liabilities, such as liabilities recorded for legal matters that are not contractual obligations by nature. The Company cannot determine with any degree of certainty the years in which these liabilities might ultimately be paid.

Due to uncertainty regarding the completion of tax audits and possible outcomes, the remaining estimate of the timing of payments related to uncertain tax positions and interest cannot be made. See Note 14 - Income Taxes and Note 16 - Commitments, Contingencies and Other Items in the notes to Consolidated Financial Statements for additional information regarding the Company's uncertain tax positions.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Company is subject to market risks arising from changesinformation in interest rates. As of December 31, 2015, Level 3 Financing had borrowed a total of approximately $4.9 billion primarily under term loans pursuant to a senior secured credit facility (excluding discounts) and Floating Rate Senior Notes due 2018 that bear interest at LIBOR rates plus an applicable margin. As the LIBOR rates fluctuate, so too will the interest expense on amounts borrowed under the debt instruments, unless LIBOR rates are below the minimum LIBOR rate for a particular Senior Secured Term Loan. The weighted average interest rate on these variable rate instruments at December 31, 2015, was approximately 3.8%.

The senior secured credit facility's variable interest rate is based on a fixed rate of 3.0% plus LIBOR, with a fixed minimum LIBOR rate of 1.0% for both the $815 million Tranche B-III 2019 and the $1.796 billion Tranche B 2020 Term Loans and the interest rate is based on a fixed rate of 2.75% plus LIBOR, with a minimum fixed LIBOR of 0.75% for the $2 billion Tranche B-II 2022 Term Loan. The market LIBOR rate for the senior secured credit facility was approximately 0.61% at December 31, 2015, which was below the fixed minimum rate. Declines in LIBORbelow the fixed minimum rate or increases up to the fixed minimum rate do not affect the Company's annual interest expense. A hypothetical increase in LIBOR by 1% point would increase the Company's annual interest expense on all of its variable rate instruments by approximately $37 million as of December 31, 2015.

At December 31, 2015, the Company had $6.1 billion (excluding discounts) of fixed rate debt bearing a weighted average interest rate of 5.7%. A decline in interest rates in the future will not generally benefit the Company with respect to the fixed rate debt due to the terms and conditions of the indentures relating to that debt that would require the Company to repurchase the debt at specified premiums if redeemed early. Indicated changes in interest rates are based on hypothetical movements and are not necessarily indicative of the actual results that may occur.

Foreign Currency Exchange Rate Risk

The Company conducts a portion of its business in currencies other than the U.S. dollar, the currency in which the Company's Consolidated Financial Statements are reported. Accordingly, the Company's operating results could be adversely affected by foreign currency exchange rate volatility

88
Table of Contents

relative to the U.S. dollar. The Company's European subsidiaries and certain Latin American subsidiaries use the local currency as their functional currency, as the majority of their revenue and purchases are transacted in their local currencies. Certain Latin American countries previously designated as highly inflationary economies use the U.S. dollar as their functional currency. Although the Company continues to evaluate strategies to mitigate risks related to the effect of fluctuations in currency exchange rates, the Company will likely recognize gains or losses from international transactions. Changes in foreign currency rates could adversely affect the Company's operating results.

Please see Venezuela Effects in Item 7. Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations includedOperations—Market Risk" in Item 7 of this Form 10-K.report is incorporated herein by reference.

Future earnings and losses will be affected by actual fluctuations in interest rates and foreign currency rates.


ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. As part of the completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.

Unless context requires otherwise, references to the "predecessor" periods, or the period ended October 31, 2017, covers the predecessor period from January 1, 2017 through October 31, 2017, and to "successor" periods, or the period ended December 31, 2017 covers the successor period from November 1, 2017 through December 31, 2017.




Report of Independent Registered Public Accounting Firm

To the Board of Directors and Member
Level 3 Parent, LLC:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Level 3 Parent, LLC and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in member’s/stockholders’ equity for the year ended December 31, 2018, for the periods November 1, 2017 to December 31, 2017 (Successor period) and January 1, 2017 to October 31, 2017 (Predecessor period) and for the year ended December 31, 2016 (Predecessor period),and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the year ended December 31, 2018, for the periods November 1, 2017 to December 31, 2017 (Successor period) and January 1, 2017 to October 31, 2017 (Predecessor period) and for the year ended December 31, 2016 (Predecessor period), in conformity with U.S. generally accepted accounting principles.

Change in Basis of Presentation

As discussed in Note 1 to the consolidated financial statements, effective November 1, 2017, CenturyLink, Inc. acquired all of the outstanding stock of Level 3 Communications, Inc. (now known as Level 3 Parent, LLC) in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.

Basis for Opinion

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 are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.




/s/ KPMG LLP

We have served as the Company’s auditor since 2002.

Shreveport, Louisiana
March 18, 2019





LEVEL 3 PARENT, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
OPERATING REVENUE        
Operating revenue$8,113
 1,391
  6,870
 8,173
Operating revenue - affiliates107
 16
  —
 —
Total operating revenue8,220
 1,407


6,870
 8,173
OPERATING EXPENSES        
Cost of services and products (exclusive of depreciation and amortization)3,937
 690
  3,493
 4,162
Selling, general and administrative1,354
 253
  1,208
 1,407
Operating expenses - affiliates257
 24
  —
 —
Depreciation and amortization1,704
 282
  1,018
 1,159
Total operating expenses7,252
 1,249
  5,719
 6,728
OPERATING INCOME968
 158
  1,151
 1,445
OTHER (EXPENSE) INCOME        
Interest income—
 1
  13
 4
Interest income - affiliate67
 11
  —
 —
Interest expense(509) (80)  (441) (544)
Loss on modification and extinguishment of debt—
 —
  (44) (40)
Other income (expense), net11
 3
  14
 (23)
Total other expense, net(431) (65)  (458) (603)
INCOME BEFORE INCOME TAX EXPENSE537
 93
  693
 842
Income tax expense(196) (234)  (268) (165)
NET INCOME (LOSS)$341
 (141)  425
 677

See accompanying notes to consolidated financial statements.


LEVEL 3 PARENT, LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
NET INCOME (LOSS)$341
 (141)  425
 677
OTHER COMPREHENSIVE (LOSS) INCOME:        
Defined benefit pension plan adjustment, net of ($1), $—, ($3), and $4 tax5
 —
  (1) (6)
Foreign currency translation adjustment, net of $50, ($17), ($46), and $39 tax(200) 18
  81
 (80)
Other comprehensive (loss) income(195) 18
  80
 (86)
COMPREHENSIVE INCOME (LOSS)$146
 (123)  505
 591

See accompanying notes to consolidated financial statements.



LEVEL 3 PARENT, LLC

CONSOLIDATED BALANCE SHEETS

 Successor
 December 31,
2018		 December 31,
2017
 (Dollars in millions)
ASSETS   
CURRENT ASSETS   
Cash and cash equivalents$243
 297
Restricted cash and securities - current4
 5
Accounts receivable, less allowance of $11 and $3712
 748
Accounts receivable - affiliates—
 13
Assets held for sale—
 140
Note receivable - affiliate1,825
 1,825
Other234
 117
Total current assets3,018
 3,145
NET PROPERTY, PLANT AND EQUIPMENT   
Property, plant and equipment10,474
 9,555
Accumulated depreciation(1,021) (143)
Net property, plant and equipment9,453
 9,412
GOODWILL AND OTHER ASSETS   
Goodwill11,119
 10,837
Restricted cash and securities25
 29
Customer relationships, net7,567
 8,845
Other intangible assets, net410
 378
Other, net699
 489
Total goodwill and other assets19,820
 20,578
TOTAL ASSETS$32,291
 33,135
LIABILITIES AND MEMBER'S EQUITY   
CURRENT LIABILITIES   
Current maturities of long-term debt$6
 8
Accounts payable726
 695
Accounts payable - affiliates246
 41
Accrued expenses and other liabilities   
Salaries and benefits233
 136
Income and other taxes130
 100
Interest95
 109
Other78
 59
Advance billings and customer deposits310
 258
Total current liabilities1,824
 1,406
LONG-TERM DEBT10,838
 10,882
DEFERRED REVENUE AND OTHER LIABILITIES   
Deferred revenue1,181
 1,093
Deferred tax liability202
 212
Other369
 270
Total deferred revenue and other liabilities1,752
 1,575
COMMITMENTS AND CONTINGENCIES (Note 16)

 

MEMBER'S EQUITY   
Member's equity18,048
 19,254
Accumulated other comprehensive (loss) gain(171) 18
Total member's equity17,877
 19,272
TOTAL LIABILITIES AND MEMBER'S EQUITY$32,291
 33,135

See accompanying notes to consolidated financial statements.



LEVEL 3 PARENT, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS
 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
OPERATING ACTIVITIES        
Net income (loss)$341
 (141)  425
 677
Adjustments to reconcile net income (loss) to net cash provided by operating activities:        
Depreciation and amortization1,704
 282
  1,018
 1,159
Deferred income taxes175
 270
  217
 123
Net long-term debt issuance costs and premium amortization(30) (5)  14
 21
Loss on modification and extinguishment of debt—
 —
  44
 40
Share-based compensation—
 26
  132
 156
Accrued interest on long-term debt, net(14) 27
  (47) 21
Changes in current assets and liabilities:        
Accounts receivable46
 (1)  (16) 31
Accounts payable(37) 35
  (102) 83
Deferred revenue71
 (15)  146
 18
Other current assets and liabilities4
 (100)  70
 26
Other current assets and liabilities, affiliates216
 (17)  —
 —
Changes in other noncurrent assets and liabilities, net(93) (38)  8
 (9)
Other, net14
 (15)  5
 (3)
Net cash provided by operating activities2,397
 308
  1,914
 2,343
INVESTING ACTIVITIES        
Capital expenditures(1,038) (207)  (1,119) (1,334)
Purchase of marketable securities—
 —
  (1,127) —
Maturity of marketable securities—
 —
  1,127
 —
Proceeds from sale of property, plant and equipment and other assets134
 —
  1
 3
Note receivable - affiliate—
 (1,825)  —
 —
Net cash used in investing activities(904) (2,032)  (1,118) (1,331)
FINANCING ACTIVITIES        
Net proceeds from issuance of long-term debt—
 —
  4,569
 764
Payments of long-term debt(7) (1)  (4,917) (820)
Distributions(1,545) (250)  —
 —
Other—
 (2)  3
 (3)
Net cash used in financing activities(1,552) (253)  (345) (59)
Net (decrease) increase in cash, cash equivalents, restricted cash and securities(59) (1,977)  451
 953
Cash, cash equivalents, restricted cash and securities at beginning of period331
 2,308
  1,857
 904
Cash, cash equivalents, restricted cash and securities at end of period$272
 331
  2,308
 1,857
Supplemental cash flow information:        
Income taxes paid, net$33
 10
  49
 35
Interest paid542
 56
  468
 508
Cash, cash equivalents, restricted cash and securities:        
Cash and cash equivalents$243
 297
  2,274
 1,819
Restricted cash and securities - current4
 5
  5
 7
Restricted cash and securities - noncurrent25
 29
  29
 31
Total$272
 331
  2,308
 1,857

See accompanying notes to consolidated financial statements.


LEVEL 3 PARENT, LLC

CONSOLIDATED STATEMENTS OF MEMBER'S/STOCKHOLDERS' EQUITY
 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
MEMBER'S EQUITY        
Balance at beginning of period$19,254
 19,617
  —
 —
Net income (loss)341
 (141)  —
 —
Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $3, $-, $-, $- tax
9
 —
  —
 —
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(6) —
  —
 —
Contributions—
 28
  —
 —
Purchase price accounting adjustments(5) —
  —
 —
Distributions(1,545) (250)  —
 —
Balance at end of period18,048
 19,254
  —
 —
COMMON STOCK        
Balance at beginning of period—
 —
  4
 4
Balance at end of period—
 —
  4
 4
ADDITIONAL PAID-IN CAPITAL        
Balance at beginning of period—
 —
  19,800
 19,642
Common stock issued under employee stock benefit plans and other—
 —
  30
 37
Share-based compensation—
 —
  102
 121
Balance at end of period—
 —
  19,932
 19,800
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME        
Balance at beginning of period18
 —
  (387) (301)
Other comprehensive (loss) income(195) 18
  80
 (86)
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
6
 —
  —
 —
Balance at end of period(171) 18
  (307) (387)
         


         
ACCUMULATED DEFICIT        
Balance at beginning of period—
 —
  (8,500) (9,219)
Net income—
 —
  425
 677
Cumulative effect of adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
—
 —
  —
 42
Balance at end of period—
 —
  (8,075) (8,500)
TOTAL MEMBER'S/STOCKHOLDERS' EQUITY$17,877
 19,272
  11,554
 10,917


See accompanying notes to consolidated financial statements.


LEVEL 3 PARENT, LLC
Notes to Consolidated Financial Statements

Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.

Unless context requires otherwise, references to the period ended October 31, 2017 covers the predecessor period from January 1, 2017 through October 31, 2017, and the period ended December 31, 2017 covers the successor period from November 1, 2017 through December 31, 2017.

(1) Background and Summary of Significant Accounting Policies

General

We are an international facilities-based communications provider (that is, a provider that owns or leases a substantial portion of the property, plant and equipment necessary to provide our services) of a broad range of integrated communications services. We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.

Effective November 1, 2017, we were acquired by CenturyLink in a cash and stock transaction, including the assumption of our debt (the "CenturyLink Merger"). See Note 2—CenturyLink Merger.

Basis of Presentation

On November 1, 2017, we became a wholly owned subsidiary of CenturyLink. On the date of the acquisition, our assets and liabilities were recognized at fair value. This revaluation has been reflected in our financial statements and, supplementarytherefore, has resulted in a new basis of accounting for the successor period beginning on November 1, 2017. This new basis of accounting means that our financial statements for the successor periods will not be comparable to our previously reported financial statements, including the predecessor period financial statements in this report.

The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries in which we have a controlling interest. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. Transactions with our non-consolidated affiliates (CenturyLink and its other subsidiaries, referred to herein as affiliates) have not been eliminated. Due to exchange restrictions and other conditions, effective at the end of the third quarter of 2015 we deconsolidated our Venezuelan subsidiary and began accounting for our investment in our Venezuelan subsidiary using the cost method of accounting. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the end of 2018.

We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenue for 2018, 2017 and 2016. Although we continued as a surviving corporation and legal entity after the acquisition of us by CenturyLink, the accompanying consolidated statements of operations, comprehensive income (loss), cash flows and member's/stockholder's equity (deficit) are presented for two periods: predecessor and successor, which relates to the period preceding the acquisition and the period succeeding the acquisition.



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 make when accounting for specific items and matters, including, but not limited to, revenue recognition, revenue reserves, network access costs, network access cost dispute reserves, 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, taxes, certain liabilities and other provisions and contingencies, are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can materially affect the reported amounts of assets, liabilities and components of member's 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 other consolidated financial statements. 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, Contingencies and Other Items 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 we determine that 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 materially from our estimates.

RevenueRecognition

We earn most of our consolidated revenue from contracts with customers, primarily through the provision of telecommunications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606. We also earn revenue from leasing arrangements (primarily fiber capacity agreements) which are not accounted for under ASC 606.

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model:

Identification of the contract with a customer;

Identification of the performance obligations in the contract;

Determination of the transaction price;

Allocation of the transaction price to the performance obligations in the contract; and

Recognition of revenue when, or as, we satisfy a performance obligation.

We provide an array of communications services, including local voice, VPN, Ethernet, data, private line (including special access), network access, transport, voice, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business.



We recognize revenue for services when we provide the applicable service or when control is transferred. Recognition of certain payments received in advance of services being provided is deferred. These advance payments include certain activation and certain installation charges. If the activation and installation charges are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which ranges from one year to seven years depending on the service. In most cases, 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.

For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis.

Promotional or performance based incentive payments are estimated at contract inception (and updated on a periodic basis as needed) and accounted for as variable consideration. In certain cases, customers may be permitted to modify their contracts. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract.

Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The revenue associated with each performance obligation is then recognized as earned.

We periodically sell optical capacity on our network. 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 10 - 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity as ASC 606 revenue which we recognize ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is adjusted for the time value of money and is accounted for as non-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for other non-owned optical capacity assets.

In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user 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 and control the goods and services used to fulfill the performance obligations associated with the transaction.

We have service level commitments pursuant to contracts with certain of our customers. 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 corresponding reduction to revenue in the period that the service level commitment was not met.

Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis.

We defer (i.e. capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average customer life. Third party installations over $50 thousand are amortized over contract term; internal contract costs are amortized over 30 months. These deferred costs are monitored every period to reflect any significant change in assumptions.

See Note 4—Revenue Recognition for additional information.



Affiliate Transactions

We provide to our affiliates telecommunications services that we also provide to external customers. Services provided by us to our affiliates are recognized as operating revenue-affiliates in our consolidated statements of operations. Services provided to us from our affiliates are recognized as operating expenses-affiliates on our consolidated statements of operations. Because of the significance of the services we provide to our affiliates and our affiliates provide to us, the results of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.

We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates.

From time to time we make distributions to our parent. Distributions are reflected on our consolidated statements of member's/stockholders' equity and the consolidated statements of cash flows reflects distributions made as financing activities.

USF Surcharges, 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 government authorities, including USF surcharges, 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. Total revenue and cost of services and products on the consolidated statements of operations include USF contributions of $415 million and $71 million for the successor year ended December 31, 2018 and successor period ended December 31, 2017, and $331 million and $414 million for the predecessor period ended October 31, 2017 and the predecessor year ended December 31, 2016, 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

Until November 1, 2017, we filed a consolidated federal income tax return with our eligible subsidiaries. Since CenturyLink's acquisition of us on November 1, 2017, we have been included in the consolidated federal income tax return of CenturyLink. Under CenturyLink's tax allocation policy, CenturyLink treats our consolidated results as if we were a separate taxpayer. Our reported deferred tax assets and liabilities, as discussed below and in Note 12—Income Taxes, are primarily determined as a result of the application of the separate return allocation method and therefore the settlement of these amounts is dependent upon our parent, CenturyLink, rather than tax authorities. The policy requires us to pay our tax liabilities in cash based upon our separate return taxable income. We are also included in the combined state tax returns filed by CenturyLink and the same payment and allocation policy applies. The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods and adjustments to our liabilities for uncertain tax positions. 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 basis 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. Each quarter we evaluate the need to retain all or a portion of the valuation allowance on 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 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 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.
Restricted Cash and Securities

Restricted cash and securities consist primarily of cash and investments that serve to collateralize our outstanding letters of credit and certain performance and operating obligations. Restricted cash and securities are recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists. Restricted securities are stated at cost which approximates fair value as of December 31, 2018 and 2017.

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 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 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.

Concentration of Credit Risk

We provide communications services to a wide range of wholesale and enterprise customers, ranging from well capitalized national carriers to small early stage companies primarily in the United States, Europe and Latin America. Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographical regions. We perform ongoing credit evaluations of our customers' financial condition and generally require no collateral from our customers, although letters of credit and deposits are required in certain limited circumstances. We have, from time to time, entered into agreements with value added resellers and other channel partners to reach consumer and enterprise markets for voice services. We have policies and procedures in place to evaluate the financial condition of these resellers prior to initiating service to the final customer. We are not able to predict changes in the financial stability of our customers. Any material change in the financial status of any one or a particular group of customers may cause us to adjust our estimate of the recoverability of receivables and could have a material effect on our results of operation.



Property, Plant and Equipment

As a result of CenturyLink's acquisition of us, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition plus the estimated value of any associated legally or contractually required retirement obligations. Therefore, the allocated fair values of the assets represent their new basis of accounting in our consolidated financial statements. This resulted in adjustments to our property, plant and equipment accounts, including accumulated depreciation at the acquisition date. The adjustments related to CenturyLink's acquisition of us are described in Note 2—CenturyLink Merger and Note 7— Property, Plant and Equipment.

We record purchased and constructed property, plant and equipment at cost, plus the estimated value of any associated legally or contractually required retirement obligations. Property, plant and equipment is depreciated using the straight-line method. 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 take into account actual usage, the physical condition of our property, plant, and equipment, industry data, and other relevant factors. Our remaining useful life assessments assess the possible loss in service value of assets that may precede the physical retirement.  Assets shared among many customers may lose service value as those customers reduce their use of the asset.  However, the asset is not retired until all customers no longer utilize the asset and we determine there is not alternative use for the asset.

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.

Capitalized labor associated with employees and contract labor working on capital projects were approximately $95 million and $32 million for the successor year ended December 31, 2018 and successor period ended December 31, 2017 and $178 million and $210 million for the predecessor period ended October 31, 2017 and year ended December 31, 2016.

We review long-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For assessment 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 estimated fair value. Recoverability of the asset group to be held and used is assessed 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, we recognize an impairment charge for the amount by which the carrying amount of the asset group exceeds its estimated fair value.



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 seven to 14 years, using the 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. We amortize our other intangible assets over an estimated life of five 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 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, other than goodwill, with indefinite lives are assessed for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be an impairment. These assets are carried at the estimated fair value at the time of acquisition and assets not acquired in acquisitions are recorded at historical cost. However, if their estimated fair value is less than the carrying amount, we recognize an impairment charge for the amount by which the carrying amount of these assets exceeds their estimated fair value.

We are required to assess goodwill for impairment at least annually, or more frequently, if an event occurs or circumstances change that would indicate an impairment may have occurred. We are required to write-down the value of goodwill in periods in which the recorded carrying value of equity exceeds the fair value of equity. Therefore, the equity carrying value and future cash flows is assessed each time a goodwill impairment assessment is performed on a reporting unit. To do so, we assign our assets, liabilities and cash flows to reporting units using reasonable and consistent allocation methodologies, which entail various estimates, judgments and assumptions. We believe these estimates, judgments and assumptions to be reasonable, but changes in any of these can significantly affect each reporting unit's equity carrying value and future cash flows utilized for our goodwill impairment assessment.

As a result of the merger, the impairment testing date was changed to October 31 for successor periods beginning in 2018. We conducted our annual goodwill impairment analysis as of October 31, 2018 and concluded that our goodwill was not impaired in 2018. We conducted our annual goodwill impairment analysis as of October 1, 2017 and concluded that our goodwill was not impaired in 2017.

We are required to reassign goodwill to reporting units each time we reorganize our internal reporting structure which causes a change in the composition of our reporting units. As a result of CenturyLink's acquisition of us, we are now comprised of one reporting unit, consistent with our determination that our business consists of one operating segment.

See Note 3—Goodwill, Customer Relationships and Other Intangible Assets for additional information.



Foreign Currency

Local currencies of foreign subsidiaries are the functional currencies for financial reporting purposes except for certain foreign subsidiaries, primarily in Latin America. For operations outside the United States that have functional currencies other than the U.S. dollar, assets and liabilities are translated to U.S. dollars at period-end exchange rates, and revenue, expenses and cash flows are translated using average monthly exchange rates. A significant portion of our non-United States subsidiaries have either the British pound, the euro or the Brazilian real as the functional currency, each of which experienced significant fluctuations against the U.S. dollar during the successor year ended December 31, 2018 and period ended December 31, 2017 and the predecessor period ended October 31, 2017 and year ended December 31, 2016. Foreign currency translation gains and losses are recognized as a component of accumulated other comprehensive income (loss) in member's/stockholders' equity and in the consolidated statements of comprehensive income (loss) in accordance with accounting guidance for foreign currency translation. We consider the majority of our investments in our foreign subsidiaries to be long-term in nature. Our foreign currency transaction gains (losses), including where transactions with our non-United States subsidiaries are not considered to be long-term in nature, are included within other income (expense) in "Other, net" on the consolidated statements of operations.

Recently Adopted Accounting Pronouncements

During 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” ASU 2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” and ASU 2017-04, Simplifying the Test for Goodwill Impairment.

Each of these is described further below.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09 which replaces virtually all existing generally accepted accounting principles on revenue recognition with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs.

We adopted the new revenue recognition standard under the modified retrospective transition method. During the year ended December 31, 2018, we recorded a cumulative catch-up adjustment that increased our retained earnings by $9 million, net of $3 million of income taxes.


See Note 4—Revenue Recognition for additional information.



Comprehensive Income (Loss)

In February 2018, the FASB issued ASU 2018-02 provides an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (the "Act") (or portion thereof) is recorded. If an entity elects to reclassify the income tax effects of the Act, the amount of that reclassification shall include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Act related to items remaining in accumulated other comprehensive income. The effect of the change in the U.S. federal corporate income tax rate on gross valuation allowances that were originally charged to income from continuing operations shall not be included. ASU 2018-02 is effective January 1, 2019, but early adoption is permitted and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. We early adopted and applied ASU 2018-02 in the first quarter of 2018. The adoption of ASU 2018-02 resulted in a $6 million decrease to member's equity and increase to accumulated other comprehensive income. See Note 17—Accumulated Other Comprehensive Income (Loss) for additional information.

Income Taxes

In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” ("ASU 2016-16"). ASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among our subsidiaries. After adoption of ASU 2016-16, the income tax effects associated with these asset transfers, except for the transfer of inventory, will be recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to a third party or over the remaining useful life of the asset. We adopted ASU 2016-16 on January 1, 2018. The adoption of ASU 2016-16 did not have a material impact to our consolidated financial statements.

Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the impairment testing for goodwill by changing the measurement for goodwill impairment. Under current rules, we are required to compute the fair value of goodwill to measure the impairment amount if the carrying value of a reporting unit exceeds its fair value. Under ASU 2017-04, the goodwill impairment charge will equal the excess of the reporting unit carrying value above its fair value, limited to the amount of goodwill assigned to the reporting unit.

We elected to early adopt the provisions of ASU 2017-04 as of October 1, 2018.

Recently Issued Accounting Pronouncements

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements.

We expect to adopt the provisions of ASU 2016-13 effective January 1, 2020 and expect to recognize the impacts through a cumulative adjustment to retained earnings as of the date of adoption.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), and associated ASUs related to ASU 842, Leases, which require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In addition, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing and


uncertainty of cash flows arising from leases. For leases where we are a lessee, the presentation and measurement of the assets and liabilities will depend on each lease’s classification as either a finance or operating lease. For leases where we are a lessor, the accounting remains largely unchanged from current U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014 (ASC 606). The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

We have a cross-functional team in place to evaluate and implement the new guidance and we have substantially completed the implementation of third-party software solutions to facilitate compliance with accounting and reporting requirements. The team continues to review existing lease arrangements and has collected and loaded a significant portion of our lease portfolio into the software. We continue to enhance accounting systems and update business processes and controls related to the new guidance for leases. Collectively, these activities are expected to facilitate our ability to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019.

ASU 2016-02 requires a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial adoption. An entity may choose to use either (1) the effective date or (2) the beginning of the earliest comparative period presented in the financial statements at the date of initial application. We will apply the transition requirements at the January 1, 2019 effective date by showing a cumulative effect adjustment in the first quarter of 2019, rather than restating any prior periods. In addition, we will elect the package of practical expedients permitted under the transition guidance, which does not require reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct lease costs. As an accounting policy election, we will exclude short-term leases (term of 12 months or less) from the balance sheet presentation and will account for non-lease and lease components in a contract as a single lease component for most asset classes.

We are in the process of completing our adoption of ASU 2016-02, including reviewing our lease portfolio, completing the implementation and testing of the third-party software solution and exercising internal controls over adoption and implementation of ASU 2016-02. Therefore, the estimated impact on our consolidated balance sheet cannot currently be determined. However, we expect the adoption of ASU 2016-02 will have a material impact on our consolidated balance sheet through the recognition of right of use assets and lease liabilities for our operating leases. The impact to our consolidated statements of operations and consolidated statements of cash flows is not expected to be material. We believe the new standard will have no impact on our debt covenant compliance under our current agreements.

(2) CenturyLink Merger

On November 1, 2017, CenturyLink acquired Level 3 through successive merger transactions, including a merger of Level 3 with and into a merger subsidiary, which survived such merger as CenturyLink's indirect wholly-owned subsidiary under the name of Level 3 Parent, LLC. CenturyLink entered into this acquisition to, among other things, realize certain strategic benefits, including enhanced financial and operational scale, market diversification and an enhanced combined network. As a result of the acquisition, Level 3 shareholders received $26.50 per share in cash and 1.4286 shares of CenturyLink common stock, with cash paid in lieu of fractional shares, for each outstanding share of Level 3 common stock they owned at closing, subject to certain limited exceptions. CenturyLink issued this consideration with respect to all of the outstanding common stock of Level 3, with the exception of shares held by the dissenting common shareholders. CenturyLink shareholders owned approximately 51% and former Level 3 shareholders owned approximately 49% of the combined company.

In addition, each outstanding Level 3 restricted stock unit award granted prior to April 1, 2014 or granted to an outside director of Level 3 was converted into $26.50 in cash and 1.4286 shares of CenturyLink common stock (and cash in lieu of fractional shares) with respect to each Level 3 share covered by such award (the "Converted RSU Awards"). Each outstanding Level 3 restricted stock unit award granted on or after April 1, 2014 (other than those granted to outside directors of Level 3) was converted into a CenturyLink restricted stock unit award using a conversion ratio of 2.8386 to 1 as determined in accordance with a formula set forth in the merger agreement (“the Continuing RSU Awards”).

In connection with the closing of the Merger Agreement, we loaned $1.825 billion to CenturyLink in exchange for an unsecured demand note that bears interest at 3.5% per annum. The principal amount of such note is payable upon demand by Level 3 Parent but no later than November 1, 2020 and may be prepaid by CenturyLink at any time.



In connection with receiving approval from the U.S. Department of Justice to complete the Level 3 acquisition CenturyLink agreed to divest (i) certain Level 3 network assets in three metropolitan areas and (ii) 24 strands of dark fiber connecting 30 specified city-pairs across the United States. All of the metro network assets were classified as assets held for sale on our consolidated balance sheet as of December 31, 2017.

All of those assets were sold by December 31, 2018. The proceeds from the sale of the metro network assets were included in the proceeds from sale of property, plant and equipment in our consolidated statements of cash flows. No gain or loss was recognized with these transactions.

CenturyLink recognized the assets and liabilities of Level 3 based on the fair value of the acquired tangible and intangible assets and assumed liabilities of Level 3 as of November 1, 2017, the consummation date of the acquisition, with the excess aggregate consideration recorded as goodwill. The estimation of such fair values and the estimation of lives of depreciable tangible assets and amortizable intangible assets required significant judgment. CenturyLink completed their final fair value determination during the fourth quarter of 2018. The final fair value determinations were different than those reflected in our consolidated financial statements at December 31, 2017.

As of October 31, 2018, the aggregate consideration exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities by $11.2 billion, which we have recognized as goodwill. The 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:
 
Adjusted November 1, 2017
Balance as of December 31, 2017
 Purchase Price Adjustments 
Adjusted November 1, 2017
Balance as of October 31, 2018
 (Dollars in millions)
Cash, accounts receivable and other current assets (1)
$3,317
 (26) 3,291
Property, plant and equipment9,311
 157
 9,468
Identifiable intangible assets (2)
     
Customer relationships8,964
 (533) 8,431
Other391
 (13) 378
Other noncurrent assets782
 216
 998
Current liabilities, excluding current maturities of long-term debt(1,461) (32) (1,493)
Current maturities of long-term debt(7) —
 (7)
Long-term debt(10,888) —
 (10,888)
Deferred revenue and other liabilities(1,613) (114) (1,727)
Goodwill10,837
 340
 11,177
Total estimated aggregate consideration$19,633
 (5) 19,628

(1)Includes accounts receivable, which had a gross contractual value of $884 million on November 1, 2017.
(2)The weighted-average amortization period for the acquired intangible assets is approximately 12.0 years.



Acquisition-Related Expenses

We have incurred acquisition-related expenses related to our activities surrounding the CenturyLink Merger. The table below summarizes our acquisition-related expenses, which consist of integration-related expenses, including severance and retention compensation expenses, and transaction-related expenses:
 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
Transaction-related expenses$1
 —
  18
 —
Integration-related expenses120
 28
  67
 15
Total acquisition-related expenses$121
 28
  85
 15

As part of the acquisition accounting on November 1, 2017, we also included in our goodwill approximately $1 million for certain restricted stock awards and $47 million related to transaction costs, all of which were contingent on the completion of the acquisition and had no benefit to CenturyLink after the acquisition.

(3) Goodwill, Customer Relationships and Other Intangible Assets

Goodwill, customer relationships and other intangible assets consisted of the following:
 Successor
 December 31,
2018		 December 31,
2017
 (Dollars in millions)
Goodwill$11,119
 10,837
Customer relationships, less accumulated amortization of $833 and $126$7,567
 8,845
Other intangible assets subject to amortization:   
Trade names, less accumulated amortization of $30 and $4$100
 126
Developed technology, less accumulated amortization of $67 and $9310
 252
Total other intangible assets, net$410
 378

The following table shows the rollforward of goodwill from November 1, 2017 through December 31, 2018:
 (Dollars in millions)
As of November 1, 2017$10,821
Purchase accounting and other adjustments16
As of December 31, 201710,837
Purchase accounting and other adjustments340
Effect of foreign currency rate change(58)
As of December 31, 2018$11,119

Our goodwill balance includes $16 million, of goodwill that was allocated to us from CenturyLink associated with differences in the deferred state income taxes that CenturyLink expects to realize due to its consolidation of our results of operations into its state tax returns.

Total amortization expense for intangible assets for the successor period ended December 31, 2018, the successor period ended December 31, 2017, the predecessor period ended October 31, 2017 and the predecessor year ended December 31, 2016 was $798 million, $139 million, $168 million and $211 million, respectively. As of December 31, 2018, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $20 billion. As of the successor date of December 31, 2018, the weighted average remaining


useful lives of our finite-lived intangible assets was 11 years in total; 11 years for customer relationships, 4 years for trade names, and 3 years for developed technology.

We estimate that total amortization expense for intangible assets for the successor years ending 2019 through 2023 will be as follows:
 (Dollars in millions)
2019$800
2020800
2021800
2022796
2023766



(4) Revenue Recognition

Comparative Results

The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:
 Successor
 Reported Balances as of December 31, 2018 Impact of ASC 606 
ASC 605
Historical Adjusted Balances
 (Dollars in millions)
Operating revenue$8,220
 (5) 8,215
Cost of services and products (exclusive of depreciation and amortization)3,937
 —
 3,937
Selling, general and administrative1,354
 52
 1,406
Interest expense509
 (9) 500
Income tax expense196
 (12) 184
Net income341
 (36) 305

The following table presents a reconciliation of certain consolidated balance sheet captions under ASC 606 to the balance sheet results using the historical accounting method:
 Successor
 Reported Balances as of December 31, 2018 Impact of ASC 606 
ASC 605
Historical Adjusted Balances
 (Dollars in millions)
Other current assets$234
 (33) 201
Other long-term assets, net191
 (31) 160
Deferred revenue1,491
 (4) 1,487
Deferred income tax assets, net306
 15
 321
Member's equity17,877
 (45) 17,832

Disaggregated Revenue by Service Offering

The following table provides disaggregation of revenue from contracts with customers based on service offering for the year ended December 31, 2018. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards.


 Successor
 Year Ended December 31, 2018
 (Dollars in millions)
 Total Revenue 
Adjustments(6)
 Total Revenue from Contracts with Customers
IP and Data Services (1)
$3,945
 —
 3,945
Transport and Infrastructure (2)
2,699
 (189) 2,510
Voice and Collaboration (3)
1,464
 —
 1,464
Other Revenue (4)
5
 (3) 2
Affiliate Revenue (5)
107
 (107) —
Total Revenue$8,220
 (299) 7,921
      
Timing of revenue     
  Goods transferred at a point in time    $—
  Services performed over time    7,921
  Total revenue from contracts with customers    $7,921

(1)Includes primarily VPN data network, IP, Ethernet, video and ancillary revenue.
(2)Includes primarily wavelength, colocation and data center services, dark fiber, private line and professional services revenue.
(3)Includes voice, Voice Over IP ("VoIP"), Collaboration.
(4)Includes sublease rental income and IT services and managed services revenue.
(5)Includes telecommunications and data services we bill to our affiliates.
(6)Includes sublease rental income and revenue from fiber capacity lease arrangements which are not within the scope of ASC 606.

Customer Receivables and Contract Balances

The following table provides balances of customer receivables, contract assets and contract liabilities as of December 31, 2018 and January 1, 2018:
 Successor
 December 31, 2018 January 1, 2018
 (Dollars in millions)
Customer receivables (1)
$712
 748
Contract assets19
 22
Contract liabilities393
 353

(1)Gross customer receivables of $723 million and $751 million, net of allowance for doubtful accounts of $11 million and $3 million, at December 31, 2018 and January 1, 2018, respectively

Contract liabilities are consideration we have received from our customers in advance of providing the goods or services promised in the future. We defer recognizing this consideration until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which ranges from one to seven years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets.



The following table provides information about revenue recognized for the year ended December 31, 2018:
 Successor
 (Dollars in millions)
Revenue recognized in the current period from: 
Amounts included in contract liability at the beginning of the period (January 1, 2018)$158
Performance obligations satisfied in previous periods—

Performance Obligations

As of December 31, 2018, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts that are unsatisfied (or partially satisfied) is approximately $5.2 billion. We expect to recognize approximately 77% of this revenue through 2021, with the balance recognized thereafter.

We do not disclose the amount of unsatisfied performance obligations for contracts under which we are contractually entitled to bill pre-determined amounts for future services (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), or contracts that are classified as leasing arrangements that are not subject to ASC 606.

Contract Costs

The following table provides changes in our contract acquisition costs and fulfillment costs for the year ended December 31, 2018:
 Successor
 December 31, 2018
 Acquisition Costs Fulfillment Costs
 (Dollars in millions)
Beginning of period balance$13
 14
Costs incurred68
 99
Amortization(17) (29)
End of period balance$64
 84
Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of telecommunications services to customers, including labor and materials consumed for these activities.

Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average expected contract term of 12 to 60 months for our business customers and amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statement of operations. The amount of these deferred costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond twelve months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.



(5) Long-Term Debt

The following chart reflects our consolidated long-term debt, including unamortized premiums, net and debt issuance costs, but excluding intercompany debt:
     Successor
 Interest Rates Maturities December 31,
2018		 December 31,
2017
     (Dollars in millions)
Level 3 Parent, LLC       
5.750% Senior Notes due 2022 (1)
5.750% 2022 $600
 600
Subsidiaries       
Level 3 Financing, Inc.       
Senior Notes:       
6.125% Senior Notes due 2021 (2)
6.125% 2021 640
 640
5.375% Senior Notes due 2022 (2)
5.375% 2022 1,000
 1,000
5.625% Senior Notes due 2023 (2)
5.625% 2023 500
 500
5.125% Senior Notes due 2023 (2)
5.125% 2023 700
 700
5.375% Senior Notes due 2025 (2)
5.375% 2025 800
 800
5.375% Senior Notes due 2024 (2)
5.375% 2024 900
 900
5.25% Senior Notes due 2026 (2)
5.250% 2026 775
 775
Term Loan:       
Tranche B 2024 Term Loan (3)(4)
LIBOR + 2.25% 2024 4,611
 4,611
Capital leases and other debtVarious Various 163
 179
Unamortized premiums, net    155
 185
Total long-term debt    10,844
 10,890
Less current maturities    (6) (8)
Long-term debt, excluding current maturities    $10,838
 10,882

(1)The notes are not guaranteed by any of Level 3 Parent, LLC's subsidiaries.
(2)The notes are fully and unconditionally guaranteed on an unsubordinated unsecured basis by Level 3 Parent, LLC and Level 3 Communications, LLC.
(3)The Tranche B 2024 Term Loan had an interest rate of 4.754% and 3.557% as of December 31, 2018 and December 31, 2017, respectively. The interest rate on the Tranche B 2024 Term Loan is set with a minimum London Interbank Offered Rate ("LIBOR") of zero percent. The term loan was refinanced on February 22, 2017 as described below.
(4)The Tranche B 2024 Term Loan is a secured obligation and is guaranteed by Level 3 Parent, LLC and certain of its non-regulated subsidiaries.

Senior Secured Term Loan

As of the successor date of December 31, 2018, Level 3 Financing, Inc., Level 3 Parent, LLC's direct wholly owned subsidiary ("Level 3 Financing") had a senior secured credit facility consisting of a $4.6 billion Tranche B Term Loan due 2024. The Tranche B 2024 Term Loan carries an interest rate, in the case of base rate borrowings, equal to (i) the greater of the Prime Rate, the Federal Funds Effective Rate plus 50 basis points, or LIBOR plus 100 basis points (with all such terms and calculations as defined or further specified in the applicable credit agreement) plus (ii) 1.25% per annum. Any Eurodollar borrowings under the Tranche B 2024 Term Loan bear interest at LIBOR plus 2.25% per annum.



The Tranche B 2024 Term Loan requires certain specified mandatory prepayments in connection with certain asset sales and other transactions, subject to certain significant exceptions. The obligations of Level 3 Financing, under the Tranche B 2024 Term Loan are, subject to certain exceptions, secured by certain assets of Level 3 Parent, LLC and certain of its material domestic telecommunication subsidiaries. Also, Level 3 Parent, LLC has guaranteed and certain of its subsidiaries guarantee the obligations of Level 3 Financing, under the Tranche B 2024 Term Loan. Level 3 Communications, LLC and its material domestic subsidiaries guarantee and, subject to certain exceptions, pledge certain of their assets to secure the obligations of Level 3 Financing, under the Tranche B 2024 Term Loan.

Senior Notes

All of the notes reflected in the table above pay interest semiannually and allow for the redemption of the notes at the option of the issuer upon not less than 30 or more than 60 days’ prior notice by paying the greater of 101% of the principal amount or a “make whole” amount, plus accrued interest. In addition, the notes also have a provision that allows for an additional right of optional redemption using cash proceeds received from the sale of equity securities. For specific details of these features and requirements, including the applicable premiums and timing, refer to the indentures for the respective senior notes in connection with the original issuances.

Debt Issuance Costs

For the successor year ended December 31, 2018 and period ended December 31, 2017, we deferred no costs in connection with debt issuances. For the predecessor period ended October 31, 2017 and the predecessor year ended December 31, 2016, we deferred costs of $40 million and $11 million, respectively, in connection with debt issuances.

New Issuances

On the predecessor date of February 22, 2017, we completed the refinancing of all of our then outstanding $4.6 billion senior secured term loans through the issuance of a new Tranche B 2024 Term Loan in the principal amount of $4.6 billion. The new Tranche B 2024 Term Loan bears interest at LIBOR plus 2.25 percent, with a zero percent minimum LIBOR, and will mature on February 22, 2024. The Tranche B 2024 Term Loan was priced to lenders at par, with the payment to the lenders at closing of an upfront 25 basis point fee. We recognized a charge of approximately $44 million for modification and extinguishment in the first quarter of 2017 related to this refinancing.

Repayments

On the predecessor date of September 29, 2017, the $300 million aggregate principal amount plus accrued and unpaid interest due under the Floating Rate Senior Notes due 2018 was paid and we recognized a loss on extinguishment of less than $1 million.



Aggregate Maturities of Long-Term Debt

Set forth below is the aggregate principal amount of our long-term debt and capital leases (excluding unamortized premiums) maturing during the following years:
 
(Dollars in millions)(1)
2019$6
20206
2021648
20221,609
20231,209
2024 and thereafter7,211
Total long-term debt$10,689

(1)Actual principal paid in any year may differ due to the possible future refinancing of outstanding debt or the issuance of new debt.

Letters of Credit

It is customary for us to use various financial instruments in the normal course of business. These instruments include letters of credit. Letters of credit are conditional commitments issued on our behalf in accordance with specified terms and conditions. As of December 31, 2018 and 2017, we had outstanding letters of credit or other similar obligations of approximately $30 million and $36 million, respectively, of which $24 million and $30 million are collateralized by cash that is reflected on the consolidated balance sheets as restricted cash and securities. We do not believe exposure to loss related to our letters of credit is material.

Covenants

The term loan and senior notes of Level 3 Parent, LLC and Level 3 Financing, Inc. contain extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on their ability to declare or pay dividends, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with their affiliates including CenturyLink and its other subsidiaries, dispose of assets and merge or consolidate with any other person. Also, Level 3 Parent, LLC, as well as Level 3 Financing, Inc., will be required to offer to purchase certain of its long-term debt securities under certain circumstances in connection with a "change of control" of Level 3 Parent, LLC.

Certain of CenturyLink's and our debt instruments contain 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.

Compliance

At the successor dates of December 31, 2018 and December 31, 2017, we believe we were in compliance with the financial covenants contained in our debt agreements in all material respects.





(6) Accounts Receivable

The following table presents details of our accounts receivable balances:

 Successor
 December 31,
2018		 December 31,
2017
 (Dollars in millions)
Trade receivables$533
 562
Earned and unbilled receivables177
 165
Other13
 24
Total accounts receivable723
 751
Less: allowance for doubtful accounts (1)
(11) (3)
Accounts receivable, less allowance$712
 748

(1)CenturyLink's acquisition of us caused our assets and liabilities to be recognized at fair value and resulted in the allowance for doubtful accounts being reset as of the date of acquisition.

We are exposed to concentrations of credit risk from our customers and other telecommunications service providers. We generally do not require collateral to secure our receivable balances.

The following table presents details of our allowance for doubtful accounts:
 Beginning BalanceAdditionsDeductionsEnding Balance
 (Dollars in millions)
2018 (Successor)$3
18
(10)11
December 31, 2017 (Successor)—
3
—
3
October 31, 2017 (Predecessor)29
16
(12)33
2016 (Predecessor)32
18
(21)29



(7) Property, Plant and Equipment

Net property, plant and equipment is composed of the following:
   Successor
 Depreciable Lives December 31,
2018		 December 31,
2017
   (Dollars in millions)
LandN/A $339
 348
Fiber conduit and other outside plant(1)
15-45 years 5,262
 4,750
Central office and other network electronics(2)
7-10 years 1,986
 2,134
Support assets(3)
3-30 years 2,327
 2,019
Construction-in-progress(4)
N/A 560
 304
Gross property, plant and equipment  10,474
 9,555
Accumulated depreciation(5)
  (1,021) (143)
Net property, plant and equipment  $9,453
 9,412

(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, data centers, computers and other administrative and support equipment.
(4)Construction in progress includes construction and property of the aforementioned categories that has not been placed in service as it is still under construction.
(5)CenturyLink's acquisition of us caused our assets and liabilities to be recognized at fair value and resulted in accumulated depreciation being reset as of the date of acquisition.

Depreciation expense was $906 million and $143 million for the successor year ended December 31, 2018 and period ended December 31, 2017, $850 million and $948 million for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016.

Asset Retirement Obligations

At the successor dates of December 31, 2018 and 2017, our asset retirement obligations consisted of restoration requirements for leased facilities. At the predecessor date of December 31, 2016, our asset retirement obligations balance was primarily related to estimated future costs to remove certain of our network infrastructure at the expiration of the underlying right-of-way ("ROW") term and restoration requirements for leased facilities and estimated future costs of properly disposing of asbestos and other hazardous materials upon remodeling or demolishing buildings. We recognize our estimate of the fair value of our asset retirement obligations in the period incurred in other long-term liabilities. The fair value of the asset retirement obligation is also capitalized as property, plant and equipment and then depreciated over the estimated remaining useful life of the associated asset.



The following table provides asset retirement obligation activity:
 Successor Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
Balance at beginning of period$45
 45
  89
 90
Accretion expense5
 1
  12
 10
Purchase price adjustments (1)
58
 —
  —
 —
Liabilities settled(13) (1)  (7) (9)
Revision in estimated cash flows10
 —
  —
 —
Effect of foreign currency rate change—
 —
  —
 (2)
Balance at end of period$105
 45
  94
 89

(1)These liabilities relate to purchase price adjustments that occurred during 2018 from CenturyLink's acquisition of us.

(8) Severance and Leased Real Estate

Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from the progression or completion of our post-acquisition integration plans, increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workload demands due to the loss of customers purchasing certain services.

We report severance liabilities within accrued expenses and other liabilities - salaries and benefits in our consolidated balance sheets and report severance expenses in selling, general and administrative expenses in our consolidated statements of operations.

We have recognized liabilities to reflect our estimates of the fair values of the existing lease obligations for real estate which we have ceased using, net of estimated sublease rentals. As of the acquisition date, we recorded liabilities to reflect 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 subleasing 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-other and report the noncurrent portion in deferred credits and other liabilities-other 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, 2018, the current and noncurrent portions of our leased real estate accrual were $8 million and $39 million, respectively. The remaining lease terms range from less than one year to 12.0 years, with a weighted average of 8.2 years.



Changes in our accrued liabilities for severance expenses and leased real estate were as follows:
 Severance Real Estate
 (Dollars in millions)
Balance at December 31, 2016 (Predecessor)$2
 5
Accrued to expense—
 2
Payments, net(1) (2)
Balance at October 31, 2017 (Predecessor)1
 5
Balance at November 1, 2017 (Successor)1
 5
Accrued to expense6
 —
Payment, net(2) (1)
Balance at December 31, 2017 (Successor)5
 4
Accrued to expense33
 51
Payments, net(19) (8)
Balance at December 31, 2018 (Successor)$19
 47

(9) Employee Benefits

Defined Contribution Plans

Prior to the CenturyLink acquisition on November 1, 2017, we offered our qualified employees the opportunity to participate in a defined contribution retirement plan qualifying under the provisions of Section 401(k) of the Internal Revenue Code ("401(k) Plan"). Each employee was eligible to contribute, on a tax deferred basis, a portion of annual earnings generally not to exceed $18,500 in 2018, $18,000 in 2017 and $18,000 in 2016. We matched 100% of employee contributions up to 4% of eligible earnings or applicable regulatory limits.

Effective December 31, 2017, the Level 3 Communications, Inc. 401(k) Profit Sharing Plan and Trust assets merged with the CenturyLink, Inc. Dollars & Sense 401(k) Plan. Those employees eligible to contribute to the Level 3 Plan at December 31, 2017 were automatically enrolled in the CenturyLink Plan at January 1, 2018. Provisions regarding eligibility, participant and employer contributions, vesting, and benefit payments within the Level 3 Plan document did not materially change and protected provisions applicable to Level 3 and its predecessor Plans remained grandfathered as required by law.

Prior to the CenturyLink acquisition on November 1, 2017, our matching contributions were made with Level 3 common stock based on the closing stock price on each pay date. After our acquisition, matching contributions were made in cash. We made 401(k) Plan matching contributions of $7 million for the successor period ended December 31, 2017, and $30 million and $37 million for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016, respectively. Our matching contributions are recorded as compensation and included in cost of services of $1 million for the successor period ended December 31, 2017, and $4 million and $5 million for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016, respectively. Our matching contributions included in selling, general and administrative expenses totaled $5 million for the successor period ended December 31, 2017, and $26 million and $32 million for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016, respectively.

Other defined contribution plans we sponsored are individually not significant. On an aggregate basis, the expense we recorded relating to these plans was approximately $5 million and $1 million for the successor year ended December 31, 2018 and period ended December 31, 2017, and $5 million and $6 million for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016, respectively.



Defined Benefit Plans

We have certain contributory and non-contributory employee pension plans, which are not significant to our financial position or operating results. We recognize in our balance sheet the funded status of our defined benefit post-retirement plans, which is measured as the difference between the fair value of the plan assets and the plan benefit obligations. We are also required to recognize changes in the funded status within accumulated other comprehensive income, net of tax, to the extent such changes are not recognized in earnings as components of periodic net benefit cost. The fair value of the plan assets was $133 million and $147 million as of December 31, 2018 and 2017, respectively. The total plan benefit obligations were $144 million and $165 million as of December 31, 2018 and 2017, respectively. Therefore, the net unfunded status was $11 million and $18 million as of December 31, 2018 and 2017, respectively.

(10) Share-Based Compensation

Prior to our acquisition by CenturyLink on November 1, 2017, we recorded share-based compensation expense for our performance restricted stock units, restricted stock units, 401(k) matching contributions and prior to October 1, 2016, outperform stock appreciation rights. Due to CenturyLink's acquisition of us, we now record share-based compensation expense that is allocated to us from CenturyLink. Based on many factors that affect the allocation, the amount of share-based compensation expense recorded at CenturyLink and ultimately allocated to us may fluctuate. We cash settle the share-based compensation expense allocated to us from CenturyLink.

 Share-based compensation expenses were included in cost of services and products, and selling, general, and administrative expenses in our consolidated statements of operations. During our predecessor period and years, we recognized compensation expense relating to awards granted to our employees under the Level 3 Communications, Inc. Stock Incentive Plan, as amended (the "Stock Plan"). The Stock Plan provided for accelerated vesting of stock awards upon retirement if an employee met certain age and years of service requirements and certain other requirements. Under the Stock Compensation guidance, if an employee meets the age and years of service requirements under the accelerated vesting provision, the award would be expensed at grant or expensed over the period from the grant date to the date the employee meets the requirements, even if the employee has not actually retired.

Our total share-based compensation expense was approximately $105 million and $26 million for the successor year ended December 31, 2018 and period ended December 31, 2017, and $132 million and $156 million for the predecessor period ended October 31, 2017 and year ended December 31, 2016, respectively.

(11) Fair Value Disclosure

Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, note receivable-affiliate and long-term debt, excluding capital lease and other obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, restricted cash, 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 debt, including the current portion, based primarily on inputs other than quoted market prices in active markets that are either directly or indirectly observable such as 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 LevelDescription of Input
Level 1Observable inputs such as quoted market prices in active markets.
Level 2Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3Unobservable inputs in which little or no market data exists.

The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease and other obligations, as well as the input level used to determine the fair values indicated below:
   Successor
   As of December 31, 2018  As of December 31, 2017
 Input Level Carrying AmountFair Value  Carrying AmountFair Value
   (Dollars in million)
Liabilities-Long-term debt, excluding capital lease and other obligations2 $10,681
10,089
  10,711
10,528

(12) Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act reduces the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.

As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we revalued our net deferred tax assets at December 31, 2017 and recognized a provisional $195 million tax expense in our consolidated statement of operations for the year ended December 31, 2017. As a result of finalizing our provisional amount recorded in 2017, we recorded an increase to this amount of $92 million in 2018.

The Tax Act imposed a one-time repatriation tax on certain earnings of foreign subsidiaries. The Tax Act also includes certain anti-abuse and base erosion provisions that may impact the amount of U.S. tax that we pay with respect to income earned by our foreign subsidiaries. We have completed our analysis of the impact of the one-time repatriation tax and concluded that we do not have a tax liability under this provision. We have also completed our analysis of the anti-abuse and base erosion provisions and have recorded a tax expense of $10 million related to the global intangible low-taxed income provisions and do not have liability related to the base erosion and anti-abuse tax provisions of the Act.



 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
Income tax expense was as follows:        
Federal        
Current$—
 —
  —
 —
Deferred199
 231
  193
 177
State        
Current(9) 2
  7
 4
Deferred28
 6
  16
 27
Foreign        
Current30
 4
  39
 41
Deferred(52) (9)  13
 (84)
Total income tax expense$196
 234
  268
 165

 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
Income tax expense was allocated as follows:        
Income tax expense in the consolidated statements of operations:        
Attributable to income$196
 234
  268
 165
Member's/Stockholders' equity:        
Tax effect of the change in accumulated other comprehensive loss$(49) 17
  49
 (43)



The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:
 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Percentage of pre-tax income)
Statutory federal income tax rate21.0 % 35.0 %  35.0 % 35.0 %
State income taxes, net of federal income tax benefit2.8 % 3.6 %  2.9 % 3.7 %
Tax Reform17.2 % 210.6 %  — % (13.2)%
Global intangible low-taxed income1.8 % — %  — % — %
CenturyLink acquisition transaction costs— % 11.3 %  — % — %
Uncertain tax positions0.5 % 1.2 %  0.1 % 0.1 %
Net foreign income tax(4.8)% (19.3)%  0.9 % (6.7)%
Executive compensation limitation1.2 % 5.4 %  0.9 % 1.1 %
Research and development credits(1.3)% (0.9)%  (1.2)% — %
Other, net(1.9)% 4.7 %  0.1 % (0.4)%
Effective income tax rate36.5 % 251.6 %  38.7 % 19.6 %

The successor year ended December 31, 2018 and the period ended December 31, 2017, the effective tax rate is 36.5% and 251.6% compared to 38.7% for the predecessor period ended October 31, 2017 and 19.6% for the predecessor year ended December 31, 2016, respectively. The effective tax rate for the successor period ended December 31, 2018 reflects $92 million of an estimated one-time income tax expense related to income tax law changes under the Tax Act enacted in 2017. The effective tax rate for the successor period ended December 31, 2017 reflects $195 million of an estimated one-time income tax expense related to income tax law changes under the Tax Act enacted in 2017. The predecessor year ended December 31, 2016 reflects a $110 million estimated one-time income tax benefit related to newly issued regulations under Internal Revenue Code Section 987 addressing the taxation of foreign currency translations gains and losses arising from foreign branches, as well as $82 million of income tax benefit related to the release of foreign valuation allowances, primarily in Germany, Brazil and Mexico.



The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
 Successor
 December 31,
2018		 December 31,
2017
 (Dollars in millions)
Deferred tax assets   
Deferred revenue$298
 256
Net operating loss carry forwards3,494
 3,633
Property, plant and equipment57
 63
Other309
 282
Gross deferred tax assets4,158
 4,234
Less valuation allowance(931) (942)
Net deferred tax assets3,227
 3,292
Deferred tax liabilities   
Deferred revenue(45) (44)
Property, plant and equipment(853) (689)
Intangible assets(1,998) (2,329)
Other(25) (16)
Gross deferred tax liabilities(2,921) (3,078)
Net deferred tax assets$306
 214

Of the $306 million and $214 million net deferred tax assets at December 31, 2018 and 2017, respectively, $202 million and $212 million is reflected as a long-term liability and $508 million and $426 million is reflected as a net noncurrent deferred tax asset at December 31, 2018 and 2017, respectively.

During the twelve months ended December 31, 2017, we completed an extensive analysis of our Internal Revenue Code ("IRC") Section 382 limitation that resulted in an increase of the amount of net operating loss carry forwards as of December 31, 2017 by approximately $1.0 billion on a pre-tax basis that was recorded in purchase accounting. At the successor date of December 31, 2018, we had federal NOLs of $13.8 billion before uncertain tax positions of $4.3 billion and state NOLs of $10 billion. If unused, the NOLs will expire between 2022 and 2037. At the successor date of December 31, 2018, we had $31 million of federal tax credits. At the successor date of December 31, 2018, we had foreign NOLs of $6.0 billion.

We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2018, a valuation allowance of $0.9 billion was established as it is more likely than not that this amount of net operating loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2018 and 2017 is primarily related to foreign and state NOL carryforwards. This valuation allowance decreased by $11 million during 2018 primarily due to the impact of foreign exchange rate adjustments and state law changes.

During 2016, we recognized a $22 million income tax benefit from the vesting of share-based compensation due to the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. We also recognized $82 million of income tax benefit related to the release of deferred tax asset valuation allowances primarily in Germany, Brazil, and Mexico. The determinations to release the foreign valuation allowances were driven by our projection of future profitability for each legal entity due to the recapitalization of our German subsidiary, the planned action to restructure our Brazilian business, and the merger of our Mexican subsidiaries.



With respect to our foreign corporate subsidiaries, we provide for U.S. income taxes on the undistributed earnings and the other outside basis temporary differences (differences between a parent's book and tax basis in a subsidiary, including currency translation adjustments) unless they are considered indefinitely reinvested outside the United States. The amount of temporary differences related to undistributed earnings and other outside basis temporary differences of investments in foreign subsidiaries upon which U.S. income taxes have not been provided was immaterial.

With respect to our foreign branches, we had historically established deferred tax liabilities for foreign branches with an overall cumulative translation gain, but had not established deferred tax assets for those with an overall translation loss as we had no plans to trigger realization of the losses in the foreseeable future. On December 7, 2016, the Internal Revenue Service issued regulations under Internal Revenue Code Section 987 addressing the taxation of foreign currency translations gains and losses arising from foreign branches. The new regulations require a “fresh start” recalculation of the unrealized gains and losses as of the adoption date. The regulations provide that the tax bases of specified assets, such as fixed assets, will be translated at historic foreign exchange rates. As a result, the deferred taxes related to such foreign currency translation are expected to reverse through the operations of the branch thereby allowing the recognition of deferred tax assets arising from translation losses as well. The issuance of the regulations resulted in us recognizing an estimated one-time tax benefit of $110 million during the fourth quarter 2016.

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from the successor period November 1 to December 31, 2017, the predecessor period January 1 to October 31, 2017 and the predecessor year ended December 31, 2016 is as follows:

 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017
 (Dollars in millions)
Unrecognized tax benefits at beginning of period$21
 20

 18
Tax positions of prior periods netted against deferred tax assets950
 —
  —
(Decrease) increase in tax positions taken in the prior period(1) 1
  —
Increase in tax positions taken in the current period3
 —
  2
Decrease due to settlement/payments(1) —
  —
Decrease from the lapse of statute of limitations(2) —
  —
Unrecognized tax benefits at end of period$970
 21

 20

The total amount (including interest and any related federal benefit) of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $23 million, $28 million, and $27 million for the successor year ended December 31, 2018, period ended December 31, 2017 and the predecessor period ended October 31, 2017, respectively.

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 $6 million and $20 million at December 31, 2018 and 2017, respectively.

We, or at least one of our affiliates, file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carry forwards are available.



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 $2 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.

We incur tax expense attributable to income in various subsidiaries that are required to file state or foreign income tax returns on a separate legal entity basis. We also recognize accrued interest and penalties in income tax expense related to uncertain tax benefits. Our tax rate is volatile and may move up or down with changes in, among other things, the amount and source of income or loss, our ability to utilize foreign tax credits, changes in tax laws, and the movement of liabilities established for uncertain tax positions as statutes of limitations expire or positions are otherwise effectively settled.

(13) Products and Services Revenue

We categorize our products, services and revenue among the following five categories:
IP and Data Services, which include primarily VPN data networks, Ethernet, IP, video (including our facilities-based video services, CDN services and Vyvx broadcast services) and other ancillary services;
Transport and Infrastructure,which includes private line (including business data services), wavelength, colocation and data center services, including cloud, hosting and application management solutions, professional services, network security services, dark fiber services and other ancillary services;
Voice and Collaboration, which includes primarily TDM voice services, VoIP and other ancillary services;
Other, which includes sublease rental income and information technology services and managed services, which may be purchased in conjunction with our other network services; and
Affiliate services, we provide to our affiliates telecommunication services that we also provide to external customers.
From time to time, we may change the categorization of our products and services.

Our operating revenue for our products and services consisted of the following categories:
 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
IP and Data Services$3,945
 668
  3,284
 3,862
Transport and Infrastructure2,699
 464
  2,272
 2,703
Voice and Collaboration1,464
 258
  1,308
 1,600
Other revenue5
 1
  6
 8
Affiliate revenue107
 16
  —
 —
Total revenue$8,220
 1,407
  6,870
 8,173

We recognize revenue in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies. The total amount of such surcharges and transaction taxes that we included in revenue aggregated $415 million, $71 million, $331 million and $414 million for the successor year ended December 31, 2018 and period ended December 31, 2017 and the predecessor period ended October 31, 2017 and year ended December 31, 2016, respectively. These USF surcharges, where we record revenue and transaction taxes, are assigned to the products and services categories based on the underlying revenue. We also act as a collection agent for certain other USF and transaction taxes that we are


required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.

The following table presents total assets as of the successor date of December 31, 2018 and December 31, 2017 as well as operating revenue for the predecessor period ended October 31, 2017 and the successor year ended December 31, 2016 by geographic region:
 Total Assets
 Successor
 December 31, 2018 December 31, 2017
 (Dollars in millions)
North America$27,520
 27,776
EMEA2,765
 1,192
Latin America2,006
 4,167
Total$32,291
 33,135
 Revenue
 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
North America$6,739
 1,155
  5,651
 6,748
EMEA744
 128
  607
 755
Latin America737
 124
  612
 670
Total$8,220
 1,407
  6,870
 8,173

Our operations are integrated into and reported as part of the consolidated segment data of CenturyLink. CenturyLink's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we believe we have one reportable segment.

A relatively small number of customers account for a significant percentage of our revenue. Our top ten customers accounted for approximately 20% and 19% for the successor year ended December 31, 2018 and period ended December 31, 2017, and 18% and 16% for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016, respectively.



(14) Affiliate Transactions

We provide to our affiliates telecommunications services that we also provide to external customers.

Whenever possible, costs are directly assigned to our affiliates for the services they use. If costs cannot be directly assigned, they are allocated among all affiliates based upon cost causative measures; or if no cost causative measure is available, these costs are allocated based on a general allocator. These cost allocation methodologies are reasonable. From time to time, we adjust the basis for allocating the costs of a shared service among affiliates. Such changes in allocation methodologies are generally billed prospectively.

We also purchase services from our affiliates including telecommunication services, insurance, flight services and other support services such as legal, regulatory, finance and accounting, tax, human resources and executive support.

Subsequent Event

As of the date of this report, $225 million of distributions were made to our parent in the first quarter of 2019.

(15) Quarterly Financial Data (Unaudited)

 Operating Revenue Operating Income Net Income (Loss)
 (Dollars in millions)
2018     
First quarter (successor)$2,087
 261
 62
Second quarter (successor)2,052
 196
 40
Third quarter (successor)2,010
 227
 88
Fourth quarter (successor)2,071
 284
 151
Total$8,220
 968
 341
      
2017     
First quarter (predecessor)$2,048
 337
 95
Second quarter (predecessor)2,062
 353
 154
Third quarter (predecessor)2,059
 349
 157
Fourth quarter (predecessor)701
 112
 19
Two months ended December 31 (successor)1,407
 158
 (141)
Total$8,277
 1,309
 284

In the two months ended December 31, 2017, we recognized a $195 million income tax expense related to the Tax Act. In the twelve months ended December 31, 2018, we recognized a $92 million income tax expense related to the Tax Act.



(16) Commitments, Contingencies and Other Items

We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.

Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for our litigation and non-income tax contingencies at December 31, 2018 aggregated to approximately $70 million and are included in other current liabilities and other liabilities in our consolidated balance sheet as of such date. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.

Peruvian Tax Litigation

In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against one of our Peruvian subsidiaries asserting $26 million of additional income tax withholding and value-added taxes ("VAT"), penalties and interest for calendar years 2001 and 2002 on the basis that the Peruvian subsidiary incorrectly documented its importations. After taking into account the developments described below, as well as the accrued interest and foreign exchange effects, we believe the total amount of exposure is $11 million at December 31, 2018.

We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the "Tribunal") decided the central issue underlying the 2002 assessments in SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. Oral argument was held before the Supreme Court of Justice in October 2018. A decision on this case is pending.

In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In June 2017, we filed an appeal with the court of appeal. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of the decision to the Supreme Court of Justice. That appeal is pending.

Brazilian Tax Claims

In December 2004, March 2009, April 2009 and July 2014, the São Paulo state tax authorities issued tax assessments against one of our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”) with respect to revenue from leasing certain assets (in the case of the December 2004, March 2009 and July 2014 assessments) and revenue from the provision of Internet access services (in the case of the April 2009 and July 2014 assessments), by treating such activities as the provision of communications services, to which the ICMS tax applies. In September 2002, July 2009 and May 2012, the Rio de Janeiro state tax authorities issued tax assessments to the same Brazilian subsidiary on similar issues.



We have filed objections to these assessments, arguing that the lease of assets and the provision of Internet access are not communication services subject to ICMS. The objections to the September 2002, December 2004 and March 2009 assessments were rejected by the respective state administrative courts, and we have appealed those decisions to the judicial courts. In October 2012 and June 2014, we received favorable rulings from the lower court on the December 2004 and March 2009 assessments regarding equipment leasing, but those rulings are subject to appeal by the state. No ruling has been obtained with respect to the September 2002 assessment. The objections to the April and July 2009 and May 2012 assessments are still pending final administrative decisions. The July 2014 assessment was confirmed during the fourth quarter of 2014 at the first administrative level, and we appealed this decision to the second administrative level.

We are vigorously contesting all such assessments in both states and, in particular, view the assessment of ICMS on revenue from equipment leasing to be without merit. These assessments, if upheld, could result in a loss of up to $37 million at December 31, 2018 in excess of the accruals established for these matters.

Qui Tam Action

We were notified in late 2017 of a qui tam action pending against Level 3 Communications, Inc. and Subsidiaries beginothers in the United States District Court for the Eastern District of Virginia, captioned United States of America ex rel., Stephen Bishop v. Level 3 Communications, Inc. et al. The original qui tam complaint was filed under seal on page F-1.November 26, 2013, and an amended complaint was filed under seal on June 16, 2014. The court unsealed the complaints on October 26, 2017.

The amended complaint alleges that we, principally through two former employees, submitted false claims and made false statements to the government in connection with two government contracts. The relator seeks damages in this lawsuit of approximately $50 million, subject to trebling, plus statutory penalties, pre-and-post judgment interest, and attorney’s fees. The case is currently stayed.

We are evaluating our defenses to the claims. At this time, we do not believe it is probable we will incur a material loss. If, contrary to our expectations, the plaintiff prevails in this matter and proves damages at or near $50 million, and is successful in having those damages trebled, the outcome could have a material adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.

Several people, including two former Level 3 employees, were indicted in the United States District Court for the Eastern District of Virginia on October 3, 2017, and charged with, among other things, accepting kickbacks from a subcontractor, who was also indicted, for work to be performed under a prime government contract. Of the two former employees, one entered into a plea agreement, and the other is deceased. We are fully cooperating in the government’s investigations in this matter.

Other Proceedings, Disputes and Contingencies

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 our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third-party tort actions.

We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of which are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial in the coming 24 months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.

We are subject to various foreign, federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $100,000 in fines and penalties.



The outcome of these other proceedings described under this heading 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 any insurance coverage or indemnification rights, will have a material adverse effect on us.

The ultimate outcome of the above-described matters may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing above in this Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us.

Environmental Contingencies

In connection with largely historical operations, we have responded to or been notified of potential environmental liability at 175 properties. We are engaged in addressing or have litigated environmental liabilities at many of those properties. We could potentially be held liable, jointly, or severally, and without regard to fault, for the costs of investigation and remediation of these sites. The discovery of additional environmental liabilities or changes in existing environmental requirements could have a material adverse effect on our business.

Capital Leases

We lease facilities and equipment under various capital lease arrangements. Depreciation of assets under capital leases is included in depreciation and amortization expense in our consolidated statements of operations. Payments on capital leases are included in repayments of long-term debt, including current maturities in our consolidated statements of cash flows.

The tables below summarize our capital lease activity
 Successor  Predecessor
 Year Ended December 31, 2018 Period Ended December 31, 2017  Period Ended October 31, 2017 Year Ended December 31, 2016
 (Dollars in millions)
Assets acquired through capital leases$7
 —
  —
 19
Depreciation expense13
 —
  2
 5
Cash payments towards capital leases14
 —
  1
 10

 Successor
 As of December 31,
 2018 2017
 (Dollars in millions)
Assets included in property, plant and equipment$135
 128
Accumulated depreciation15
 2



The future annual minimum payments under capital lease arrangements as of December 31, 2018 were as follows:
 
Future Minimum
Payments
 (Dollars in millions)
Capital lease obligations: 
2019$16
202015
202116
202216
202317
2024 and thereafter164
Total minimum payments244
Less: amount representing interest and executory costs(81)
Present value of minimum payments163
Less: current portion(6)
Long-term portion$157

Operating Lease Income

We lease fiber capacity agreements, various office and switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations.

For the successor year ended December 31, 2018, the period ended December 31, 2017, the predecessor period ended October 31, 2017 and year ended December 31, 2016, our gross rental income was $192 million, $28 million, $138 million and $165 million, respectively.

At December 31, 2018, our future commitments for operating lease income were as follows:
 
Future Minimum
Receipts
 (Dollars in millions)
2019$135
202090
202178
202273
202369

Right-of-Way and Operating Lease Expense

We lease 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, 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 successor year ended December 31, 2018, the period ended December 31, 2017, the predecessor period ended October 31, 2017 and year ended December 31, 2016, our gross rental expense was $524 million, $95 million, $447 million and $552 million, respectively. We also received sublease rental income for the successor year ended December 31, 2018, the period ended December 31, 2017, the predecessor period ended October 31, 2017 and year ended December 31, 2016 of $9 million, $2 million, $7 million and $8 million, respectively.


At December 31, 2018, our future rental commitments for right-of-way agreements and operating leases were as follows:
  
Right-of-Way
Agreements
 Operating Leases Total
  (Dollars in millions)
2019 $77
 396
 473
2020 51
 259
 310
2021 38
 219
 257
2022 37
 164
 201
2023 37
 137
 174
2024 and thereafter 225
 613
 838
Total future minimum payments(1)
 $465
 1,788
 2,253

(1)Minimum payments have not been reduced by minimum sublease rentals of $29 million due in the future under non-cancelable
subleases.

Purchase Commitments

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 $339 million at December 31, 2018. Of this amount, we expect to purchase $132 million in 2019, $130 million in 2020 through 2021, $41 million in 2022 through 2023 and $36 million in 2024 and thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we were contractually committed as of December 31, 2018.



(17) Accumulated Other Comprehensive Income (Loss)

The table below summarizes changes in accumulated other comprehensive income (loss) recorded on our consolidated balance sheet by component for the predecessor period ended October 31, 2017 and the successor period ended December 31, 2017 and December 31, 2018:
 Pension Plans Foreign Currency Translation Adjustments and Other Total
 (Dollars in millions)
Balance at December 31, 2016 (predecessor)$(34) (353) (387)
Other comprehensive (loss) income before reclassifications(3) 81
 78
Amounts reclassified from accumulated other comprehensive loss2
 —
 2
Net other comprehensive (loss) income(1) 81
 80
Balance at October 31, 2017 (predecessor)$(35) (272) (307)
      
Balance at November 1, 2017 (successor)$—
 —
 —
Other comprehensive income before reclassifications—
 18
 18
Amounts reclassified from accumulated other comprehensive loss—
 —
 —
Net other comprehensive income—
 18
 18
Balance at December 31, 2017 (successor)$—
 18
 18
      
Balance at December 31, 2017 (successor)$—
 18
 18
Other comprehensive loss before reclassifications—
 (200) (200)
Amounts reclassified from accumulated other comprehensive income5
 —
 5
Net current-period other comprehensive income5
 (200) (195)
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated other Comprehensive Income
—
 6
 6
Balance at December 31, 2018 (successor)$5
 (176) (171)

(18) Condensed Consolidating Financial Information

Level 3 Financing, Inc., a wholly owned subsidiary, has issued Senior Notes that are unsecured obligations of Level 3 Financing, Inc.; however, they are also fully and unconditionally and jointly and severally guaranteed on an unsecured senior basis by Level 3 Parent, LLC and Level 3 Communications, LLC.

In conjunction with the registration of the Level 3 Financing, Inc. Senior Notes, the accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered."

The operating activities of the separate legal entities included in our consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the statements of comprehensive income (loss), balance sheets and statements of cash flows of each legal entity and, on an aggregate basis, the other non-guarantor subsidiaries based on amounts incurred by such entities, and is not intended to present the operating results of those legal entities on a stand-alone basis. Level 3 Communications, LLC leases equipment and certain facilities from other wholly owned subsidiaries of Level 3 Parent, LLC. These transactions are eliminated in our consolidated results.



Condensed Consolidating Statements of Comprehensive Income (Loss)
For the year ended December 31, 2018 (Successor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
OPERATING REVENUE          

Operating revenue$—
 —
 3,884
 4,229
 —
 8,113
Operating revenue - affiliates—
 —
 130
 285
 (308) 107
Total operating revenue—
 —
 4,014
 4,514
 (308) 8,220
OPERATING EXPENSES           
Cost of services and products (exclusive of depreciation and amortization)—
 —
 2,209
 1,728
 —
 3,937
Selling, general and administrative12
 3
 392
 1,255
 (308) 1,354
Operating expenses - affiliates—
 —
 176
 81
 —
 257
Depreciation and amortization—
 —
 688
 1,016
 —
 1,704
Total operating expenses12
 3
 3,465
 4,080
 (308) 7,252
OPERATING (LOSS) INCOME(12) (3) 549
 434
 —
 968
OTHER INCOME (EXPENSE)           
Interest income (expense) - affiliates, net2,430
 1,562
 (3,800) (125) —
 67
Interest expense(33) (457) (3) (16) —
 (509)
Equity in net (losses) earnings of subsidiaries(2,044) (3,257) 254
 —
 5,047
 —
Other income, net(9) —
 1
 19
 —
 11
Total other income (expense), net344
 (2,152) (3,548) (122) 5,047
 (431)
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE)332
 (2,155) (2,999) 312
 5,047
 537
Income tax benefit (expense)10
 111
 (232) (85) —
 (196)
NET INCOME (LOSS)342
 (2,044) (3,231) 227
 5,047
 341
Other comprehensive loss, net of income taxes(195) —
 —
 (195) 195
 (195)
COMPREHENSIVE INCOME (LOSS)$147
 (2,044) (3,231) 32
 5,242
 146



Condensed Consolidating Statements of Comprehensive Income (Loss)
For the period ended December 31, 2017 (Successor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
OPERATING REVENUE           
Operating revenue$—
 —
 748
 671
 (28) 1,391
Operating revenue - affiliates—
 —
 16
 —
 —
 16
Total operating revenue—
 —
 764
 671
 (28) 1,407
OPERATING EXPENSES           
Cost of services and products (exclusive of depreciation and amortization)—
 —
 418
 300
 (28) 690
Selling, general and administrative1
 3
 179
 70
 —
 253
Operating expenses - affiliates—
 —
 24
 —
 —
 24
Depreciation and amortization—
 —
 117
 165
 —
 282
Total operating expenses1
 3
 738
 535
 (28) 1,249
OPERATING (LOSS) INCOME(1) (3) 26
 136
 —
 158
OTHER (EXPENSE) INCOME           
Interest income—
 —
 1
 —
 —
 1
Interest income (expense) affiliates, net262
 368
 (578) (41) —
 11
Interest expense(5) (72) —
 (3) —
 (80)
Equity in net (losses) earnings of subsidiaries(827) (15) 71
 —
 771
 —
Other income (expense), net1
 —
 2
 —
 —
 3
Total other (expense) income, net(569) 281
 (504) (44) 771
 (65)
(LOSS) INCOME BEFORE INCOME TAX (EXPENSE) BENEFIT(570) 278
 (478) 92
 771
 93
Income tax benefit (expense)429
 (1,105) 433
 9
 —
 (234)
NET (LOSS) INCOME(141) (827) (45) 101
 771
 (141)
Other comprehensive income, net of income taxes18
 —
 —
 18
 (18) 18
COMPREHENSIVE (LOSS) INCOME$(123) (827) (45) 119
 753
 (123)



Condensed Consolidating Statements of Comprehensive Income (Loss)
For the period ended October 31, 2017 (Predecessor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
OPERATING REVENUE           
Operating revenue$—
 —
 3,108
 3,891
 (129) 6,870
Total operating revenue—
 —
 3,108
 3,891
 (129) 6,870
OPERATING EXPENSES           
Cost of services and products (exclusive of depreciation and amortization)—
 —
 1,942
 1,680
 (129) 3,493
Selling, general and administrative4
 3
 942
 259
 —
 1,208
Depreciation and amortization—
 —
 356
 662
 —
 1,018
Total operating expenses4
 3
 3,240
 2,601
 (129) 5,719
OPERATING (LOSS) INCOME(4) (3) (132) 1,290
 —
 1,151
OTHER INCOME (EXPENSE)           
Interest income—
 —
 12
 1
 —
 13
Interest income (expense) - affiliates, net1,260
 1,890
 (2,896) (254) —
 —
Interest expense(30) (397) (2) (12) —
 (441)
Loss on modification and extinguishment of debt—
 (44) —
 —
 —
 (44)
Equity in net (losses) earnings of subsidiaries(815) (2,138) 692
 —
 2,261
 —
Other (expense) income, net3
 —
 15
 (4) —
 14
Total other income (expense), net418
 (689) (2,179) (269) 2,261
 (458)
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE)414
 (692) (2,311) 1,021
 2,261
 693
Income tax benefit (expense)11
 (123) (2) (154) —
 (268)
NET INCOME (LOSS)425
 (815) (2,313) 867
 2,261
 425
Other comprehensive income, net of income taxes80
 —
 —
 —
 —
 80
COMPREHENSIVE INCOME (LOSS)$505
 (815) (2,313) 867
 2,261
 505


Condensed Consolidating Statements of Comprehensive Income (Loss)
For the year ended December 31, 2016 (Predecessor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
OPERATING REVENUE           
Operating revenue$—
 —
 3,558
 4,747
 (132) 8,173
Total operating revenue—
 —
 3,558
 4,747
 (132) 8,173
OPERATING EXPENSES           
Cost of services and products (exclusive of depreciation and amortization)—
 —
 2,249
 2,045
 (132) 4,162
Selling, general and administrative16
 5
 1,025
 361
 —
 1,407
Depreciation and amortization—
 —
 372
 787
 —
 1,159
Total operating expenses16
 5
 3,646
 3,193
 (132) 6,728
OPERATING (LOSS) INCOME(16) (5) (88) 1,554
 —
 1,445
OTHER INCOME (EXPENSE)           
Interest income—
 —
 3
 1
 —
 4
Interest income (expense) - affiliates, net1,385
 2,113
 (3,215) (283) —
 —
Interest expense(36) (505) (2) (1) —
 (544)
Equity in net earnings (losses) of subsidiaries(669) (2,033) 757
 —
 1,945
 —
Other (expense) income, net(1) (39) 2
 (25) —
 (63)
Total other income (expense), net679
 (464) (2,455) (308) 1,945
 (603)
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE)663
 (469) (2,543) 1,246
 1,945
 842
Income tax benefit (expense)14
 (200) (2) 23
 —
 (165)
NET INCOME (LOSS)677
 (669) (2,545) 1,269
 1,945
 677
Other comprehensive loss, net of income taxes(86) —
 —
 (86) 86
 (86)
COMPREHENSIVE INCOME (LOSS)$591
 (669) (2,545) 1,183
 2,031
 591




Condensed Consolidating Balance Sheets
December 31, 2018 (Successor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
ASSETS           
CURRENT ASSETS           
Cash and cash equivalents$2
 —
 164
 77
 —
 243
Restricted cash and securities - current—
 —
 —
 4
 —
 4
Accounts receivable—
 —
 70
 642
 —
 712
Advances to affiliates16,852
 23,957
 7,744
 2,707
 (51,260) —
Note receivable - affiliate1,825
 —
 —
 —
 —
 1,825
Other1
 3
 97
 133
 —
 234
Total current assets18,680
 23,960
 8,075
 3,563
 (51,260) 3,018
NET PROPERTY, PLANT AND EQUIPMENT          

Property, plant and equipment—
 —
 3,456
 7,018
 —
 10,474
Accumulated depreciation—
 —
 (320) (701) —
 (1,021)
Net property, plant and equipment—
 —
 3,136
 6,317
 —
 9,453
GOODWILL AND OTHER ASSETS          

Goodwill—
 —
 1,665
 9,454
 —
 11,119
Restricted cash and securities15
 —
 9
 1
 —
 25
Customer relationships, net—
 —
 3,823
 3,744
 —
 7,567
Other intangible assets, net—
 —
 409
 1
 —
 410
Investment in subsidiaries15,541
 17,915
 3,861
 —
 (37,317) —
Other, net275
 1,421
 110
 225
 (1,332) 699
Total goodwill and other assets15,831
 19,336
 9,877
 13,425
 (38,649) 19,820
TOTAL ASSETS$34,511
 43,296
 21,088
 23,305
 (89,909) 32,291
           

LIABILITIES AND MEMBER'S EQUITY (DEFICIT)          

CURRENT LIABILITIES           
Current maturities of long-term debt$—
 —
 1
 5
 —
 6
Accounts payable—
 —
 380
 346
 —
 726
Accounts payable - affiliates62
 11
 162
 11
 —
 246
Accrued expenses and other liabilities          

Salaries and benefits—
 —
 189
 44
 —
 233
Income and other taxes—
 4
 72
 54
 —
 130
Interest11
 78
 1
 5
 —
 95
Other3
 1
 8
 66
 —
 78


Advance billings and customer deposits—
 —
 168
 142
 —
 310
Due to affiliates—
 —
 45,347
 5,913
 (51,260) —
Total current liabilities76
 94
 46,328
 6,586
 (51,260) 1,824
LONG-TERM DEBT613
 10,068
 7
 150
 —
 10,838
DEFERRED REVENUE AND OTHER LIABILITES          

Deferred revenue—
 —
 971
 210
 —
 1,181
Deferred tax liability56
 —
 841
 637
 (1,332) 202
Other—
 —
 197
 172
 —
 369
Total deferred revenue and other liabilities56
 —
 2,009
 1,019
 (1,332) 1,752
COMMITMENTS AND CONTINGENCIES
 
 
 
 
 

MEMBER'S EQUITY (DEFICIT)33,766
 33,134
 (27,256) 15,550
 (37,317) 17,877
TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT)$34,511
 43,296
 21,088
 23,305
 (89,909) 32,291




Condensed Consolidating Balance Sheets
December 31, 2017 (Successor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
ASSETS           
CURRENT ASSETS           
Cash and cash equivalents$13
 —
 175
 109
 —
 297
Restricted cash and securities - current—
 —
 1
 4
 —
 5
Accounts receivable—
 —
 26
 722
 —
 748
Accounts receivable - affiliates—
 —
 60
 4
 (51) 13
Assets held for sale68
 —
 5
 67
 —
 140
Advances to affiliates16,251
 21,032
 —
 5,200
 (42,483) —
Note receivable - affiliate1,825
 —
 —
 —
 —
 1,825
Other—
 —
 54
 63
 —
 117
Total current assets18,157
 21,032
 321
 6,169
 (42,534) 3,145
NET PROPERTY, PLANT AND EQUIPMENT           
Property, plant and equipment—
 —
 3,285
 6,270
 —
 9,555
Accumulated depreciation—
 —
 (48) (95) —
 (143)
Net property, plant and equipment—
 —
 3,237
 6,175
 —
 9,412
GOODWILL AND OTHER ASSETS           
Goodwill—
 —
 1,200
 9,637
 —
 10,837
Restricted cash and securities19
 —
 10
 —
 —
 29
Customer relationships, net—
 —
 4,324
 4,521
 —
 8,845
Other intangible assets, net—
 —
 378
 —
 —
 378
Investment in subsidiaries16,954
 18,403
 3,616
 —
 (38,973) —
Other, net280
 1,795
 32
 153
 (1,771) 489
Total goodwill and other assets17,253
 20,198
 9,560
 14,311
 (40,744) 20,578
TOTAL ASSETS$35,410
 41,230
 13,118
 26,655
 (83,278) 33,135
            
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)           
CURRENT LIABILITIES           
Current maturities of long-term debt$—
 —
 2
 6
 —
 8
Accounts payable—
 1
 323
 371
 —
 695
Accounts payable - affiliates11
 —
 —
 81
 (51) 41
Accrued expenses and other liabilities           
Salaries and benefits—
 —
 109
 27
 —
 136
Income and other taxes—
 —
 55
 45
 —
 100


Interest11
 91
 —
 7
 —
 109
Other16
 —
 25
 18
 —
 59
Advance billings and customer deposits—
 —
 127
 131
 —
 258
Due to affiliates—
 —
 42,483
 —
 (42,483) —
Total current liabilities38
 92
 43,124
 686
 (42,534) 1,406
LONG-TERM DEBT616
 10,096
 13
 157
 —
 10,882
DEFERRED REVENUE AND OTHER LIABILITES           
Deferred revenue—
 —
 841
 252
 —
 1,093
Deferred tax liability648
 —
 870
 465
 (1,771) 212
Other1
 1
 103
 165
 —
 270
Total deferred revenue and other liabilities649
 1
 1,814
 882
 (1,771) 1,575
COMMITMENTS AND CONTINGENCIES
 
 
 
 
 

MEMBER'S EQUITY (DEFICIT)34,107
 31,041
 (31,833) 24,930
 (38,973) 19,272
TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT)$35,410
 41,230
 13,118
 26,655
 (83,278) 33,135




Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2018 (Successor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
OPERATING ACTIVITIES           
Net cash (used in) provided by operating activities$(98) —
 2,059
 436
 —
 2,397
INVESTING ACTIVITIES           
Capital expenditures—
 —
 (527) (511) —
 (1,038)
Proceeds from the sale of property, plant and equipment and other assets83
 —
 —
 51
 —
 134
Net cash provided by (used in) investing activities83
 —
 (527) (460) —
 (904)
FINANCING ACTIVITIES           
Payments of long-term debt—
 —
 —
 (7) —
 (7)
Distributions(1,545) —
 —
 —
 —
 (1,545)
Increase (decrease) due to from affiliates, net1,545
 —
 (1,545) —
 —
 —
Net cash used in financing activities—
 —
 (1,545) (7) —
 (1,552)
Net decrease in cash, cash equivalents and restricted cash and securities(15) —
 (13) (31) —
 (59)
Cash, cash equivalents and restricted cash and securities at beginning of period32
 —
 186
 113
 —
 331
Cash, cash equivalents and restricted cash and securities at end of period$17
 —
 173
 82
 —
 272



Condensed Consolidating Statements of Cash Flows
For the period ended December 31, 2017 (Successor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
OPERATING ACTIVITIES           
Net cash (used in) provided by operating activities$(1) —
 172
 137
 —
 308
INVESTING ACTIVITIES           
Capital expenditures—
 —
 (110) (97) —
 (207)
Note receivable - affiliate—
 —
 (1,825) —
 —
 (1,825)
Net cash used in investing activities—
 —
 (1,935) (97) —
 (2,032)
FINANCING ACTIVITIES           
Payments of long-term debt—
 —
 —
 (1) —
 (1)
Distributions(250) —
 —
 —
 —
 (250)
Increase (decrease) due from/to affiliates, net250
 —
 (250) —
 —
 —
Other—
 —
 —
 (2) —
 (2)
Net cash used in financing activities—
 —
 (250) (3) —
 (253)
Net increase (decrease) in cash, cash equivalents, and restricted cash and securities(1) —
 (2,013) 37
 —
 (1,977)
Cash, cash equivalents and restricted cash and securities at beginning of period33
 —
 2,199
 76
 —
 2,308
Cash, cash equivalents and restricted cash and securities at end of period$32
 —
 186
 113
 —
 331



Condensed Consolidating Statements of Cash Flows
For the period ended October 31, 2017 (Predecessor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
OPERATING ACTIVITIES           
Net cash (used in) provided by operating activities$(61) (401) 1,615
 761
 —
 1,914
INVESTING ACTIVITIES           
Capital expenditures—
 —
 (667) (452) —
 (1,119)
Purchase of marketable securities—
 —
 (1,127) —
 —
 (1,127)
Maturity of marketable securities—
 —
 1,127
 —
 —
 1,127
Proceeds from sale of property, plant and equipment and other assets—
 —
 1
 —
 —
 1
Net cash used in investing activities—
 —
 (666) (452) —
 (1,118)
FINANCING ACTIVITIES           
Net proceeds from issuance of long-term debt—
 4,569
 —
 —
 —
 4,569
Payments of long-term debt—
 (4,911) 1
 (7) —
 (4,917)
Increase (decrease) due from/to affiliates, net57
 743
 (460) (340) —
 —
Other—
 —
 —
 3
 —
 3
Net cash provided by (used in) financing activities57
 401
 (459) (344) —
 (345)
Net (decrease) increase in cash, cash equivalents, and restricted cash and securities(4) —
 490
 (35) —
 451
Cash, cash equivalents and restricted cash and securities at beginning of period37
 —
 1,710
 110
 —
 1,857
Cash, cash equivalents and restricted cash and securities at end of period$33
 —
 2,200
 75
 —
 2,308


Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2016 (Predecessor)

 Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
 (Dollars in millions)
OPERATING ACTIVITIES           
Net cash (used in) provided by operating activities$(49) (468) 565
 2,295
 —
 2,343
INVESTING ACTIVITIES           
Capital expenditures—
 —
 (704) (630) —
 (1,334)
Proceeds from sale of property, plant and equipment and other assets—
 —
 1
 2
 —
 3
Net cash used in investing activities—
 —
 (703) (628) —
 (1,331)
FINANCING ACTIVITIES           
Net proceeds from issuance of long-term debt—
 764
 —
 —
 —
 764
Payments of long-term debt—
 (806) (1) (13) —
 (820)
Increase (decrease) due from/to affiliates, net47
 504
 1,107
 (1,658) —
 —
Other—
 —
 —
 (3) —
 (3)
Net cash provided by (used in) financing activities47
 462
 1,106
 (1,674) —
 (59)
Net increase (decrease) in cash, cash equivalents, and restricted cash and securities(2) (6) 968
 (7) —
 953
Cash, cash equivalents and restricted cash and securities at beginning of period39
 6
 742
 117
 —
 904
Cash, cash equivalents and restricted cash and securities at end of period$37
 —
 1,710
 110
 —
 1,857





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosureDisclosure controls and procedures as(as defined in RulesRule 13a-15(e) and 15d-15(e)promulgated under the Securities Exchange Act of 1934 as amended (the "Exchange Act"“Exchange Act”), as of December 31, 2015. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective and) are designed to ensureprovide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is(i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionSEC’s rules and forms. Disclosure controlsforms and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Exchange Act is(ii) accumulated and communicated to the Company's management, including its principal executive officerour Chief Executive Officer and principal financial officer, as appropriate,Chief Financial Officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Based on their most recent evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2018, our Company’s disclosure controls and procedures were not effective as a result of the material weaknesses in our internal control over financial reporting described below.

Notwithstanding the material weaknesses described below, our management, including our chief executive officer and chief financial officer, believes that the audited consolidated financial statements contained in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal years presented in conformity with U.S. generally accepted accounting principles. In addition, the material weaknesses described below did not result in the restatements of any of our audited or unaudited consolidated financial statements or disclosures for any previously reported periods.

Changes in Internal Control over Financial Reporting

During the fourth quarter 2018, we identified a deficiency that existed earlier in the year in the design of process controls over manual journal entries. Specifically, we had not designed and implemented controls to ensure all manual journal entries were reviewed. Although this control deficiency did not result in a misstatement in our consolidated financial statements, it created a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis. Therefore we concluded the deficiency represented a material weakness in our internal control over financial reporting.

Upon identification of the deficiency, management designed and implemented a new journal entry module into our enterprise resource planning (ERP) system with certain configuration and automated workflow controls that we believe, together with newly-designed and implemented monitoring controls, sufficiently remediated the material weakness prior to December 31, 2018.

Except for the remediation of the manual journal entry material weakness discussed above, and the two additional material weaknesses disclosed below, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2018 that materially affected, or that we believe are reasonably likely to materially affect, our internal control over financial reporting.



Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the fourth quarter of 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management's AnnualManagement’s Report on Internal Control Overover Financial Reporting

Management of the CompanyOur management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is(as defined in Rule 13a-15(f) of the Exchange Act Rules 13a-15(f)Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and 15d-15(f)

89
Tablethe preparation of Contentsfinancial statements for external purposes in accordance with generally accepted accounting principles in the United States. Our system of internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of our management; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.


Our management, under the Securities Exchange Actoversight of 1934, as amended. Under the supervision and with the participation of its management, including the Company'sour principal executive officer and principal financial officer, managementand Audit Committee, assessed the effectiveness of our internal controlscontrol over financial reporting as of December 31, 2015 based on2018 using the guidelines established in Internal Control—Integrated Framework (2013) issuedcriteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)in Internal control - An Integrated Framework (“2013 Framework”). Based on the Company'sIn connection with this assessment, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2015.

The Company's independent registered public accounting firm, KPMG LLP, has issued an attestation report on the effectiveness of the Company'swe identified material weaknesses in internal control over financial reporting as of December 31, 2015. That2018. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this assessment, management concluded that two material weaknesses existed as described below.

Ineffective design and operation of process level internal controls over the fair value measurement of certain assets acquired and liabilities assumed in CenturyLink's acquisition of us.

These deficiencies arose because (i) CenturyLink did not conduct an effective risk assessment to identify and assess changes needed to make to our financial reporting and process level controls, related to fair value measurement of assets acquired and liabilities assumed in the transaction with CenturyLink, (ii) CenturyLink did not clearly assign responsibility for the design, implementation, and operation of controls over the fair value measurements and (iii) CenturyLink did not maintain effective information and communication processes to ensure the right information was available to personnel on a timely basis so they could fulfill their control responsibilities related to the fair value measurements.

Ineffective design and operation of certain process level internal controls over the existence and accuracy of revenue transactions.

These deficiencies arose because we did not conduct an effective risk assessment to identify risks of material misstatement related to the existence and accuracy of revenue transactions.

The deficiencies led to material misstatements in the valuation of assets acquired and liabilities assumed in CenturyLink's acquisition of us that were corrected prior to the issuance of the consolidated financial statements as of and for the year ended December 31, 2018 set out in this annual report appears on page F-3.Form 10-K. However, the misstatements did not result in the need to restate any of our audited or unaudited consolidated financial statements or disclosures filed for any previously reported period. The deficiencies also led to immaterial misstatements that were not corrected in the valuation of assets acquired and liabilities assumed in the acquisition and in revenue. These control deficiencies created a reasonable possibility that material misstatements to the consolidated financial statements would not be prevented or detected on a timely basis. Therefore, we concluded they represented material weaknesses and our internal control over financial reporting was not effective as of December 31, 2018.

Pursuant to Regulation S-K 308(b), this Annual Report on Form 10-K does not include an attestation report of our company’s registered public accounting firm regarding internal control over financial reporting.



Remediation Plans

We are taking several steps to remediate the material weaknesses identified above. These steps include the following:

We plan to implement continuous risk assessment processes that are designed to identify and assess changes that could significantly impact our internal control over financial reporting environment and risks of material misstatement related to the revenue recognition process.

We plan to ensure the effective design, implementation and operation of sufficient process level controls over the valuation of assets acquired and liabilities assumed in business combinations by developing written procedures and controls on accounting for business combinations. Additionally, we plan to assign responsibility for financial reporting and internal controls and will endeavor to ensure there are effective communication processes in place so individuals assigned with the overall responsibility to operate these process level controls understand their roles and expectations as it relates to designing, implementing and operating process level controls for future business combinations.

We plan to design and implement sufficient additional process level control activities over the existence and accuracy of revenue transactions.

We plan to execute our plans to remediate the material weaknesses identified above as soon as feasible. We will test the ongoing effectiveness of the new controls and will consider the material weakness remediated after the new controls operate effectively for a sufficient period of time. There is no assurance, however, that these measures will remediate the material weakness or ensure that our internal controls over financial reporting will be effective in the future.


ITEM 9B. OTHER INFORMATION

None.


Part III

Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. As part of the completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.

Unless context requires otherwise, references to the period ended October 31, 2017, covers the predecessor period from January 1, 2017 through October 31, 2017, and the period ended December 31, 2017, covers the successor period from November 1, 2017, through December 31, 2017.

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
We have omitted this information required by this Item 10 is incorporated by referencepursuant to our definitive proxy statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC.General Instruction I.

ITEM 11.    EXECUTIVE COMPENSATION
The
We have omitted this information required by this Item 11 is incorporated by referencepursuant to our definitive proxy statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC.General Instruction I.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
We have omitted this information called for by Item 201(d) of Regulation S-K regarding our compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance is contained in Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities" above. The other information required by this Item 12 is incorporated by referencepursuant to our definitive proxy statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC.General Instruction I.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
We have omitted this information required by this Item 13 is incorporated by referencepursuant to our definitive proxy statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC.General Instruction I.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Pre-Approval Policies and Procedures

The informationAudit Committee of CenturyLink's Board of Directors is responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm. Under the Audit Committee's charter, the Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered public accounting firm. The approval may be given as part of the Audit Committee's approval of the scope of the engagement of our independent registered public accounting firm or on an individual basis. The pre-approval of non-audit services may be delegated to one or more of the Audit Committee's members, but the decision must be reported to the full Audit Committee. Our independent registered public accounting firm may not be retained to perform the non-audit services specified in Section 10A(g) of the Exchange Act.

Fees Paid to the Independent Registered Public Accounting Firm

Level 3 Parent, LLC first engaged KPMG LLP to be our independent registered public accounting firm in 2002. The aggregate fees billed or allocated to us for the successor years ended December 31, 2018 and 2017 for professional accounting services, including KPMG's audit of our annual consolidated financial statements, are set forth in the table below.

 December 31, 2018 December 31, 2017
 (Dollars in thousands)
Audit fees$3,100
 4,303
Audit-related fees—
 168
Tax fees—
 7
Total fees$3,100
 4,478

For purposes of the preceding table, the professional fees are classified as follows:

Audit fees— These fees consisted principally of fees for the audit of financial statements, including statutory audits of foreign subsidiaries, audit of internal control over financial reporting, and fees relating to comfort letters and registration statements.

Audit-related fees—These fees consisted principally of fees for audits of employee benefit plans, agreed-upon procedures reports, due diligence activities, and other audits not required by this Item 14 is incorporatedstatute or regulation.

Tax fees - These fees consisted principally of fees for tax consultation and tax compliance activities.

The CenturyLink Audit Committee, subsequent to November 1, 2017, and the Level 3 Audit Committee prior to that date approved in advance all of the services performed by reference to our definitive proxy statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC.KPMG described above.
Part IV


Part IV

Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. As part of the completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.

Unless context requires otherwise, references to the period ended October 31, 2017, covers the predecessor period from January 1, 2017 through October 31, 2017, and the period ended December 31, 2017, covers the successor period from November 1, 2017, through December 31, 2017.

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.
(a)Financial statements and financial statement schedules required to be filed for the registrant under Items 8 or 15 are set forth following the index page at page F-l. Exhibits filed as a part of this report are listed below. Exhibits incorporated by reference are indicated in parentheses.
3.1Restated
Certificate of IncorporationFormation of Level 3 Communications, Inc.Parent, LLC (f/k/a WWG Merger Sub LLC) (incorporated by reference to Exhibit 3(i)3.1 to the Registrant's Current Report on Form 8-K (file No. 001-35134) dated May 23, 2008)November 1, 2017).

3.2.13.2Certificate of Amendment of
Amended and Restated Certificate of IncorporationLimited Liability Company Agreement of Level 3 Communications, Inc. (incorporated by reference to Exhibit 3.2Parent, LLC, effective as of Level 3 Communications, Inc.’s Registration Statement on Form S-3 (SEC File No. 333-160493) filed with the Securities and Exchange Commission on July 9, 2009).

90
Table of Contents

3.2.2Certificate of Amendment of Restated Certificate of Incorporation of Level 3 Communications, Inc. (incorporated by reference to Exhibit 3.2 of Level 3 Financing, Inc.'s, Level 3 Communications, Inc.'s and Level 3 Communications, LLC's Registration Statement on Form S-4 (SEC File No. 333-167110) filed on May 26, 2010).
3.2.3Certificate of Amendment to the Restated Certificate of Incorporation of Level 3 Communications, Inc.November 1, 2017 (f/k/a WWG Merger Sub LLC) (incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated October 6, 2011).
3.2.4Certificate of Amendment of the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1.2 to the Form 8-A filed on October 19, 2011).
3.2.5Certificate of Amendment of Restated Certificate of Incorporation of Level 3 Communications, Inc. (incorporated by reference to Exhibit 3.1.1 to the Registrant's Quarterly Report on Form 10-Q for the three months ended June 30, 2012).
3.2.6Certificate of Amendment of Restated Certificate of Incorporation of Level 3 Communications, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (file No. 001-35134) dated November 5, 2014)1, 2017).
3.3Conformed copy of the Restated Certificate of Incorporation of Level 3 Communications, Inc., as amended through October 30, 2014 (incorporated by reference to Exhibit 3.6 to the Registrant’s Current Report on Form 10-K dated February 27, 2015).
3.4Amended and Restated By-Laws of Level 3 Communications, Inc., effective as of November 12, 2015 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated November 13, 2015).
4.1.1Rights Agreement, dated as of April 10, 2011, by and between Level 3 Communications, Inc. and Wells Fargo Bank, N.A., as rights agent (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-A dated April 11, 2011).
4.1.2Amendment to the Rights Agreement, dated as of March 15, 2012, by and between Level 3 Communications, Inc. and Wells Fargo Bank, N.A., as rights agent (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated March 13, 2012).
4.1.3Amendment No. 2 to the Rights Agreement, dated as of July 21, 2014, by and between Level 3 Communications, Inc. and Wells Fargo Bank, N.A., as rights agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 22, 2014).
4.2.1
Indenture, dated as of August 6, 2012,November 14, 2013, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and Thethe Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 7%6.125% Senior Notes due 20202021 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated August 1, 2012)November 14, 2013).
4.2.24.1.2Supplemental Indenture, dated as of December 6, 2012, among Level 3 Communications, LLC, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 7% Senior Notes due 2020 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated December 6, 2012).
4.2.3Supplemental Indenture, dated as of December 6, 2012, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 7% Senior Notes due 2020 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated December 6, 2012).

91
Table of Contents

4.3.1Indenture, dated as of November 26, 2013, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the Floating Rate Senior Notes due 2018 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated November 26, 2013).
4.3.2Supplemental Indenture, dated as of March 14, 2014, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the Floating Rate6.125% Senior Notes due 20182021 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.34.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated March 14,17, 2014).
4.3.34.1.3
Supplemental Indenture, dated as of March 14, 2014, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the Floating Rate6.125% Senior Notes due 20182021 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.44.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated March 14,17, 2014).
4.4.14.1.4
Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of November 14, 2013, governing the 6.125% Senior Notes due 2021 (incorporated by reference to Exhibit 4.7 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016).
4.1.5
Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of November 14, 2013, governing the 6.125% Senior Notes due 2021 (incorporated by referenced to Exhibit 4.7 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017).


4.2.1
Indenture, dated as of August 12, 2014, between Level 3 Escrow II, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.375% Senior Notes due 2022 of Level 3 Escrow II, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated August 12, 2014).
4.4.24.2.2
Securities Assumption Supplemental Indenture, dated as of October 31, 2014, by and among Level 3 Escrow II, Inc., Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated October 30,November 5, 2014).
4.4.34.2.3
Supplemental Indenture, dated as of October 31, 2014, by and among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.375% Senior Notes due 2022 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated October 30,November 5, 2014).
4.54.2.4
Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of August 12, 2014, governing the 5.375% Senior Notes due 2022 (incorporated by reference to Exhibit 4.6 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016).
4.2.5
Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of August 12, 2014, governing the 5.375% Senior Notes due 2022 (incorporated by referenced to Exhibit 4.6 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017).
4.3.1
Indenture, dated as of December 1, 2014, between Level 3 Communications, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 5.75%5.750% Senior Notes due 2022 of Level 3 Communications, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated December 1, 2014).
4.6.14.3.2
Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, Inc., and The Bank of New York Mellon Trust Company, N.A, amending the Indenture, dated as of December 1, 2014 governing the 5.750% Senior Notes due 2022 (incorporated by reference to Exhibit 4.8 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016).
4.3.3
Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc., Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., amending the Indenture, dated as of December 1, 2014 governing the 5.750% Senior Notes due 2022 (incorporated by reference to Exhibit 4.8 of the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017).
4.4.1
Indenture, dated as of January 29, 2015, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.625% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated January 30, 2015).
4.6.24.4.2
Supplemental Indenture, dated as of June 3, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 5.625% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated June 4, 2015).

92
Table of Contents

4.4.3
4.6.3
Supplemental Indenture, dated as of June 3, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.625% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated June 4, 2015).


4.7.1
4.4.4
Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of January 29, 2015, governing the 5.625% Senior Notes due 2023 (incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016).
4.4.5
Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc. as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of January 29, 2015 governing the 5.625% Senior Notes due 2023 (incorporated by reference to Exhibit 4.5 of the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017).
4.5.1
Indenture, dated as of April 28, 2015, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.375% Senior Notes due 2025 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated April 30, 2015).
4.7.24.5.2
Supplemental Indenture, dated as of September 1, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 5.375% Senior Notes due 2025 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 2, 2015).
4.7.34.5.3
Supplemental Indenture, dated as of September 1, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.375% Senior Notes due 2025 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 2, 2015).
4.8.14.5.4
Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of April 28, 2015, governing the 5.375% Senior Notes due 2025 (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016).
4.5.5
Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc. as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of April 28, 2015 governing the 5.375% Senior Notes due 2025 (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017).
4.6.1
Indenture, dated as of April 28, 2015, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.125% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated April 30, 2015).
4.8.24.6.2
Supplemental Indenture, dated as of September 1, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 5.125% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 2, 2015).
4.8.34.6.3
Supplemental Indenture, dated as of September 1, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.125% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 2, 2015).


4.9.1
4.6.4
Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of April 28, 2015, governing the 5.125% Senior Notes due 2023 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016).
4.6.5
Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc. as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of April 28, 2015 governing the 5.125% Senior Notes due 2023 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017).
4.7.1
Indenture, dated as of November 13, 2015, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.375% Senior Notes due 2024 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 13, 2015).

93
Table of Contents

4.7.2
4.9.2
Supplemental Indenture, dated as of February 8, 2016, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 5.375% Senior Notes due 2024 of Level 3 Financing, Inc. (Exhibit(incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated February 8, 2016).
4.9.34.7.3
Supplemental Indenture, dated as of February 8, 2016, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.375% Senior Notes due 2024 of Level 3 Financing, Inc. (Exhibit(incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated February 8, 2016).
4.9.44.7.4Registration Agreement,
Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of November 13, 2015, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC, Barclays Capital Inc., Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and J. P. Morgan Securities LLC, relating to Level 3 Financing, Inc.’sgoverning the 5.375% Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 13, 2015)28, 2016).
10.1.14.7.5Amendment No.
Supplemental Indenture, dated as of November 1, to Separation Agreement, dated March 18, 1997, by and2017, among Peter Kiewit Sons',Level 3 Communications, Inc. as guarantor, Level 3 Financing, Inc., Kiewit Diversified Group Inc.as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., PKS Holdings, Inc. and Kiewit Construction Group Inc.as trustee, amending the Indenture dated as of November 13, 2015 governing the 5.375% Senior Notes due 2024 (incorporated by reference to Exhibit 10.14.2 to the Registrant's AnnualRegistrant’s Current Report on Form 10-K for the year ended December 31, 1997)8-K (file no. 001-35134) dated November 1, 2017).
10.24.8.1Form of Aircraft Time-Share Agreement (incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001).
10.3Stockholder Rights Agreement,
Indenture, dated as of April 10, 2011, by and betweenMarch 22, 2016, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and STT Crossing Ltd.The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.25% Senior Notes due 2026 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant'sRegistrant’s Current Report on Form 8-K (file no. 001-35134) dated April 14, 2011)March 22, 2016).
10.44.8.2
Supplemental Indenture, dated as of September 16, 2016, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc. Stock Incentive Plan, effective May 21, 2015 (incorporated by reference, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to AnnexLevel 3 toCommunications, LLC’s unconditioned, unsecured guarantee of the Registrant’s Proxy Statement for its 2015 Annual Meeting of Stockholders, filed with the Securities and Exchange Commission on April 7, 2015).
10.5Form of OSO Master Award Agreement5.25% Senior Notes due 2026 of Level 3 Communications,Financing, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated May 25, 2010).
10.6Form of Amended Master Deferred Issuance Stock Agreement of Level 3 Communications, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated May 25, 2010).
10.7.1Form of Level 3 Communications, Inc. Restricted Stock Unit and Performance Restricted Stock Unit Master Award Agreement (incorporated by reference to Exhibit 10.14.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated April 1, 2014)September 16, 2016).
10.7.24.8.3Form
Supplemental Indenture, dated as of September 16, 2016, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.25% Senior Notes due 2026 of Level 3 Communications,Financing, Inc. Restricted Stock Unit and Performance Unit Master Award Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 10-Q dated August 6, 2015).
10.7.3Form of Level 3 Communications, Inc. Amended and Restated Restricted Stock Unit and Performance Unit Master Award Agreement, dated as of December 31, 2015.
10.8.1Level 3 Communications, Inc. Key Executive Severance Plan (as approved by the Board on April 1, 2014) (to be effective as of April 1, 2015) (incorporated by reference to Exhibit 10.34.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated April 1, 2014)September 16, 2016).
10.8.2Restrictive Covenant Agreement, dated as of March 13, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 13, 2013).

94
Table of Contents

10.8.34.8.4Form
Supplemental Indenture, dated as of Key Executive Severance Plan Amendment Notice Letter Dated October 9, 2014November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of March 22, 2016 governing the 5.25% Senior Notes due 2026 (incorporated by reference to Exhibit 10.8.34.1 to the Registrant’s Current Report on Form 10-K8-K (file no. 001-35134) dated February 27, 2015)November 28, 2016).
10.94.8.5Form
Supplemental Indenture, dated as of Master Deferred Issuance Stock Agreement for consultantsNovember 1, 2017, among Level 3 Communications, Inc. as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of March 22, 2016 governing the 5.25% Senior Notes due 2026 (incorporated by reference to Exhibit 10.44.1 to the Registrant'sRegistrant’s Current Report on Form 8-K (file no. 001-35134) dated February 23, 2011)November 1, 2017).
10.1010.12012 Management Incentive and Retention Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated March 23, 2012).
10.11
Credit Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated March 16, 2007).
10.1210.2
Guarantee Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., the Subsidiaries of Level 3 Communications, Inc. and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated March 16, 2007).
10.1310.3
Collateral Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Subsidiaries of Level 3 Communications, Inc. and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated March 16, 2007).
10.1410.4
Indemnity, Subrogation and Contribution Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Subsidiaries of Level 3 Communications, Inc. and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated March 16, 2007).
10.1510.5
Omnibus Offering Proceeds Note Subordination Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc., Level 3 Communications, LLC and the Subsidiaries party thereto (incorporated by reference to Exhibit 10.5 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated March 16, 2007).
10.1610.6
Supplement No. 1 to Omnibus Offering Proceeds Note Subordination Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Communications, LLC, Level 3 Financing, Inc. and the Subsidiaries party thereto (incorporated by reference to Exhibit 10.6 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated March 16, 2007).
10.1710.7
Amendment Agreement to the March 13, 2007 Credit Agreement, dated April 16, 2009, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Citigroup Global Markets, Inc., Credit Suisse Securities (USA) LLC, Wachovia Bank, N.A., and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated April 17, 2009).
10.1810.8
Amended and Restated Loan Proceeds Note Collateral Agreement, dated as of March 13, 2007, as amended and restated as of April 16, 2009, among Level 3 Financing, Inc., Level 3 Communications, LLC and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated April 17, 2009).
10.1910.9
First Amendment, dated as of May 15, 2009, to the Amended and Restated Credit Agreement dated as of April 16, 2009, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Citigroup Global Markets, Inc., Credit Suisse Securities (USA) LLC, Wachovia Bank, N.A., and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated May 15, 2009).

95
Table of Contents

10.10
10.20
Second Amendment Agreement to the Amended and Restated Credit Agreement, dated as of October 4, 2011, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (file no. 001-35134) dated October 6, 2011).
10.2110.11
Third Amendment Agreement to the Amended and Restated Credit Agreement, dated as of November 10, 2011, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (file no. 001-35134) dated November 17, 2011).
10.2210.12
Fourth Amendment Agreement to Amended and Restated Credit Agreement, dated as of August 6, 2012, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (file no. 001-35134) dated August 9, 2012).


10.23
10.13
Fifth Amendment Agreement to Amended and Restated Credit Agreement dated October 4, 2012 among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (file no. 001-35134) dated October 5, 2012).
10.2410.14
Sixth Amendment Agreement to Amended and Restated Credit Agreement, dated as of August 12, 2013, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated August 12, 2013).
10.2510.15
Seventh Amendment Agreement to Amended and Restated Credit Agreement, dated as of August 16, 2013, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated August 16, 2013).
10.2610.16
Eighth Amendment Agreement to Amended and Restated Credit Agreement, dated as of October 4, 2013, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated October 4, 2013).
10.2710.17
Ninth Amendment Agreement to Amended and Restated Credit Agreement, dated as of October 31, 2014, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated October 30, 2014).
10.2810.18
Tenth Amendment Agreement to the Amended and Restated Credit Agreement, dated as of May 8, 2015, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated May 15, 2015).
10.2910.19
Eleventh Amendment Agreement to the Amended and Restated Credit Agreement, dated as of November 22, 2016, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 22, 2016).
10.20
Twelfth Amendment Agreement to the Amended and Restated Credit Agreement, dated as of February 22, 2017, by and between Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file No. 001-35134) dated February 22, 2017), including the Amended and Restated Loan Proceeds Note, dated as of May 8, 2015,Notes issued on the same date by Level 3 Communications, LLC to Level 3 Financing, Inc. (incorporated by reference to Exhibit 10.2 and Exhibit 10.3 to the Registrant's Current Report on Form 8-K (file No. 001-35134) dated February 22, 2017).
10.21
Assumption Agreement, dated as of November 1, 2017, between Level 3 Parents, LLC (f/k/a WWG Merger Sub LLC) and Merrill Lynch Capital Corporation, as administrative agent and collateral agent, with respect to the Amended and Restated Credit Agreement, amended as of February 22, 2017, among Level 3 Communications, Inc., Level 3 Financing, Inc., as borrower, the lenders party thereto and Merrill Lynch Capital Corporation, as administrative agent and collateral agent (incorporated by reference to Exhibit 4.9 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated May 15, 2015)November 1, 2017).
10.3031.1*Amended and Restated Loan Proceeds Note, dated as of May 8, 2015, issued by Level 3 Communications, LLC to Level 3 Financing, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated May 15, 2015).
10.31Standstill Agreement, dated as of May 20, 2011, between Level 3 Communications, Inc. and Southeastern Asset Management, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 23, 2011).
10.32Amendment to the Standstill Agreement, dated as of March 15, 2012, by and between Level 3 Communications, Inc. and Southeastern Asset Management Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated March 13, 2012).

96
Table of Contents

10.33Amendment No. 2 to the Standstill Agreement, dated as of July 21, 2014, by and between Level 3 Communications, Inc. and Southeastern Asset Management Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 21, 2014).
10.34Exchange Agreement, dated as of March 13, 2012, by and among Level 3 Communications, Inc., Longleaf Partners Fund, a series of the Longleaf Partners Fund Trust, and solely with respect to Sections 3, 5.3 and 5.4 therein, Southeastern Asset Management Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 13, 2012).
12Statements re computation of ratios.
21List of subsidiaries of the Registrant.
23Consent of KPMG LLP.
31.1Rule 13a-14(a)/15d-14(a) Certification of the Interim Chief Executive Officer andOfficer.
31.2*
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.132*
Certification of Interimthe Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101101*The following materials from the Annual Report on Form 10-K of Level 3 Communications, Inc.Parent, LLC for the year ended December 31, 2015,2018, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Member's/Stockholders' Equity and (vi) Notes to Consolidated Financial Statements.

97

Table of Contents

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

*Page
Reports of Independent Registered Public Accounting Firm
F-2
Financial Statements as of December 31, 2015 and 2014 and for each of the three years ended December 31, 2015, 2014 and 2013:
Consolidated Statements of Operations
F-5
Consolidated Statements of Comprehensive Income (Loss)
F-6
Consolidated Balance Sheets
F-7
Consolidated Statements of Cash Flows
F-8
Consolidated Statements of Changes in Stockholders' Equity
F-9
Notes to Consolidated Financial Statements
F-10
Exhibit filed herewith.

Schedules not indicated above have been omitted because of the absence of the condition under which they are required or because the information called for is shown in the Consolidated Financial Statements or in the notes hereto.

F-1
Table of Contents




Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Level 3 Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Level 3 Communications, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in stockholders' equity for each of the years in the three-year period ended December 31, 2015. 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 Level 3 Communications, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, 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), Level 3 Communications, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2016 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

Denver, Colorado
February 26, 2016

F-2
Table of Contents




Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Level 3 Communications, Inc.:

We have audited Level 3 Communications, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Level 3 Communications, Inc.’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 Management’s Annual Report on Internal Control Over Financial Reporting. 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, Level 3 Communications, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Level 3 Communications, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations,




F-3
Table of Contents

comprehensive income (loss), cash flows and changes in stockholders’ equity, for each of the years in the three-year period ended December 31, 2015, and our report dated February 26, 2016, expressed an unqualified opinion on those consolidated financial statements.


/s/ KPMG LLP


Denver, Colorado
February 26, 2016





F-4
Table of Contents

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the three years ended December 31,

(dollars in millions, except per share data) 2015 2014 2013
       
Revenue $8,229
 $6,777
 $6,313
Costs and Expenses:      
Network access costs 2,833
 2,529
 2,471
Network related expenses 1,432
 1,246
 1,214
Depreciation and amortization 1,166
 808
 800
Selling, general and administrative expenses 1,467
 1,181
 1,162
Total costs and expenses 6,898
 5,764
 5,647
Operating Income 1,331
 1,013
 666
Other Income (Expense):      
Interest income 1
 1
 —
Interest expense (642) (654) (649)
Loss on modification and extinguishment of debt (218) (53) (84)
Venezuela deconsolidation charge (171) —
 —
Other, net (18) (69) (4)
Total other expense (1,048) (775) (737)
Income (Loss) Before Income Taxes 283
 238
 (71)
Income Tax Benefit (Expense) 3,150
 76
 (38)
Net Income (Loss) $3,433
 $314
 $(109)
       
Basic Earnings per Common Share      
Net Income (Loss) Per Share $9.71
 $1.23
 $(0.49)
Shares Used to Compute Basic Net Income (Loss) per Share (in thousands) 353,385
 254,428
 222,368
       
Diluted Earnings per Common Share      
Net Income (Loss) Per Share $9.58
 $1.21
 $(0.49)
Shares Used to Compute Diluted Net Income (Loss) per Share (in thousands) 358,593
 258,483
 222,368


See accompanying notes to Consolidated Financial Statements.

F-5
Table of Contents

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For each of the three years ended December 31,

(dollars in millions) 2015 2014 2013
       
Net Income (Loss) $3,433
 $314
 $(109)
Other Comprehensive Income (Loss) net of Tax:      
Foreign currency translation adjustments, net of tax effect of $13, $0, and $0 (162) (178) 11
Defined benefit pension plan adjustments, net of tax effect of ($2), $0, and $0 8
 (5) (1)
Other Comprehensive Income (Loss) net of Tax (154) (183) 10
Comprehensive Income (Loss) $3,279
 $131
 $(99)


See accompanying notes to Consolidated Financial Statements.


F-6
Table of Contents

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,

(dollars in millions, except share data) 2015 2014
Assets:    
Current Assets:    
Cash and cash equivalents $854
 $580
Restricted cash and securities 8
 7
Receivables, less allowances for doubtful accounts of $32 and $30, respectively 757
 737
Other 130
 157
Total Current Assets 1,749
 1,481
Property, Plant and Equipment, net of Accumulated Depreciation of $10,365 and $9,629, respectively 9,878
 9,860
Restricted Cash and Securities 42
 20
Goodwill 7,749
 7,689
Other Intangibles, net 1,127
 1,414
Deferred Tax Assets 3,441
 300
Other Assets, net 159
 183
Total Assets $24,145
 $20,947
Liabilities and Stockholders’ Equity:    
Current Liabilities:    
Accounts payable $629
 $664
Current portion of long-term debt 15
 349
Accrued payroll and employee benefits 218
 273
Accrued interest 108
 174
Current portion of deferred revenue 267
 287
Other 179
 159
Total Current Liabilities 1,416
 1,906
Long-Term Debt, less current portion 10,994
 10,984
Deferred Revenue, less current portion 977
 921
Other Liabilities 632
 773
Total Liabilities 14,019
 14,584
Commitments and Contingencies —
 —
Stockholders’ Equity:    
Preferred stock, $.01 par value, authorized 10,000,000 shares: no shares issued or outstanding —
 —
Common stock, $.01 par value, authorized 433,333,333 shares in both periods; 356,374,473 shares issued and outstanding at December 31, 2015 and 341,361,420 shares issued and outstanding at December 31, 2014 4
 3
Additional paid-in capital 19,642
 19,159
Accumulated other comprehensive loss (301) (147)
Accumulated deficit (9,219) (12,652)
Total Stockholders’ Equity 10,126
 6,363
Total Liabilities and Stockholders’ Equity $24,145
 $20,947


See accompanying notes to Consolidated Financial Statements.


F-7
Table of Contents

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For each of the three years ended December 31,
(dollars in millions) 2015 2014 2013
Cash Flows from Operating Activities:      
Net income (loss) $3,433
 $314
 $(109)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:      
Depreciation and amortization 1,166
 808
 800
Loss on impairment —
 18
 7
Non-cash compensation expense attributable to stock awards 141
 73
 151
Loss on modification and extinguishment of debt 218
 53
 84
Venezuela deconsolidation charge 171
 —
 —
Accretion of debt discount and amortization of debt issuance costs 24
 36
 36
Accrued interest on long-term debt, net (57) 12
 (49)
Non-cash tax adjustments —
 (7) (42)
Deferred income taxes (3,202) (116) (29)
Loss (gain) on sale of property, plant, and equipment and other assets 1
 (3) (2)
Other, net 35
 (8) (41)
Changes in working capital items:      
Receivables (87) 9
 30
Other current assets (11) 2
 3
Payables 4
 (77) (162)
Deferred revenue 88
 6
 28
Other current liabilities (69) 41
 8
Net Cash Provided by Operating Activities 1,855
 1,161
 713
Cash Flows from Investing Activities:      
Capital expenditures (1,229) (910) (760)
Cash related to deconsolidated Venezuela operations (83) —
 —
Decrease (increase) in restricted cash and securities, net (22) (10) 13
Proceeds from sale of property, plant and equipment and other assets 4
 3
 —
Investment in tw telecom, net of cash acquired —
 (167) —
Other (14) (2) 2
Net Cash Used in Investing Activities (1,344) (1,086) (745)
Cash Flows from Financing Activities:      
Long-term debt borrowings, net of issuance costs 4,832
 589
 1,502
Payments on and repurchases of long-term debt, including current portion and refinancing costs (5,051) (671) (1,796)
Net Cash Used in Financing Activities (219) (82) (294)
Effect of Exchange Rates on Cash and Cash Equivalents (18) (44) (22)
Net Change in Cash and Cash Equivalents 274
 (51) (348)
Cash and Cash Equivalents at Beginning of Year 580
 631
 979
Cash and Cash Equivalents at End of Year $854
 $580
 $631
Supplemental Disclosure of Cash Flow Information:      
Cash interest paid $668
 $598
 $674
Income taxes paid, net of refunds $50
 $44
 $33
Non-cash Investing and Financing Activities:      
Capital lease obligations incurred $6
 $2
 $13
Note issued for property $—
 $—
 $12
Long-term debt conversion into equity $333
 $142
 $200
Accrued interest conversion into equity $10
 $2
 $3
Long-term debt issued and proceeds placed in escrow $—
 $3,000
 $—
Escrowed securities used in the acquisition of tw telecom $—
 $3,014
 $—


See accompanying notes to Consolidated Financial Statements.

F-8
Table of Contents

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For each of the three years ended December 31,

  Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss)    
(dollars in millions, except share data) Shares $   Accumulated Deficit Total
Balance at January 1, 2013 218,380,070
 $2
 $14,000
 $26
 $(12,857) $1,171
Common stock:            
Common stock issued under employee stock benefit plans and other 5,493,729
 —
 70
 —
 —
 70
Stock-based compensation —
 —
 69
 —
 —
 69
Conversion of debt to equity 10,814,264
 —
 200
 —
 —
 200
Net Loss —
 —
 —
 —
 (109) (109)
Other Comprehensive Income —
 —
 —
 10
 —
 10
Balance at December 31, 2013 234,688,063
 $2
 $14,339
 $36
 $(12,966) $1,411
Common stock:            
Common stock issued under employee stock benefit plans and other 4,528,559
 —
 78
 —
 —
 78
Stock-based compensation —
 —
 55
 —
 —
 55
tw telecom acquisition equity consideration 96,868,883
 1
 4,543
 —
 —
 4,544
Conversion of debt to equity 5,275,915
 —
 144
 —
 —
 144
Net Income —
 —
 —
 —
 314
 314
Other Comprehensive Loss —
 —
 —
 (183) —
 (183)
Balance at December 31, 2014 341,361,420
 $3
 $19,159
 $(147) $(12,652) $6,363
Common stock:            
Common stock issued under employee stock benefit plans and other 2,696,470
 —
 35
 —
 —
 35
Stock-based compensation —
 —
 106
 —
 —
 106
Conversion of debt to equity 12,316,583
 1
 342
 —
 —
 343
Net Income —
 —
 —
 —
 3,433
 3,433
Other Comprehensive Loss —
 —
 —
 (154) —
 (154)
Balance at December 31, 2015 356,374,473
 $4
 $19,642
 $(301) $(9,219) $10,126
             


See accompanying notes to Consolidated Financial Statements.


F-9
Table of Contents

LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements


(1) Organization and Summary of Significant Accounting Policies

Description of Business

Level 3 Communications, Inc. and subsidiaries (the "Company" or "Level 3") is a facilities-based provider (that is, a provider that owns or leases a substantial portion of the plant, property and equipment necessary to provide its services) of a broad range of integrated communications services. The Company created its communications network by constructing its own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. Level 3's network is an international, facilities-based communications network. The Company designed its network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.

On October 31, 2014, the Company completed the acquisition of tw telecom inc. (“tw telecom”) and tw telecom became an indirect, wholly owned subsidiary of the Company through a tax-free, stock and cash reorganization (the "Merger"). See Note 2 - Events Associated with the Merger of tw telecom inc.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Level 3 Communications, Inc. and subsidiaries in which it has a controlling interest. All significant intercompany accounts and transactions have been eliminated. The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP").

As part of its consolidation policy, the Company considers its controlled subsidiaries, investments in businesses in which the Company is not the primary beneficiary or does not have effective control but has the ability to significantly influence operating and financial policies, and variable interests resulting from economic arrangements that give the Company rights to economic risks or rewards of a legal entity. The Company does not have variable interests in a variable interest entity where it is required to consolidate the entity as the primary beneficiary.

Prior to October 1, 2015, the Company included the results of its wholly owned Venezuelan subsidiary in its Consolidated Financial Statements using the consolidation method of accounting. The Company’s Venezuelan subsidiary's earnings and cash flows are reflected in the Consolidated Financial Statements for the nine months ended September 30, 2015 and the years ended December 31, 2014 and 2013, respectively.

Venezuelan exchange control regulations have resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar, and have restricted the Company's Venezuelan operations’ ability to pay dividends in U.S. dollars and settle intercompany obligations in U.S. dollars. The severe currency controls imposed by the Venezuelan government have significantly limited the ability to realize the benefits from earnings of the Company’s Venezuelan operations and access the resulting liquidity provided by those earnings in U.S. dollars. The Company expects that this condition will continue for the foreseeable future. Additionally, government regulations affecting the Company's ability to manage its Venezuelan subsidiary’s capital structure, purchasing, product pricing, customer invoicing and collections, and labor relations; and the current political and economic situation within Venezuela have resulted in an acute degradation in the Company's ability to make key operational decisions for its Venezuelan operations. This lack of exchangeability into U.S. dollars and the degradation in the Company's ability to control key operational decisions has resulted in a lack of control over the Company's Venezuelan subsidiary for U.S. accounting purposes. Therefore, while continuing to wholly own a variable interest in its Venezuelan subsidiary, in accordance with Accounting Standards Codification 810 -- Consolidation, the Company deconsolidated its Venezuelan subsidiary on September 30, 2015, and began accounting for its investment in its Venezuelan operations using the cost method of accounting. While the Company does not expect to enter into material transactions with its subsidiary in Venezuela that would result in the creation of additional intercompany receivable balances, if any such

F-10
Table of Contents

transactions were completed the Company would evaluate collectability of the intercompany receivable balance at that time, which could result in a charge that negatively affects its results of operations.

As a result of deconsolidating of its Venezuelan subsidiary, the Company recorded a one-time charge of $171 million in the third quarter of 2015, which had no accompanying tax benefit. This charge included the write-off of both the Company's investment in its Venezuelan subsidiary and $40 million of intercompany receivables from its Venezuelan subsidiary. The Company's Venezuelan operations’ bolivar-denominated cash balance of $83 million (at the SICAD I exchange rate of 13.5 bolivars per U.S. dollar) at September 30, 2015 is no longer reported in Cash and Cash Equivalents on the Consolidated Balance Sheet. The Company's financial results no longer include the operating results of its Venezuelan operations. Any dividends from the Company's Venezuelan subsidiaries are recorded as other income upon receipt of the cash. Prior period results have not been adjusted to reflect the deconsolidation of the Company's Venezuelan subsidiary.

Foreign Currency Translation

Local currencies of foreign subsidiaries are the functional currencies for financial reporting purposes except for certain foreign subsidiaries in Latin America. For operations outside the United States that have functional currencies other than the U.S. dollar, assets and liabilities are translated to U.S. dollars at period-end exchange rates, and revenue, expenses and cash flows are translated using average exchange rates prevailing during the year. A significant portion of the Company's non-United States subsidiaries have either the British pound, the euro or the Brazilian real as the functional currency, each of which experienced significant fluctuations against the U.S. dollar during 2015, 2014 and 2013. Foreign currency translation gains and losses are recognized as a component of accumulated other comprehensive income (loss) in stockholders' equity and in the Consolidated Statements of Comprehensive Income (Loss) in accordance with accounting guidance for foreign currency translation. The Company considers the majority of its investments in its foreign subsidiaries to be long-term in nature. The Company's non-United States exchange transaction gains (losses), including where transactions with its non-United States subsidiaries are not considered to be long-term in nature, are included within other income (expense) in Other, net on the Consolidated Statements of Operations.

Reclassifications

Certain amounts in the prior year Consolidated Financial Statements and accompanying footnotes have been reclassified to conform to the current year's presentation primarily pursuant to the early adoption of Accounting Standards Update ("ASU") 2015-17. As of December 31, 2014, approximately $8 million of current deferred tax assets has been reclassified to non-current deferred tax assets and approximately $8 million of current deferred tax liabilities has been reclassified to non-current deferred tax liabilities.

Use of Estimates

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. The accounting estimates that require management's judgments include revenue recognition, revenue reserves, network access costs, network access cost dispute reserves, determination of the useful lives of long-lived assets, measurement and recognition of stock-based compensation expense, valuation of long-lived assets, goodwill and acquired indefinite-lived intangible assets for purposes of impairment testing, valuation of asset retirement obligations, allowance for doubtful accounts, measurement of the fair value of assets acquired and liabilities assumed in business combinations, accruals for estimated tax and legal liabilities, and valuation allowance for deferred tax assets. Actual results could differ from these estimates under different assumptions or conditions and such differences could be material.

F-11
Table of Contents


Revenue

Revenue is recognized monthly as the services are provided based on contractual amounts expected to be collected. Management establishes appropriate revenue reserves at the time services are rendered based on an analysis of historical credit activity to address, where significant, situations in which collection is not reasonably assured as a result of credit risk, potential billing disputes or other reasons. Actual results may differ from these estimates under different assumptions or conditions and these differences could be material.

Intercarrier compensation revenue is recognized when an interconnection agreement is in place with another carrier, or if an agreement has expired, when the parties have agreed to continue operating under the previous agreement until a new agreement is negotiated and executed, or at rates mandated by the Federal Communications Commission (the "FCC").

For certain sale and long-term indefeasible right of use, or IRU, contracts involving private line, wavelengths and dark fiber services, the Company may receive upfront payments for services to be delivered for a period of up to 25 years. In these situations, the Company defers the revenue and amortizes it on a straight-line basis to earnings over the term of the contract.

Termination revenue is recognized when a customer discontinues service prior to the end of the contract period for which Level 3 had previously received consideration and for which revenue recognition was deferred. Termination revenue also is recognized when customers are required to make termination penalty payments to Level 3 to settle contractually committed purchase amounts that the customer no longer expects to meet or when a customer and Level 3 renegotiate a contract under which Level 3 is no longer obligated to provide services for consideration previously received and for which revenue recognition has been deferred.

The Company is obligated under dark fiber IRUs and other capacity agreements to maintain its network in efficient working order and in accordance with industry standards. Customers are obligated for the term of the agreement to pay for their allocable share of the costs for operating and maintaining the network. The Company recognizes this revenue monthly as services are provided.

Level 3's customer contracts require the Company to meet certain service level commitments. If Level 3 does not meet the required service levels, it may be obligated to provide credits, usually in the form of free service, for a short period of time. The credits are a reduction to revenue and, to date, have not been material.

Network Access Costs

Network Access Costs for the communications business include leased capacity, right-of-way costs, access charges, satellite transponder lease costs and other third party costs directly attributable to providing access to customer locations from the Level 3 network, but excludes Network Related Expenses, and depreciation and amortization. Network Access Costs do not include any employee expenses or impairment expenses; these expenses are allocated to Network Related Expenses or Selling, General and Administrative Expenses.

The Company recognizes the network access costs as they are incurred in accordance with contractual requirements. The Company disputes incorrect billings from its suppliers of network services. The most prevalent types of disputes include disputes for circuits that are not disconnected by the supplier on a timely basis charges from suppliers for circuits that were not timely installed and incorrect rate or other inadequate information needed to determine the appropriate billing from the supplier. Depending on the type and complexity of the issues involved, it may and often does take several quarters to resolve the disputes. The Company establishes appropriate network access costs reserves for

F-12
Table of Contents

disputed supplier billings based on an analysis of its historical experience in resolving disputes with its suppliers and regulatory analysis regarding certain supplier billing matters. Judgment is required in estimating the ultimate outcome of the dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from these estimates under different assumptions or conditions and these differences could be material.

Network Related Expenses

Network Related Expenses includes certain expenses associated with the delivery of services to customers and the operation and maintenance of the Level 3 network, such as facility rent, utilities, maintenance and other costs, each related to the operation of its communications network, as well as salaries, wages and related benefits (including non-cash stock-based compensation expenses) associated with personnel who are responsible for the delivery of services, operation and maintenance of its communications network, and accretion expense on asset retirement obligations, but excludes depreciation and amortization.

Selling, General and Administrative Expenses

Selling, General and Administrative Expenses includes the salaries, wages and related benefits (including non-cash, stock-based compensation expenses) and the related costs of corporate and sales personnel, travel, insurance, non-network related rent, advertising, and other administrative expenses.

USF and Gross Receipts Taxes

The revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, gross receipts taxes and certain state regulatory fees. The Company records Universal Service Fund ("USF") contributions where the Company is the primary obligor for the taxes assessed in each jurisdiction where it does business on a gross basis in its Consolidated Statements of Operations, but generally records gross receipts taxes and certain state regulatory fees billed to its customers on a net basis in its Consolidated Statements of Operations. Total revenue and network access costs on the Consolidated Statements of Operations include USF contributions totaling $323 million, $234 million and $194 million for the years ended December 31, 2015, 2014 and 2013, respectively.


Stock-Based Compensation

The Company recognizes the estimated fair value of stock-based compensation costs, net of an estimated forfeiture rate, over the requisite service period of the award, which is generally the vesting term or term for restrictions on transfer that lapse, as the case may be. The Company funded a portion of its 2013 discretionary bonus in restricted stock unit awards that vested upon issuance. The Company estimates forfeiture rates based on its historical experience for the type of award, adjusted for expected activities as necessary.

Income Taxes

The Company recognizes deferred tax assets and liabilities for its United States and non-U.S. operations, for operating loss and other credit carry forwards and the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction.

F-13
Table of Contents



Cash and Cash Equivalents

The Company classifies investments as cash equivalents if they are readily convertible to cash and have original maturities of three months or less at the time of acquisition. Cash and cash equivalents consist primarily of highly liquid investments in government and government agency securities and money market funds issued or managed by financial institutions in the United States, Europe and Latin America and commercial paper depending on liquidity requirements. As of December 31, 2015 and 2014, the carrying value of cash equivalents approximates fair value due to the short period of time to maturity.

Restricted Cash and Securities

Restricted cash and securities consists primarily of cash and investments that serve to collateralize outstanding letters of credit and certain performance and operating obligations of the Company. Restricted cash and securities are recorded as current or non-current assets in the Consolidated Balance Sheets depending on the duration of the restriction and the purpose for which the restriction exists. Restricted securities are stated at cost which approximates fair value as of December 31, 2015 and 2014.

Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and can bear interest. The Company establishes an allowance for doubtful accounts for accounts receivable amounts that may not be collectible. The Company determines the allowance for doubtful accounts based on the aging of its accounts receivable balances, the credit quality of its customers and an analysis of its historical experience of bad debt write-offs. Accounts receivable balances are written off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The Company recognized bad debt expense, net of recoveries, of approximately $23 million in 2015, $22 million in 2014 and $17 million in 2013.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation and amortization for the Company's property, plant and equipment are computed using the straight-line method based on the following estimated useful lives:

Facility and Leasehold Improvements15-40years
Network Infrastructure (including fiber and conduit)25-50years
Operating Equipment5-15years
Furniture, Fixtures, Office Equipment and Other3-7years

The Company performs internal reviews to evaluate the depreciable lives of its property, plant and equipment annually, or more frequently if new facts and circumstances arise, that may affect management's original estimates. Due to the rapid changes in technology and the competitive environment, selecting the estimated economic life of telecommunications property, plant, and equipment requires a significant amount of judgment. The Company's internal reviews take into account input from the Company's global engineering and network services personnel, actual usage, the physical condition of the Company's property, plant, and equipment, industry data, and other relevant factors. In connection with its periodic review of the estimated useful lives of property, plant and equipment, the Company may

F-14
Table of Contents

determine that the period it expects to use certain assets is different than the remaining previously estimated useful lives. The Company completed an evaluation in the first quarter 2014 and revised its estimated useful lives for: IP equipment from its historical estimate of four years to a revised estimate of seven years; racks and cabinets from its historical estimate of seven years to a revised estimate of 15 years; and facility equipment from its historical estimate of 10 years to its revised estimate of 15 years. In determining the change in estimated useful lives, the Company, with input from its engineering team, considered its historical usage patterns and retirements, estimates of technological obsolescence and expected usage and maintenance. The change in the estimated useful lives of the Company’s property, plant and equipment was accounted for as a change in accounting estimate on a prospective basis effective January 1, 2014 under the accounting standard related to changes in accounting estimates.

The carrying values of assets subject to these revisions were (in millions):
  January 1, 2014
IP Equipment $222
Racks and Cabinets 114
Facility Equipment 151
  $487

The change in estimated useful lives of the Company’s property, plant and equipment resulted in less depreciation expense than would have otherwise been recorded and in the following increase in net income and net income per share for the year ended December 31, 2014 (in millions, except per share amounts):

Net Income $90
Basic Net Income per Share $0.35
Diluted Net Income per Share $0.35

Leasehold improvements are depreciated over the shorter of their estimated useful lives or lease terms that are reasonably assured.

The Company capitalizes costs directly associated with expansions and improvements of the Company's communications network and customer installations, including employee-related costs, and generally capitalizes costs associated with network construction and provisioning of services. The Company amortizes such costs over an estimated useful life of 3 to 7 years.

In addition, the Company continues to develop business support systems required for its business. The external direct costs of software, materials and services, and payroll and payroll-related expenses for employees directly associated with business support systems projects are capitalized. The total cost of the business support system is amortized over an estimated useful life of 3 years.

Capitalized labor and related costs associated with employees and contract labor working on capital projects were approximately $244 million, $187 million and $164 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Asset Retirement Obligations

The Company recognizes a liability for the estimated fair value of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset in the period incurred. The fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life

F-15
Table of Contents

of the associated asset. Increases to the asset retirement obligation liability due to the passage of time are recognized as accretion expense and included within network related expenses. Changes in the liability due to revisions to the amount or timing of future cash flows are recognized by increasing or decreasing the liability with the offset adjusting the carrying amount of the related long-lived asset. To the extent that the downward revisions exceed the carrying amount of the related long-lived asset initially recorded when the asset retirement obligation liability was established, the Company records the remaining adjustment as a reduction to depreciation expense, to the extent of historical depreciation of the related long-lived asset, and then to network related expenses.

Goodwill and Acquired Indefinite-Lived Intangible Assets

Accounting guidance prohibits the amortization of goodwill and purchased intangible assets with indefinite useful lives. The Company reviews goodwill and purchased intangible assets with indefinite lives for impairment annually as of October 1st and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable.

The Company's goodwill impairment review process considers the fair value of each reporting unit relative to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is performed. If the carrying value of the reporting unit exceeds its fair value, then a second step must be performed, and the implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded. Prior to performing the two step evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value. If it is determined that it is unlikely that the carrying value exceeds the fair value, the Company is not required to complete the two step goodwill impairment evaluation.

At the time of each impairment assessment date in 2015, 2014 and 2013, the Company's reporting units consisted of its three regional operating units in: North America; Europe, the Middle East and Africa ("EMEA"); and Latin America. As a result of the deconsolidation of the Company's Venezuelan subsidiary, the Company completed an assessment of the Latin American and its other reporting units' goodwill as of September 30, 2015 and concluded there was no impairment in 2015. The Company conducted its annual goodwill impairment analysis as of October 1, 2014, and concluded that its goodwill was not impaired in 2014.

The Company's indefinite-lived intangible assets impairment review process compares the estimated fair value of the indefinite-lived intangible assets to their respective carrying values. If the fair value of the indefinite-lived intangible assets exceeds their carrying values, then the indefinite-lived intangible assets are not impaired. If the carrying value of the indefinite-lived intangible assets exceeds their fair value, then an impairment loss equal to the difference will be recorded. In accordance with applicable accounting guidance, an entity may assess qualitative factors to determine whether it is more likely than not that the fair value exceeds the carrying value prior to performing the two step evaluation. If it is determined that it is unlikely the carrying value exceeds the fair value, then the entity is not required to complete the two step indefinite-lived intangible assets impairment evaluation.

Long-Lived Assets Including Finite-Lived Purchased Intangible Assets

The Company amortizes acquired intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 2 to 12 years.

The Company evaluates long-lived assets, such as property, plant and equipment and acquired intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the asset groups are expected to generate and

F-16
Table of Contents

recognizes an impairment loss when estimated undiscounted future cash flows expected to result from the use of the assets plus net proceeds expected from disposition of the assets, if any, are less than the carrying value of the assets. If an asset is deemed to be impaired, the amount of the impairment loss is the excess of the asset's carrying value over its estimated fair value.

The Company conducted a long-lived asset impairment analysis in 2015, 2014 and 2013 and in each case concluded that its long-lived assets, including finite-lived acquired intangible assets, were not impaired.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, accounts receivable, restricted cash and securities and derivatives. The Company maintains its cash equivalents, restricted cash and securities and derivatives with various financial institutions. These financial institutions are primarily located in the United States, Europe and Latin America and the Company's policy is to limit exposure with any one institution. As part of its cash and risk management processes, the Company performs periodic evaluations of the relative credit standing of the financial institutions. The Company also has established guidelines relative to financial instrument credit ratings, diversification and maturities that seek to maintain safety and liquidity. The Company's investment strategy generally results in lower yields on investments but reduces the risk to principal in the short term prior to these funds being used in the Company's business. Notwithstanding the devaluation of the Venezuelan bolivar, the Company has not experienced any material losses on financial instruments held at financial institutions.

The Company provides communications services to a wide range of wholesale and enterprise customers, ranging from well capitalized national carriers to small early stage companies primarily in the United States, Europe, and Latin America. Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising Level 3's customer base and their dispersion across many different industries and geographical regions. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers, although letters of credit and deposits are required in certain limited circumstances. The Company has from time to time entered into agreements with value-added resellers and other channel partners to reach consumer and enterprise markets for voice services. The Company has policies and procedures in place
to evaluate the financial condition of these resellers prior to initiating service to the final customer. The Company maintains an allowance for doubtful accounts based upon the expected collectability of accounts receivable. Due to the Company's credit evaluation and collection process, bad debt expenses have not been significant; however, the Company is not able to predict changes in the financial stability of its customers. Any material change in the financial status of any one or a particular group of customers may cause the Company to adjust its estimate of the recoverability of receivables and could have a material effect on the Company's results of operations. Fair values of accounts receivable approximate carrying amount due to the short period of time to collection.

A relatively small number of customers account for a significant percentage of the Company's revenue. The Company's top ten customers accounted for approximately 16%, 17% and 17% of Level 3's revenue for the years ended December 31, 2015, 2014 and 2013, respectively.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (ASC Topic 842), which requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. This ASU will replace most existing leasing guidance in U.S. GAAP when it becomes effective. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. Early application is permitted. The standard requires the use of a modified retrospective transition method. The Company is evaluating the effect that ASU 2016-02 will

F-17
Table of Contents

have on its Consolidated Financial Statements and related disclosures, and expects the new guidance to significantly increase the reported assets and liabilities on its Consolidated Balance Sheets.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (ASC Topic 740). This ASU was issued to simplify the presentation of deferred income taxes to require that all deferred income tax assets and liabilities be classified as noncurrent in the balance sheet. Early application of ASU 2015-17 is permitted and the Company elected to adopt this ASU effective as of December 31, 2015, with retrospective application. The effect of the retrospective application did not have significant effect on the Company's financial position.

In April 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The new guidance is effective retrospectively for public companies for fiscal years beginning after December 15, 2015, and interim periods within those years. It will be effective for the Company on January 1, 2016, and, upon adoption, debt issuance costs capitalized in other current assets and other assets in the consolidated balance sheet will be reclassified and presented as a reduction to current and noncurrent long-term debt. As of December 31, 2015, debt issuance costs, net of accumulated amortization, recognized in the consolidated balance sheet totaled $128 million, of which $19 million is recorded in other current assets.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its Consolidated Financial Statements and related disclosures and has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

(2) Events Associated with the Merger of tw telecom inc.

On October 31, 2014, the Company completed its acquisition of tw telecom and tw telecom became an indirect, wholly owned subsidiary of the Company through a tax-free, stock and cash reorganization (the "Merger"). As a result of the Merger, (1) each issued and outstanding share of common stock of tw telecom was exchanged for 0.7 shares of Level 3 common stock and $10 in cash ( together the "merger consideration"); (2) the outstanding stock options of tw telecom were canceled and the holders received the merger consideration, net of aggregate per share exercise price; (3) each restricted stock unit award of tw telecom was immediately vested and canceled and the holders received the merger consideration; and (4) each restricted stock unit of tw telecom was immediately vested and canceled and holders received the merger consideration.

In connection with the closing of the Merger, Level 3 Financing, Inc., a wholly owned subsidiary, amended its existing credit agreement to incur an additional $2 billion of borrowings through an additional Tranche (the "Tranche B 2022 Term Loan"). The aggregate net proceeds of the Tranche B 2022 Term Loan were used to finance the cash portion of the merger consideration payable to tw telecom's stockholders and to refinance certain existing indebtedness of tw telecom, including fees and premiums, in connection with the closing of the Merger (see Note 11 — Long-Term Debt for additional information). In addition, the net proceeds from the issuance of $1 billion of 5.375% Senior Notes due 2022 raised in August 2014 (see Note 11 — Long-Term Debt) were used to finance the cash portion of the merger consideration payable to tw telecom stockholders and to refinance certain existing indebtedness of tw telecom, including fees and premiums, in connection with the closing of the Merger.

F-18
Table of Contents


On October 30, 2014, the Company increased the number of authorized shares of common stock to 433,333,333. As a result of the Merger, the Company issued approximately 96.9 million shares of Level 3 common stock to former holders of tw telecom common shares, stock options, restricted stock awards and restricted stock units. In addition, Level 3 called for redemption and discharged or repaid approximately $1.793 billion of tw telecom's outstanding consolidated debt including premiums of $154 million.

Based on the number of Level 3 shares issued, Level 3's closing stock price of $46.91 on October 31, 2014, the cash paid to the former holders of tw telecom common stock and the $2.1 billion of debt of tw telecom called for redemption and discharged or repaid, the aggregate consideration for acquisition
accounting, including assumed capital leases of $152 million, approximated $8.1 billion.

The premium paid by Level 3 in this transaction is attributable to strategic benefits, as the transaction further solidifies Level 3's position as a premier global communications provider to the enterprise, government and carrier market, combining tw telecom's extensive local operations and assets in North America with Level 3's global assets and capabilities. tw telecom's business model is directly aligned with Level 3's initiatives for growth, which include building managed solutions to meet customer needs through an advanced IP/optical network.

The goodwill associated with this transaction is not deductible for income tax purposes except that certain deductible goodwill of tw telecom will continue to be deductible following the Merger.

The combined results of operations of Level 3 and tw telecom are included in the Company's consolidated results of operations beginning in November 2014. The assets acquired and liabilities assumed of tw telecom were recognized at their acquisition date fair value. The purchase price allocation of acquired assets and assumed liabilities, including the assignment of goodwill to reporting units, was completed in the fourth quarter of 2015. The following is the final allocation of the purchase price.
 Purchase Price Allocation
 (dollars in millions)
Assets: 
Cash, Cash Equivalents and Restricted Cash$309
Property, Plant and Equipment1,553
Goodwill5,181
Identifiable Intangible Assets1,263
Other Assets140
Total Assets8,446
  
Liabilities: 
Long-Term Debt(2,099)
Deferred Revenue(57)
Other Liabilities(279)
Total Liabilities(2,435)
Total Consideration to be Allocated$6,011

As a result of new information available since the acquisition date, the Company made certain immaterial adjustments to the preliminary purchase price allocation during the first quarter of 2015, which

F-19
Table of Contents

have been reflected in the above table. The primary adjustment was a result of a single change in the purchase price allocation of $60 million related to the estimated value associated with the identifiable intangible assets and goodwill.

The following unaudited pro forma financial information presents the combined results of Level 3 and tw telecom as if the completion of the Merger had occurred as of January 1, 2013 (dollars in millions, except per share data).
 Year Ended December 31,
 20142013
Total Revenue$8,123
$7,825
Net Income (Loss)$149
$(153)
Net Income (Loss) per Share - Basic$0.44
$(0.48)
Net Income (Loss) per Share - Diluted$0.44
$(0.48)

These pro forma results include certain adjustments, primarily due to increases in depreciation and amortization expense due to fair value adjustments of tangible and intangible assets, increases in interest expense due to Level 3's issuance of incremental debt to finance cash consideration, partially offset by the refinancing of tw telecom debt that had higher interest rates than the incremental financing, and to eliminate historical transactions between Level 3 and tw telecom. The unaudited pro forma information is not intended to represent or be indicative of the actual results of operations of Level 3 that would have been reported had the Merger been completed on January 1, 2013, nor is it representative of future operating results of the Company. The pro forma information does not include any operating efficiencies or cost savings that Level 3 achieved with respect to combining the companies.

Acquisition related costs include transaction costs such as legal, accounting, valuation and other professional services as well as integration costs such as severance and retention. Acquisition related costs have been recorded in Network Related Expenses and Selling, General and Administrative Expenses in the Company's Consolidated Statements of Operations. Level 3 incurred total acquisition related transaction and integration costs of approximately $113 million through December 31, 2015.


(3) Earnings (Loss) Per Share

The Company computes basic net earnings (loss) per share by dividing net income or loss for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net earnings (loss) per share is computed by dividing net income or loss for the period by the weighted average number of shares of common stock outstanding during the period and including the dilutive effects of common stock that would be issued assuming conversion of outstanding convertible notes and stock-based compensation awards. No such items were included in the computation of diluted earnings per share in the year ended 2013 because the Company incurred a loss from continuing operations in the year and the effect of inclusion would have been anti-dilutive.

The effect of approximately17 million and 18 million shares issuable pursuant to the various series of convertible notes outstanding at December 31, 2014 and 2013, respectively, have not been included in the computation of diluted earnings (loss) per share because their inclusion would have been anti-dilutive to the computation. In addition, The effect of the approximately 6 million stock options, outperform stock appreciation rights ("OSOs"), and restricted stock units ("RSUs") and warrants outstanding at December 31, 2013, have not been included in the computation of diluted loss per share because their inclusion would have been anti-dilutive to the computation.



F-20
Table of Contents

(4) Property, Plant and Equipment

The components of the Company's property, plant and equipment as of December 31, 2015 and 2014 are as follows (dollars in millions):

  Cost  
Accumulated
Depreciation
 Net
December 31, 2015       
Land $180
  $—
 $180
Land Improvements 76
  (53) 23
Facility and Leasehold Improvements 2,582
  (1,352) 1,230
Network Infrastructure 8,979
  (3,669) 5,310
Operating Equipment 7,988
  (5,079) 2,909
Furniture, Fixtures and Office Equipment 242
  (189) 53
Other 28
  (23) 5
Construction-in-Progress 168
  —
 168
  $20,243
  $(10,365) $9,878
December 31, 2014       
Land $192
  $—
 $192
Land Improvements 73
  (50) 23
Facility and Leasehold Improvements 2,489
  (1,265) 1,224
Network Infrastructure 8,941
  (3,447) 5,494
Operating Equipment 7,217
  (4,669) 2,548
Furniture, Fixtures and Office Equipment 255
  (177) 78
Other 29
  (21) 8
Construction-in-Progress 293
  —
 293
  $19,489
  $(9,629) $9,860

Depreciation expense was $939 million in 2015, $713 million in 2014 and $727 million in 2013.

(5) Asset Retirement Obligations

The Company's asset retirement obligations consist of legal requirements to remove certain of its network infrastructure at the expiration of the underlying right-of-way ("ROW") term and restoration requirements for leased facilities. The Company recognizes its estimate of the fair value of its asset retirement obligations in the period incurred in other long-term liabilities. The fair value of the asset retirement obligation is also capitalized as property, plant and equipment and then depreciated over the estimated remaining useful life of the associated asset.

The following table provides asset retirement obligation activity for the years ended December 31, 2015 and 2014 (dollars in millions):

F-21
Table of Contents

  2015 2014
Asset retirement obligation at January 1 $85
 $56
Accretion expense 9
 8
Liabilities assumed in tw telecom acquisition —
 22
Liabilities settled (8) (7)
Revision in estimated cash flows 5
 7
Effect of foreign currency rate change (1) (1)
Asset retirement obligation at December 31 $90
 $85


(6) Goodwill

The changes in the carrying amount of goodwill during the years ended December 31, 2015 and 2014 are as follows (dollars in millions):
 Total
Balance as of January 1, 2014$2,577
Goodwill adjustments including the effect of foreign currency rate change(12)
Goodwill acquired in tw telecom acquisition5,124
Balance as of December 31, 20147,689
Goodwill adjustments including the effect of foreign currency rate change60
Balance as of December 31, 2015$7,749



(7) Acquired Intangible Assets

Identifiable acquisition-related intangible assets as of December 31, 2015 and 2014 were as follows (dollars in millions):


F-22
Table of Contents

 
Gross
Carrying
Amount
 
Accumulated
Amortization
 Net
December 31, 2015     
Finite-Lived Intangible Assets:     
Customer Contracts and Relationships$1,975
 $(932) $1,043
Trademarks55
 (55) —
Patents and Developed Technology230
 (161) 69
 2,260
 (1,148) 1,112
Indefinite-Lived Intangible Assets:     
Trade Name15
 —
 15
 $2,275
 $(1,148) $1,127
December 31, 2014     
Finite-Lived Intangible Assets:     
Customer Contracts and Relationships$1,977
 $(741) $1,236
Trademarks115
 (47) 68
Patents and Developed Technology228
 (133) 95
 2,320
 (921) 1,399
Indefinite-Lived Intangible Assets:     
Trade Name15
 —
 15
 $2,335
 $(921) $1,414

During the fourth quarter of 2015 and 2014, the Company conducted its long-lived assets and indefinite-lived intangible assets impairment analysis and concluded that there was no impairment in 2015 and there was impairment of $17 million in its trade name indefinite-lived intangible asset in 2014.

Acquired finite-lived intangible assets amortization expense was $227 million in 2015, $95 million in 2014 and $73 million in 2013.

At December 31, 2015, the weighted average remaining useful lives of the Company's acquired finite-lived intangible assets was 5.9 years for customer contracts and relationships and 3.2 years for patents and developed technology.

As of December 31, 2015, estimated amortization expense for the Company’s finite-lived acquisition-related intangible assets over the next five years and thereafter is as follows (dollars in millions):

2016$212
2017196
2018193
2019181
2020166
Thereafter164
 $1,112





F-23
Table of Contents

(8) Restructuring ChargesITEM 16. SUMMARY OF BUSINESS AND FINANCIAL INFORMATION

Employee SeparationsNot Applicable

Changing economic and business conditions as well as organizational structure optimization efforts have caused the Company to initiate from time to time various workforce reductions resulting in involuntary employee terminations. The Company also has initiated workforce reductions resulting from the integration of previously acquired companies.

During 2015 and 2014, as part of the Merger and to improve organizational effectiveness, the Company initiated workforce reductions. During 2013, the Company initiated workforce reductions primarily focused on labor cost savings and improving organizational effectiveness. Restructuring charges totaled $24 million, $45 million and $47 million in 2015, 2014 and 2013, respectively, of which $8 million, $11 million and $12 million in 2015, 2014 and 2013, respectively, were recorded in Network Related Expenses and $16 million, $34 million and $35 million in 2015, 2014 and 2013, respectively, were recorded in Selling, General and Administrative Expenses.

As of December 31, 2015 and 2014, the Company had $4 million and $37 million, respectively, of employee termination liabilities.

Facility Closings

The Company also has accrued contract termination costs of $11 millionand$20 million as of December 31, 2015 and 2014, respectively, for facility lease costs that the Company continues to incur without economic benefit. Accrued contract termination costs are recorded in other liabilities (current and non-current) in the Consolidated Balance Sheets. The Company expects to pay the majority of these costs through 2025. The Company recognized a charge of approximately $3 million, a charge of less than $1 million and a charge of $7 million in 2015, 2014 and 2013, respectively, as a result of facility lease costs. The Company records charges for contract termination costs within Selling, General and Administrative Expenses in the Consolidated Statements of Operations.

(9) Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, restricted cash and securities, accounts receivable, accounts payable, capital leases, other liabilities, interest rate swaps and long-term debt (including the current portion). The carrying values of cash and cash equivalents, restricted cash and securities, accounts receivable, accounts payable, capital leases and other liabilities approximated their fair values at December 31, 2015 and 2014.

GAAP defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements and disclosures for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as interest and foreign exchange rates, transfer restrictions, and risk of nonperformance.

Fair Value Hierarchy

GAAP establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value measurement of each class of assets and liabilities is dependent upon its categorization within the fair value hierarchy, based upon the lowest level of input that is significant to the fair value measurement of each class of asset and liability. GAAP establishes three levels of inputs that may be used to measure fair value:

F-24
Table of Contents


Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2— Unadjusted quoted prices for similar assets or liabilities in active markets, or
unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Level 3— Unobservable inputs for the asset or liability.

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the fair value hierarchy during each of the years ended December 31, 2015 and 2014.

The table below presents the fair values for the Company’s long-term debt as well as the input levels used to determine these fair values as of December 31, 2015 and 2014:

      Fair Value Measurement Using
  Total Carrying Value in Consolidated Balance Sheets 
Unadjusted Quoted Prices in Active
Markets for Identical Assets or Liabilities (Level 1)
 Significant Other Observable Inputs (Level 2)
(dollars in millions) December 31,
2015		 December 31,
2014		 December 31,
2015		 December 31,
2014		 December 31,
2015		 December 31,
2014
Liabilities Not Recorded at Fair Value in the Financial Statements:            
Long-term Debt, including the current portion:            
Term Loans $4,595
 $4,590
 $4,570
 $4,593
 $—
 $—
Senior Notes 6,215
 6,203
 6,298
 6,481
 —
 —
Convertible Notes —
 333
 —
 —
 —
 868
Capital Leases and Other 199
 207
 —
 —
 199
 207
Total Long-term Debt, including the current portion: $11,009
 $11,333
 $10,868
 $11,074
 $199
 $1,075

The Company does not have any assets or liabilities where the fair value is measured using significant unobservable inputs (Level 3).

Term Loans

The fair value of the Term Loans referenced above was approximately $4.6 billion and $4.6 billion at December 31, 2015 and 2014, respectively. The fair value of each loan is based on quoted prices. Each loan tranche is actively traded.

Senior Notes

The fair value of the Senior Notes referenced above was approximately $6.3 billion and $6.5 billion at December 31, 2015 and 2014, respectively, based on quoted prices. Each series of notes is actively traded.




F-25
Table of Contents

Convertible Notes

The fair value of the Company’s Convertible Notes was approximately $868 million at December 31, 2014. As of March 31, 2015, all of the Company's Convertible Notes had converted to common equity. The estimated fair value of the Convertible Notes was based on a Black-Scholes valuation model and an income approach using discounted cash flows. The most significant inputs affecting the valuation were the pricing quotes provided by market participants that incorporated spreads to the Treasury curve, security coupon, convertible optionality, corporate and security credit ratings, maturity date, liquidity and other equity option inputs, such as the risk-free rate, underlying stock price, strike price of the embedded derivative, estimated volatility and maturity inputs for the option component and for the bond component, among other security characteristics and relative value at both the borrower entity level and across other securities with similar terms. The fair value of each instrument was obtained by adding together the value derived by discounting the security’s coupon or interest payment using a risk-adjusted discount rate and the value calculated from the embedded equity option based on the estimated volatility of the Company’s stock price, conversion rate of the particular Convertible Note, remaining time to maturity and risk-free rate. The Convertible Notes were unsecured obligations of Level 3 Communications, Inc. No subsidiary of Level 3 Communications, Inc. provided a guarantee of the Convertible Notes.

Capital Leases

The fair value of the Company's capital leases are determined by discounting anticipated future cash flows derived from the contractual terms of the obligations and observable market interest and foreign exchange rates.


(10) Derivative Financial Instruments

The Company has floating rate long-term debt (see Note 11 - Long-Term Debt). This type of debt exposes the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also generally decreases. The Company has used interest rate swaps, in an attempt to manage its exposure to fluctuations in interest rate movements. The Company’s primary objective in managing interest rate risk was to decrease the volatility of its earnings and cash flows affected by changes in the underlying rates. The Company does not use derivative financial instruments for speculative purposes.

In March 2007, Level 3 Financing, Inc. entered into two interest rate swap agreements to hedge the interest payments on $1 billion principal amount of floating rate debt. The Company had designated these interest rate swap agreements as cash flow hedges. The hedge designation was terminated in 2012 in connection with certain refinancing activities, and the instruments were settled upon maturity in 2014. Prior to the redesignation of the hedging relationship in 2012, the change in the fair value of the interest rate swap agreements was reflected in Accumulated Other Comprehensive Income (Loss) ("AOCI") and was subsequently reclassified into earnings through an interest expense yield adjustment, as interest expense on the hedged debt obligation was incurred.

After the redesignation in August 2012, the Company recorded the change in the fair value of the swaps in Other, net in its Consolidated Statement of Operations until maturity of the swaps in early 2014. The Company recognized a loss of zero and $2 million for the year ended December 31, 2014 and 2013, respectively.



F-26
Table of Contents

(11) Long-Term Debt

The following table summarizes the Company’s long-term debt (amounts in millions):
 Date of 
December 31,
2015
December 31,
2014
 Issuance/AmendmentMaturityInterest PaymentsInterest RateAmountAmount
Senior Secured Term Loans:      
Borrowed by Level 3 Financing, Inc.
Tranche B-III 2019 Term Loan (1)(4)
Aug 2013Aug 2019QuarterlyLIBOR +3.00%815
815
Tranche B 2020 Term Loan (1)(4)
Oct 2013Jan 2020QuarterlyLIBOR +3.00%1,796
1,796
Tranche B 2022 Term Loan (1)(4)
Oct 2014Jan 2022QuarterlyLIBOR +3.50%—
2,000
Tranche B-II 2022 Term Loan (1)(4)
May 2015May 2022QuarterlyLIBOR +2.75%2,000
—
Senior Notes:      
Issued by Level 3 Financing, Inc.
Floating Rate Senior Notes due 2018 (2)(4)
Nov 2013Jan 2018May/Nov6-Month LIBOR +3.50%300
300
9.375% Senior Notes due 2019 (2)
Mar 2011Apr 2019Apr/Oct9.375%—
500
8.125% Senior Notes due 2019 (2)
Jul 2011Jul 2019Jan/Jul8.125%—
1,200
8.625% Senior Notes due 2020 (2)
Jan 2012Jul 2020Jan/Jul8.625%—
900
7% Senior Notes due 2020 (2)
Aug 2012Jun 2020Jun/Dec7.000%775
775
6.125% Senior Notes due 2021 (2)
Nov 2013Jan 2021Apr/Oct6.125%640
640
5.375% Senior Notes due 2022 (2)
Aug 2014Aug 2022May/Nov5.375%1,000
1,000
5.625% Senior Notes due 2023 (2)
Jan 2015Feb 2023Jun/Dec5.625%500
—
5.125% Senior Notes due 2023 (2)
Apr 2015May 2023Mar/Sept5.125%700
—
5.375% Senior Notes due 2025 (2)
Apr 2015May 2025Mar/Sept5.375%800
—
5.375% Senior Notes due 2024 (2)
Nov 2015Jan 2024Jan/Jul5.375%900
—
Issued by Level 3 Communications, Inc.
8.875% Senior Notes due 2019 (3)
Aug 2012Jun 2019Jun/Dec8.875%—
300
5.75% Senior Notes due 2022 (3)
Dec 2014Dec 2022Mar/Sept5.750%600
600
7% Convertible Senior Notes Due 2015 (3)
Jun 2009Mar 2015Mar/Sept7.000%—
58
7% Convertible Senior Notes Due 2015 Series B (3)
Oct 2009Mar 2015Mar/Sept7.000%—
275
Capital Leases and Other Debt    199
207
Total Debt Obligations    11,025
11,366
Unamortized discounts    (16)(33)
Current Portion    (15)(349)
Total Long-Term Debt    10,994
10,984
(1) The term loans are secured obligations and guaranteed by the Company and Level 3 Communications, LLC and certain other subsidiaries.
(2) The notes are fully and unconditionally guaranteed on an unsubordinated unsecured basis by the Company and Level 3 Communications, LLC.
(3) The notes were not guaranteed by any of the Company’s subsidiaries.
(4) The Tranche B-III 2019 Term Loan and the Tranche B 2020 Term Loan each had an interest rate of 4.000% as of December 31, 2015 and 2014. The Tranche B-II 2022 Term Loan had an interest rate of 3.500% as of December 31, 2015 and the Tranche B 2022 Term Loan had an interest rate of 4.500% as of December 31, 2014. The Floating Rate Senior Notes due 2018 had an interest rate of 4.101% as of December 31, 2015 and 3.826% as of December 31, 2014. The interest rate on the Tranche B-III 2019 Term Loan, the Tranche B 2020 Term Loan and the Tranche B 2022 Term Loan are set with a minimum LIBOR of 1.00%, and the Tranche B-II 2022 Term Loan is set with a minimum LIBOR of 0.75%.




F-27
Table of Contents

Senior Secured Term Loans

As of January 1, 2014, Level 3 Financing, Inc., the Company's direct wholly owned subsidiary ("Level 3 Financing") had a senior credit facility consisting of $815 million Tranche B-III Term Loan due 2019 and $1.796 billion Tranche B Term Loan due 2020.

On October 31, 2014, Level 3 Financing entered into a ninth amendment agreement to the Existing Credit Agreement to incur $2 billion in aggregate borrowings under the Existing Credit Agreement through the creation of a new Tranche B 2022 Term Loan (the "Tranche B 2022 Term Loan"). The Tranche B 2022 Term Loan included an upfront payment to the lenders of 0.75% of par and bears interest equal to LIBOR plus 3.50% with LIBOR set at a minimum of 1.00%.

On May 8, 2015, Level 3 Financing refinanced its existing $2 billion senior secured Tranche B 2022 Term Loan under a tenth amendment agreement to its Existing Credit Agreement through the creation of a new senior secured Tranche B-II 2022 term loan in the aggregate principal amount of $2 billion (the "Tranche B-II 2022 Term Loan"). The Tranche B-II 2022 Term Loan has an interest rate of LIBOR plus 2.75%, with a minimum LIBOR of 0.75%, and will mature on May 31, 2022. The Tranche B-II 2022 Term Loan was priced to lenders at par, with the payment to the lenders of an upfront fee of 25 basis points at closing. As a result of this transaction, the Company recognized a loss on the refinancing of approximately $27 million.

Senior Notes

The Company completed several offerings and refinancing of senior notes in 2015 and 2014. All of the notes pay interest semiannually, and allow for the redemption of the notes at the option of the issuer upon not less than 30 or more than 60 days’ prior notice by paying the greater of the principal amount or a “make-whole” amount, plus accrued interest. In addition, the following notes also have a provision that allows for an additional right of optional redemption using cash proceeds received from the sale of equity securities. For specific details of these features and requirements, including the applicable premiums and timing, refer to the indentures for the respective senior notes in connection with the original issuances.


5.375% Senior Notes due 2022

On August 12, 2014, Level 3 Escrow II, Inc. (“Level 3 Escrow”), an indirect, wholly owned subsidiary of Level 3 Communications, Inc., issued $1.0 billion in aggregate principal amount of its 5.375% Senior Notes due 2022 (the “5.375% Senior Notes due 2022”). The 5.375% Senior Notes due 2022 were assumed by Level 3 Financing and the proceeds were used to refinance certain existing indebtedness of tw telecom.

5.75% Senior Notes due 2022

On December 1, 2014, Level 3 issued a total of $600 million aggregate principal amount of its 5.75% Senior Notes due 2022 (the “5.75% Senior Notes”). The net proceeds from the offering of the notes, together with cash on hand were used to redeem all of the outstanding 11.875% Senior Notes due 2019 issued by Level 3 Financing, including the payment of accrued interest and applicable premiums, and in connection with that redemption, the indenture relating to the 11.875% Senior Notes due 2019 was discharged on December 31, 2014. Level 3 Financing redeemed its 11.875% Senior Notes due 2017 at a price of 106.859% of the principal amount and recognized a loss on extinguishment of debt of $53 million.




F-28
Table of Contents

9.375% Senior Notes due 2019 and 5.625% Senior Notes due 2023

In January 2015, Level 3 Financing issued $500 million in aggregate principal amount of its 5.625% Senior Notes due 2023 (the “5.625% Senior Notes”). The net proceeds from the offering of the 5.625% Senior Notes, together with cash on hand, were used to redeem, on April 1, 2015, all of Level 3 Financing’s approximately $500 million aggregate principal amount of 9.375% Senior Notes due 2019, including accrued interest, applicable premiums and expenses. Total loss on extinguishment of debt related to the 9.375% Senior Notes due 2019 was $36 million.


8.125% Senior Notes due 2019, 8.875% Senior Notes due 2019, 5.125% Senior Notes due 2023 and 5.375% Senior Notes due 2025

In April 2015, Level 3 Financing issued $700 million in aggregate principal amount of its 5.125% Senior Notes due 2023 (the “5.125% Senior Notes”) and $800 million in aggregate principal amount of its 5.375% Senior Notes due 2025 (the “5.375% Senior Notes due 2025”). The net proceeds from the offering of the 5.125% Senior Notes and 5.375% Senior Notes due 2025, together with cash on hand, were used to redeem all $1.2 billion aggregate principal amount of Level 3 Financing’s 8.125% Senior Notes due 2019 and all $300 million aggregate principal amount of the Company's 8.875% Senior Notes due 2019. Total loss on extinguishment of debt related to the 8.125% Senior Notes due 2019 was $82 million and total loss on extinguishment of debt related to the 8.875% Senior Notes due 2019 was $18 million.

The 5.125% Senior Notes and 5.375% Senior Notes due 2025 were not originally registered under the Securities Act of 1933, as amended. The registration rights agreement became effective as of December 10, 2015.

8.625% Senior Notes due 2020 and 5.375% Senior Notes due 2024

On November 13, 2015, Level 3 Financing issued $900 million in aggregate principal amount of its 5.375% Senior Notes due 2024 (the “5.375% Senior Notes due 2024”). The net proceeds from the offering of the 5.375% Senior Notes due 2014, together with cash on hand, were used to redeem all $900 million aggregate principal amount of Level 3 Financing’s 8.625% Senior Notes due 2020. Total loss on modification and extinguishment of debt related to the 8.625% Senior Notes due 2020 was approximately $55 million.

The 5.375% Senior Notes due 2024 are fully and unconditionally guaranteed on an unsubordinated unsecured basis by the Company and now Level 3 Communications, LLC as of February 2016.

7% Convertible Senior Notes

During the fourth quarter of 2014, certain holders converted approximately $142 million of the 7% Convertible Senior Notes to common equity. Upon conversion, the Company issued an aggregate of approximately 5 million shares of Level 3 common stock, representing the approximately 37 shares per $1,000 note into which the notes were then convertible.

During the first quarter of 2015, holders converted the remaining $333 million aggregate principal amount of the Level 3's 7% Convertible Senior Notes due 2015 to common equity. Upon conversion, the Company issued an aggregate of approximately 12 million shares of Level 3 common stock, representing the approximately 37 shares per $1,000 note into which the notes were then convertible.




F-29
Table of Contents

Capital Leases

As of December 31, 2015, the Company had $199 million of capital leases. The Company leases property, equipment, certain dark fiber facilities and metro fiber under non-cancelable IRU agreements that are accounted for as capital leases. Interest rates on these capital leases approximated 5.9% on average as of December 31, 2015.

Other Debt

As of December 31, 2015, the Company had less than $1 million of other debt with an average interest rate of 5.0%.

Debt Issuance Costs

For the years ended December 31, 2015, 2014 and 2013, the Company deferred debt issuance costs of $50 million, $49 million and $27 million, respectively, in connection with debt issuances, that are being amortized to interest expense over the respective terms of the debt. At December 31, 2015 and 2014, there was $128 million and $145 million, respectively, of unamortized debt issuance costs.

Covenant Compliance

At December 31, 2015 and 2014, the Company was in compliance with the financial covenants on all outstanding debt issuances.

Long-Term Debt Maturities

Aggregate future contractual maturities of long-term debt and capital leases (excluding discounts and fair value adjustments) were as follows as of December 31, 2015 (dollars in millions):

2016$15
20177
2018307
2019822
20202,579
Thereafter7,295
 $11,025



F-30
Table of Contents

(12) Accumulated Other Comprehensive Income (Loss)

The accumulated balances for each classification of other comprehensive income (loss) are as follows:

(dollars in millions) Net Foreign Currency Translation Adjustment Net Defined Benefit Pension Plans Total
Balance at January 1, 2013 $56
 $(30) $26
Other comprehensive income (loss) before reclassifications 11
 (3) 8
Amounts reclassified from accumulated other comprehensive loss —
 2
 2
Balance at December 31, 2013 67
 (31) 36
Other comprehensive income (loss) before reclassifications (178) (9) (187)
Amounts reclassified from accumulated other comprehensive loss —
 4
 4
Balance at December 31, 2014 (111) (36) (147)
Other comprehensive income (loss) before reclassifications (162) 6
 (156)
Amounts reclassified from accumulated other comprehensive loss —
 2
 2
Balance at December 31, 2015 $(273) $(28) $(301)

(13) Employee Benefits and Stock-Based Compensation

The Company records non-cash compensation expense for its outperform stock appreciation rights ("OSOs"), performance restricted stock units, restricted stock units, 401(k) matching contributions, and, prior to 2014, other stock-based compensation expense associated with the Company's discretionary bonus grants.

The following table summarizes non-cash compensation expense and capitalized non-cash compensation for each of the three years ended December 31, 2015, 2014 and 2013 (dollars in millions):

  2015 2014 2013
OSOs $6
 $8
 $21
Restricted Stock Units 65
 34
 38
Performance Restricted Stock Units 35
 14
 —
401(k) Match Expense 36
 23
 24
Restricted Stock Unit Bonus Grant —
 (5) 59
Management Incentive and Retention Plan —
 —
 10
  142
 74
 152
Capitalized Non-Cash Compensation (1) (1) (1)
  $141
 $73
 $151

The Company capitalizes non-cash compensation for those employees directly involved in the construction of the network, installation of services for customers or the development of business support systems.

OSOs and restricted stock units are granted under the Level 3 Communications, Inc. Stock Incentive Plan, as amended (the "Stock Plan"), which term extends through May 21, 2025. The Stock Plan provides for accelerated vesting of stock awards upon retirement if an employee meets certain age and years of

F-31
Table of Contents

service requirements and certain other requirements. Under the Stock Compensation guidance, if an employee meets the age and years of service requirements under the accelerated vesting provision, the award would be expensed at grant or expensed over the period from the grant date to the date the employee meets the requirements, even if the employee has not actually retired. The Company recognized non-cash compensation expense for employees that met the age and years of service requirements for accelerated vesting at retirement of $14 million, $4 million and $5 million in 2015, 2014 and 2013, respectively.

Outperform Stock Appreciation Rights

OSOs were awarded through the end of 2013, and will continue to be outstanding through 2016. The Company's OSO program was designed so that the Company's stockholders would receive a market return on their investment before OSO holders receive any return on their OSOs. The Company believes that the OSO program directly aligned management's and stockholders' interests by basing stock option value on the Company's ability to outperform the market in general, as measured by the Standard & Poor's ("S&P") 500® Index. Participants in the OSO program do not realize any value from awards unless the Company's common stock price outperforms the S&P 500® Index during the life of the grant. When the stock price gain is greater than the corresponding gain on the S&P 500® Index, the value received for awards under the OSO plan is based on a formula involving a multiplier related to the level by which the Company's common stock outperforms the S&P 500® Index. To the extent that Level 3's common stock outperforms the S&P 500® Index, the value of OSO units to a holder may exceed the value of non-qualified stock options.

The initial strike price, as determined on the day prior to the OSO grant date, is adjusted over time (the "Adjusted Strike Price"), until the settlement date. The adjustment is an amount equal to the percentage appreciation or depreciation in the value of the S&P 500® Index from the date of grant to the date of exercise. The value of the OSO increased for increasing levels of outperformance. OSO units have a multiplier range from zero to four depending upon the performance of Level 3 common stock relative to the S&P 500® Index as shown in the following table.

If Level 3 Stock Outperforms the S&P 500® Index by:Then the Pre-multiplier Gain Multiplied by a Success Multiplier of:
0% or Less—
More than 0% but Less than 11%Outperformance percentage multiplied by 4/11
11% or More4.00

The Pre-multiplier Gain is the Level 3 common stock price minus the Adjusted Strike Price on the date of settlement.

Upon settlement of an OSO, the Company shall deliver or pay to the grantee the difference between the fair market value of a share of Level 3 common stock as of the day prior to the settlement date, less the Adjusted Strike Price (the "Exercise Consideration"). The Exercise Consideration may be paid in cash, Level 3 common stock or any combination of cash or Level 3 common stock at the Company's discretion. The number of shares of Level 3 common stock to be delivered by the Company to the grantee is determined by dividing the Exercise Consideration to be paid in Level 3 common stock by the fair market value of a share of Level 3 common stock as of the date prior to the settlement date. Fair market value was defined in the OSO agreement as the closing price per share of Level 3 common stock on the national securities exchange on which the common stock is traded. Settlement of the OSO units does not require any cash outlay by the employee.


F-32
Table of Contents

OSO units have a three year life and vest 100% and are fully settled on the third anniversary of the date of the award. Recipients have no discretion on the timing to exercise OSO units, thus the expected life of all such OSO units was three years.

As of December 31, 2015, there was $1 million of unamortized compensation expense related to granted OSO units. The weighted average period over which this cost will be recognized is 0.60 years.

The fair value of the OSO units last granted in 2013 was calculated by applying a modified Black-Scholes model with the assumptions identified below. The Company utilized a modified Black-Scholes model due to the additional variables required to calculate the effect of the market conditions and success multiplier of the OSO program. The Company believes that given the relative short life of the OSOs and the other variables used in the model, the modified Black-Scholes model provides a reasonable estimate of the fair value of the OSO units at the time of grant.

Year Ended December 31, 2013
S&P 500 Expected Dividend Yield Rate2.24%
Expected Life3 years
S&P 500 Expected Volatility Rate19%
Level 3 Common Stock Expected Volatility Rate39%
Expected S&P 500 Correlation Factor0.44
Calculated Theoretical Value101%
Estimated Forfeiture Rate15%

The fair value of each OSO unit equaled the calculated theoretical value multiplied by the Level 3 common stock price on the grant date.

As described above, recipients have no discretion on the timing to exercise OSO units. Thus the expected life of all such OSO units was three years. The Company estimates the stock price volatility using a combination of historical and implied volatility as Level 3 believes it is consistent with the approach most marketplace participants would consider using all available information to estimate expected volatility. The Company has determined that expected volatility is more reflective of market conditions and provides a more accurate indication of volatility than using solely historical volatility. In reaching this conclusion, the Company has considered many factors including the extent to which its future expectations of volatility over the respective term is likely to differ from historical measures.

The fair value for OSO units awarded to participants during the year ended December 31, 2013 was approximately $17 million.

Transactions involving OSO units awarded are summarized in the table below. The Option Price Per Unit identified in the table below represents the initial strike price, as determined on the day prior to the OSO grant date for those grants.

F-33
Table of Contents

  Units Initial Strike Price Per Unit 
Weighted
Average
Initial
Strike
Price
 
Aggregate
Intrinsic
Value
 
Weighted
Average
Remaining
Contractual
Term (years)
          (in millions)  
Balance January 1, 2013 2,066,419
 $14.10
-$36.60
 $23.40
 $6.6
 1.73
OSOs granted 748,481
 $20.29
-$26.69
 $22.64
    
OSOs forfeited (271,883) $14.10
-$36.60
 $22.33
    
OSOs expired (286,924) $16.35
-$24.30
 $21.48
    
OSOs exercised (107,228) $14.10
-$14.10
 $14.10
    
Balance December 31, 2013 2,148,865
 $14.10
-$36.60
 $23.99
 $31.6
 1.46
OSOs granted —
 $—
-$—
 $—
    
OSOs forfeited (52,901) $16.99
-$27.53
 $22.99
    
OSOs expired (106,844) $36.60
-$36.60
 $36.60
    
OSOs exercised (771,251) $14.70
-$27.53
 $24.26
    
Balance December 31, 2014 1,217,869
 $16.99
-$27.53
 $22.76
 $88.0
 0.90
OSOs granted —
 $—
-$—
 $—
    
OSOs forfeited (12,945) $20.29
-$26.69
 $22.81
    
OSOs expired —
 $—
-$—
 $—
    
OSOs exercised (589,944) $22.15
-$22.97
 $22.32
    
Balance December 31, 2015 614,980
 $20.29
-$26.69
 $22.77
 $48.5
 0.37

    
OSO Units Outstanding
at December 31, 2015
 
OSO units Exercisable
at December 31, 2015
Range of Exercise Prices 
Number
Outstanding
 
Weighted
Average
Remaining
Life (years)
 
Weighted
Average
Initial
Strike Price
 
Number
Exercisable
 
Weighted
Average
Initial
Strike Price
$20.29
-$26.69
 614,980
 0.37 $22.77
 —
 $—

In the table above, the weighted average initial strike price represents the values used to calculate the theoretical value of OSO units on the grant date and the intrinsic value represents the value of OSO units that have outperformed the S&P 500® Index as of December 31, 2015, 2014 and 2013, respectively.

The total realized value of OSO units settled was $13 million, $19 million and $2 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company issued 622,755, 732,593 and 90,879 shares of Level 3 common stock upon the exercise of OSO units for the years ended December 31, 2015, 2014 and 2013, respectively. The number of shares of Level 3 common stock issued upon settlement of an OSO unit varies based upon the relative performance of Level 3 stock price and the S&P 500® Index between the initial grant date and settlement date of the OSO unit.

Restricted Stock and Units and Performance Restricted Stock Units

Restricted stock units are generally granted annually on July 1 to certain eligible recipients, including the Board of Directors, at no cost. Restrictions on transfer lapse over one to four year periods.

F-34
Table of Contents


In April 2014, the Company began granting Performance Restricted Stock Units ("PRSUs"). PRSUs are designed to provide participants with a long-term stake in the Company’s success with both retention and performance components. Under these awards, a participant becomes vested in a number of PRSUs based on the Company's achievement of specified levels of financial performance during the performance period set forth in the applicable award letter issued pursuant to the award agreement, so long as the participant remains continuously employed by the Company until the applicable scheduled vesting date, subject to certain change in control provisions as outlined in the award agreement. The performance objective is based on the Company’s financial performance measures. Participants will be entitled to an award within a range of 50% at a minimum achievement level and 200% at a maximum achievement level.

PRSUs use a two-year performance measurement period and vest 50% on the second anniversary of the grant date (after the relevant performance has been measured) and the second 50% vest on the third anniversary of grant date.

The fair value of restricted stock units awarded totaled $144 million, $96 million and $34 million for the years ended December 31, 2015, 2014 and 2013, respectively. The fair value of these awards was calculated using the value of Level 3 common stock on the grant date and are being amortized over the periods in which the restrictions lapse. As of December 31, 2015, unamortized compensation cost related to nonvested restricted stock and restricted stock units was $109 million and the weighted average period over which this cost will be recognized is 2.17 years.

The changes in nonvested restricted stock and restricted stock units are shown in the following table:
  Number 
Weighted Average
Grant Date
Fair Value
Nonvested at January 1, 2013 3,636,976
 $24.71
Stock and units granted 1,617,592
 $21.26
Lapse of restrictions (1,841,757) $25.19
Stock and units forfeited (488,461) $23.10
Nonvested at December 31, 2013 2,924,350
 $22.77
Stock and units granted 1,650,772
 $43.48
Lapse of restrictions (1,150,080) $22.92
Stock and units forfeited (206,305) $27.14
Nonvested at December 31, 2014 3,218,737
 $32.95
Stock and units granted 2,087,942
 $50.60
Lapse of restrictions (1,194,519) $31.70
Stock and units forfeited (358,227) $44.25
Nonvested at December 31, 2015 3,753,933
 $42.09








F-35
Table of Contents

The changes in nonvested performance restricted stock units are shown in the following table:

  Number 
Weighted Average
Grant Date
Fair Value
Nonvested at January 1, 2014 —
 $—
Stock and units granted 605,111
 $39.30
Lapse of restrictions (1,750) $39.14
Stock and units forfeited (35,480) $39.14
Nonvested at December 31, 2014 567,881
 $39.31
Stock and units granted 713,657
 $53.82
Lapse of restrictions —
 $—
Stock and units forfeited (53,073) $49.25
Nonvested at December 31, 2015 1,228,465
 $47.31


The total fair value of restricted stock and restricted stock units and PRSUs whose restrictions lapsed in the years ended December 31, 2015, 2014 and 2013 was $38 million, $27 million and $46 million, respectively.

Management Incentive and Retention Plan

Effective March 2012, the Company adopted a Management Incentive and Retention Plan ("MIRP") as a means of encouraging key management personnel to remain employed with the Company or one of its subsidiaries and to reward the achievement of established performance criteria. The MIRP provided an opportunity to receive two types of awards: a retention award and an incentive award. Participants' retention and incentive awards had a cash component only or a cash component and an equity component. The equity component was granted in the form of restricted stock units under the Stock Plan. The MIRP has terminated pursuant to its terms and there are no remaining unamortized compensation costs related to MIRP.

A summary of the retention restricted stock units granted under the MIRP is shown in the following table:
  Number 
Weighted Average
Grant Date
Fair Value
Nonvested at January 1, 2013 465,000
 $25.92
Stock and units granted —
 $—
Lapse of restrictions (270,000) $25.92
Stock and units forfeited —
 $—
Nonvested at December 31, 2013 195,000
 $25.92
Stock and units granted —
 

Lapse of restrictions (195,000) $25.92
Stock and units forfeited —
 

Nonvested at December 31, 2014 —
 



F-36
Table of Contents

No retention restricted stock units were awarded during the years ended December 31, 2015 and 2014 under the MIRP, and all prior awards were vested as of December 31, 2014.


Defined Contribution Plans

The Company sponsors a number of defined contribution plans. The principal defined contribution plans are discussed individually below. Other defined contribution plans are not individually significant and therefore have been summarized in aggregate below.

The Company and its subsidiaries offer their qualified employees the opportunity to participate in a defined contribution retirement plan qualifying under the provisions of Section 401(k) of the Internal Revenue Code ("401(k) Plan"). Each employee is eligible to contribute, on a tax deferred basis, a portion of annual earnings generally not to exceed $18,000 in 2015 and $18,000 in 2016. The Company matches 100% of employee contributions up to 4% of eligible earnings or applicable regulatory limits.

The Company's matching contributions are made with Level 3 common stock based on the closing stock price on each pay date. The Company's matching contributions are made through units in the Level 3 Stock Fund, which represent shares of Level 3 common stock. The Level 3 Stock Fund is the mechanism that is used for Level 3 to make employer matching and other contributions to employees through the Level 3 401(k) Plan. Prior to January 2016, employees were not able to purchase units in the Level 3 Stock Fund but effective January 2016, employees may allocate account balances to the Level 3 Stock Fund subject to a limitation on the total percentage of the employee's 401(K) account balances maintained in the Level 3 Stock Fund. Employees are able to diversify the Company's matching contribution as soon as it is made, even if they are not fully vested, subject to insider trading rules and regulations. The Company's matching contributions vest ratably over the first three years of service or over such shorter period until the employee has completed three years of service at such time the employee is then 100% vested in all Company matching contributions, including future contributions. The Company made 401(k) Plan matching contributions of $36 million, $23 million and $24 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company's matching contributions are recorded as non-cash compensation and included in network related expenses of $5 million, $4 million and $4 million for the years ended December 31, 2015, 2014 and 2013, respectively, and in selling, general and administrative expenses of $31 million, $19 million and $20 million for the years ended December 31, 2015, 2014 and 2013, respectively. Former tw telecom employees became eligible to participate in the Level 3 401(k) Plan starting January 1, 2015.

The tw telecom 401(k) Plan ("tw telecom 401(k) Plan") provided 100% matching cash contributions up to a maximum 5% of eligible compensation. The Company's contributions to the tw telecom 401(k) Plan vest immediately. Expenses recorded by the Company relating to the tw telecom 401(k) Plan for the two months in 2014 subsequent to the completion of the Merger were approximately $2 million.

Other defined contribution plans sponsored by the Company are individually not significant. On an aggregate basis the expenses recorded by the Company relating to these plans was approximately $6 million, $6 million and $5 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Defined Benefit Plans

The Company has certain contributory and non-contributory employee pension plans, which are not significant to the financial position or operating results of the Company. The Company recognizes in its balance sheet the funded status of its defined benefit post-retirement plans, which is measured as the difference between the fair value of the plan assets and the plan benefit obligations. The Company is also required to recognize changes in the funded status within accumulated other comprehensive income, net of tax to the extent such changes are not recognized in earnings as components of periodic net benefit cost. The fair value of the plan assets was $142 million and $151 million as of December 31, 2015 and

F-37
Table of Contents

2014, respectively. The total plan benefit obligations were $158 million and $176 million as of December 31, 2015 and 2014, respectively. Therefore, the total funded status was an obligation of $16 million and $25 million as of December 31, 2015 and 2014, respectively.

Annual Discretionary Bonus Grant

The Company's annual discretionary bonus program is intended to motivate employees to achieve the Company's financial and business goals. Each participant is provided a target award expressed as a percentage of base salary. Actual awards under the program are based on corporate results as well as achievement of specific individual performance criteria during the bonus plan period, and may be paid in cash, restricted stock units, or a combination of the two, at the sole discretion of the Compensation Committee of the Board of Directors. The annual discretionary bonus will be paid in cash for the 2015 bonus plan, was paid in cash for the 2014 bonus plan and was paid partially in cash and equity for the 2013 bonus plan. The Company paid out 1.4 million immediately-vested restricted stock units in 2014 for the 2013 bonus plan.

(14) Income Taxes

The following table summarizes the income tax benefit (expense) attributable to the income (loss) before income taxes for each of the three years ended December 31, 2015, 2014 and 2013:

  2015 2014 2013
(dollars in millions)
Current:      
United States Federal $—
 $—
 $9
State (3) (1) (1)
Foreign (33) (40) (37)
  (36) (41) (29)
Deferred, net of changes in valuation allowances:      
United States federal 2,941
 6
 (3)
State 246
 15
 —
Foreign (1) 96
 (6)
  3,186
 117
 (9)
Income Tax Benefit (Expense) $3,150
 $76
 $(38)

The United States and Foreign components of income (loss) before income taxes for each of the three years ended December 31, 2015, 2014 and 2013 are as follows (some of the income (loss) is subject to taxation in multiple jurisdictions):

  2015 2014 2013
(dollars in millions)
United States $401
 $207
 $(122)
Foreign (118) 31
 51
  $283
 $238
 $(71)

A reconciliation of the actual income tax benefit (expense) and the tax computed by applying the U.S. federal rate (35%) to the income (loss) before income taxes for each of the three years ended December 31, 2015, 2014 and 2013 is shown in the following table:

F-38
Table of Contents


  2015 2014 2013
  (dollars in millions)
Computed Tax (Expense) Benefit at Statutory Rate $(99) $(83) $25
Effect of Earnings in Jurisdictions outside of the United States 30
 13
 12
Change in Valuation Allowance 3,386
 197
 (27)
Disallowed Interest (62) (25) (33)
Non-Deductible Deconsolidation Loss (57) —
 —
Other Permanent Items (25) (19) (11)
Indefinite-Lived Assets —
 2
 (3)
Uncertain Tax Positions (5) 3
 9
Changes in Tax Rates (20) (7) (7)
Other, net 2
 (5) (3)
Income Tax Benefit (Expense) $3,150
 $76
 $(38)


The components of the net deferred tax assets (liabilities) as of December 31, 2015 and 2014 are as follows:

  2015 2014
  (dollars in millions)
Deferred Tax Assets:    
Deferred revenue 351
 322
Unutilized tax net operating loss carry forwards 4,959
 5,218
Fixed assets 115
 90
Intangible assets —
 —
Other 501
 415
Total Deferred Tax Assets 5,926
 6,045
Deferred Tax Liabilities:    
Deferred revenue (58) (73)
Fixed assets (924) (893)
Intangible assets (399) (486)
Other (350) (189)
Total Deferred Tax Liabilities (1,731) (1,641)
Net Deferred Tax Assets before Valuation Allowance 4,195
 4,404
Valuation Allowance (1,002) (4,429)
Net Deferred Tax Asset (Liability) after Valuation Allowance $3,193
 $(25)


On October 31, 2014, the Company completed its acquisition of tw telecom. The Merger qualified as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code, and therefore the Company assumed the carryover tax basis of the acquired assets and liabilities of tw telecom. As a result, the Company recorded a net deferred tax liability of $15 million as the acquired

F-39
Table of Contents

deferred tax assets, net of valuation allowance, were offset by the deferred tax liabilities created by the additional financial reporting basis of the identifiable intangible assets. Simultaneously, the Company released $15 million of valuation allowance against its deferred tax assets as the acquired deferred tax liabilities serve as a source of taxable income to support such release.

As of December 31, 2015, the Company had available net operating loss carry forwards of approximately $9.8 billion after taking into account the effects of Section 382 limitation of the Internal Revenue Code for U.S. federal income tax purposes, including $1 billion from the tw telecom acquisition ($9.7 billion net of stock compensation excess benefit). Although the tw telecom acquisition triggered an ownership change under Section 382 of the Internal Revenue Code, the Company has determined that its loss carryforwards should not be mathematically limited based on its value at the time of the ownership change and the expiration dates of its net operating losses.

As a result of certain realization requirements of applicable accounting guidance, the table of deferred tax asset and liabilities shown above does not include certain deferred tax assets as of December 31, 2015 and December 31, 2014 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased if and when such deferred tax assets are ultimately realized. The Company uses the ordering rules prescribed by recent accounting guidance to determine when the stock compensation excess tax benefits have been realized. If actual future tax deductions are less than the amount recognized for financial reporting, the tax-effect of the difference may result in an increase to income tax expense.

The Company’s loss carry forwards expire in future years through 2035 and are subject to examination by the tax authorities up to three years after the carry forwards are utilized. The U.S. net operating tax loss carry forwards available for federal income tax purposes expire as follows (dollars in millions):

Expiring December 31,Amount
2023$239
20241,456
20251,267
20261,254
20271,644
2028477
2029694
2030663
2031833
2032729
2033172
2034395
20353
 $9,826

Under the rules prescribed by Internal Revenue Code Section 382 and applicable regulations, if certain transactions occur with respect to an entity's capital stock that result in a cumulative ownership shift of more than 50 percentage points by 5% stockholders over a three-year testing period, annual limitations are imposed with respect to the entity's ability to utilize its net operating loss carry forwards and certain current deductions against any taxable income the entity achieves in future periods and could result in a substantial income tax expense at the time of the shift. Level 3 extended the term of its

F-40
Table of Contents

Stockholder Rights Plan, which was adopted to protect its U.S. federal net operating loss carry forwards from these limitations. This plan was designed to deter trading that would result in a change of control (as defined in Section 382) without the limitations imposed by Section 382, and therefore protect the Company's ability to use its historical U.S. federal net operating loss carry forwards in the future.

As of December 31, 2015, the Company had state net operating loss carry forwards of approximately $9.9 billion that are subject to limitations on their utilization and have various expiration periods through 2035. The Company had approximately $5.5 billion of foreign jurisdiction net operating loss carry forwards that are subject to limitations on their utilization. The majority of these foreign jurisdiction tax loss carry forwards have no expiration period.

The Company recognizes deferred tax assets and liabilities for its domestic and non-U.S. operations, for operating loss and other credit carry forwards and the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns, and future profitability by tax jurisdiction. The Company has historically provided a valuation allowance to reduce its U.S federal and state and foreign deferred tax assets to the amount that is more likely than not to be realized. The Company monitors its cumulative loss position and other evidence each quarter to determine the appropriateness of its valuation allowance. Although the Company believes its estimates are reasonable, the ultimate determination of the appropriate amount of valuation allowance involves significant judgment.

In the fourth quarter 2015, the Company released the majority of the valuation allowance against its U.S. federal and state deferred tax assets, resulting in a non-cash benefit to income tax expense of approximately $3.3 billion, $3.1 billion of which was related to future years’ earnings. In making the determination to release the valuation allowance against U.S. federal and state deferred tax assets, the Company took into consideration its movement into a cumulative income position for the most recent 3-year period, including pro forma adjustments for acquired entities, its 8 out of 9 consecutive quarters of pre-tax operating income, and forecasts of future earnings for its U.S. business. The Company expects to continue to generate income before taxes in the United States in future periods.

In 2014, the Company released approximately $100 million of deferred tax valuation allowance primarily related to its business in the UK due to consolidation of legal entities whereby one UK entity with a full valuation allowance was merged with an entity that had no valuation allowance against its deferred tax assets.

The Company continues to maintain its existing valuation allowance against net deferred tax assets in many of its state and foreign jurisdictions where it does not currently believe that the realization of its deferred tax assets is more likely than not.

The valuation allowance for deferred tax assets was approximately $1.0 billion as of December 31, 2015 and $4.4 billion as of December 31, 2014. The change in valuation allowance is primarily due to the release of the valuation allowance against U.S. federal and state deferred tax assets.

The Company provides for U.S. income taxes on the undistributed earnings and the other outside basis temporary differences of foreign corporations unless they are considered indefinitely reinvested outside the United States. The amount of temporary differences related to undistributed earnings and other outside basis temporary differences of investments in foreign subsidiaries upon which U.S. income taxes have not been provided was immaterial.With respect to the Company’s foreign branches, it has established deferred tax liabilities for branches with an overall cumulative translation gain, but has not has established deferred tax assets for those with an overall translation loss as it is necessary to demonstrate

F-41
Table of Contents

that the temporary difference will reverse in the foreseeable future. The Company has no plans that would trigger such reversal.

The Company's liability for uncertain income tax positions totaled $18 million at December 31, 2015 and $17 million at December 31, 2014. If the remaining balance of unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $17 million ($14 million as of December 31, 2014) and a reduction in the effective tax rate. The Company does not expect that the liability for uncertain tax positions will materially increase or decrease during the twelve months ended December 31, 2016. A reconciliation of the beginning and ending balance of unrecognized income tax benefits follows (dollars in millions):

 Amount
Balance as of January 1, 2013$18
Gross increases - tax positions of prior years—
Gross increases - tax positions during 20131
Gross decreases - lapse of statute of limitations(6)
Gross decreases - settlement with taxing authorities—
Balance as of December 31, 201313
Tax positions of prior years netted against deferred tax assets5
Gross increases - tax positions of prior years1
Gross increases - tax positions during 2014—
Gross decreases - lapse of statute of limitations(2)
Gross decreases - settlement with taxing authorities—
Balance as of December 31, 201417
Tax positions of prior years netted against deferred tax assets(2)
Gross increases - tax positions of prior years3
Gross increases - tax positions during 20152
Gross decreases - lapse of statute of limitations(2)
Gross decreases - settlement with taxing authorities—
Balance as of December 31, 2015$18

The unrecognized tax benefits in the table above do not include accrued interest and penalties of $16 million, $17 million and $18 million as of December 31, 2015, 2014 and 2013, respectively. The Company's policy is to record interest and penalties related to uncertain tax positions in income tax expense. The Company recognized accrued interest and penalties related to uncertain tax positions in income tax expense in its Consolidated Statements of Operations of a benefit of less than $1 million, a benefit of approximately $1 million and a benefit of approximately $4 million for the years ended December 31, 2015, 2014 and 2013, respectively.

The Company, or at least one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carry forwards are available.

The Company incurs tax expense attributable to income in various subsidiaries that are required to file state or foreign income tax returns on a separate legal entity basis. The Company also recognizes accrued interest and penalties in income tax expense related to uncertain tax benefits. Our tax rate is

F-42
Table of Contents

volatile and may move up or down with changes in, among other things, the amount and source of income or loss, our ability to utilize foreign tax credits, changes in tax laws, and the movement of liabilities established for uncertain tax positions as statutes of limitations expire or positions are otherwise effectively settled.


(15) Segment Information

Operating segments are defined under GAAP as components of an enterprise for which separate financial information is available and evaluated regularly by the Company's chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance. The Company's CODM is Jeff K. Storey, President and Chief Executive Officer. As a result of the Merger, Mr. Storey also monitored performance of the former tw telecom business. Therefore, the Company was comprised of the following four reportable segments for financial reporting purposes for the fourth quarter of 2014: 1) North America; 2) Europe, the Middle East and Africa (EMEA); 3) Latin America; and 4) tw telecom, which represents the standalone operations of the former tw telecom business. As a result of the integration of tw telecom (see Note 2 - Events Associated with the Merger of tw telecom), the Company reorganized its management reporting structure to reflect the way in which it allocates resources and assesses performance. Effective the first quarter of 2015, tw telecom has been integrated into North America. As a result of the change, the Company's reportable segments now consist of: 1) North America; 2) EMEA; and 3) Latin America. Other separate business interests that are not segments include interest, certain corporate assets and overhead costs, and certain other general and administrative costs that are not allocated to any of the operating segments. Historical presentation of segment information has been retrospectively reclassified to conform to the new geographical presentation.

The CODM measures and evaluates segment performance primarily based upon revenue, revenue growth and Adjusted EBITDA. Adjusted EBITDA, as defined by the Company, is equal to net income (loss) from the Consolidated Statements of Operations before (1) income tax benefit (expense), (2) total other income (expense), (3) non-cash impairment charges included within selling, general and administrative expenses and network related expenses, (4) depreciation and amortization expense, and (5) non-cash stock-based compensation expense included within selling, general and administrative expenses and network related expenses.

Adjusted EBITDA is not a measurement under GAAP and may not be used in the same way by other companies. Management believes that Adjusted EBITDA is an important part of the Company's internal reporting and is a key measure used by management to evaluate profitability and operating performance of the Company and to make resource allocation decisions. Management believes such measurement is especially important in a capital-intensive industry such as telecommunications. Management also uses Adjusted EBITDA to compare the Company's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure from period to period its ability to fund capital expenditures, fund growth, service debt and determine bonuses.

Adjusted EBITDA excludes non-cash impairment charges and non-cash stock-based compensation expense because of the non-cash nature of these items. Adjusted EBITDA also excludes interest income, interest expense and income tax benefit (expense) because these items are associated with the Company's capitalization and tax structures. Adjusted EBITDA also excludes depreciation and amortization expense because these non-cash expenses reflect the effect of capital investments which management believes are better evaluated through cash flow measures. Adjusted EBITDA excludes net other income (expense) because these items are not related to the primary operations of the Company.

There are limitations to using non-GAAP financial measures such as Adjusted EBITDA, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from the Company's calculations. Additionally, this financial measure does not include certain significant items such as interest income, interest expense, income tax benefit (expense),

F-43
Table of Contents

depreciation and amortization expense, non-cash impairment charges, non-cash stock-based compensation expense, and net other income (expense). Adjusted EBITDA should not be considered a substitute for other measures of financial performance reported in accordance with GAAP.

Revenue and the related expenses are attributed to regions based on where services are provided. Revenue and costs for services provided in more than one region are allocated equally between the regions, and the Company does not otherwise charge for services between reportable segments. Therefore, segment results do not include any intercompany revenue. The operating activities of the separate regions along with the activities that are not attributable to a segment are interdependent, and the regional results in the tables below do not include all intercompany charges and allocations that would be necessary to report the regional results on a standalone basis.

Total revenue consists of:

Core Network Services revenue from colocation and data center services; transport and fiber; IP and data services; and local and enterprise voice services.

Wholesale Voice Services revenue from sales to other carriers of long distance voice services.

Core Network Services revenue represents higher profit services and Wholesale Voice Services revenue represents lower profit services. Core Network Services revenue requires different levels of investment and focus and provides different contributions to the Company's operating results than Wholesale Voice Services revenue. Management of the Company believes that growth in revenue from its Core Network Services is critical to the long-term success of its business. The Company also believes it must continue to effectively manage the profitability of the Wholesale Voice Services revenue. The Company believes that trends in its communications business are best gauged by analyzing revenue changes in Core Network Services.

The following table presents revenue by segment for each of the years ended December 31,

(dollars in millions) 2015 2014 2013
Core Network Services Revenue:      
North America $6,208
 $4,525
 $3,949
EMEA 835
 891
 888
Latin America 714
 779
 754
Total Core Network Services Revenue $7,757
 $6,195
 $5,591
       
Wholesale Voice Services Revenue:      
North America $446
 $530
 $681
EMEA 14
 19
 31
Latin America 12
 33
 10
Total Wholesale Voice Services Revenue $472
 $582
 $722
       
Total Consolidated Revenue $8,229
 $6,777
 $6,313



F-44
Table of Contents

The following table presents Adjusted EBITDA by segment and reconciles Adjusted EBITDA to net income (loss) for each of the years ended December 31,

(dollars in millions) 2015 2014 2013
Adjusted EBITDA:      
North America $3,048
 $2,065
 $1,799
EMEA 235
 214
 226
Latin America 302
 348
 313
Unallocated Corporate Expenses (947) (732) (714)
Consolidated Adjusted EBITDA $2,638
 $1,895
 $1,624
Income Tax Benefit (Expense) 3,150
 76
 (38)
Total Other Expense (1,048) (775) (737)
Depreciation and Amortization (1,166) (808) (800)
Non-Cash Stock Compensation (141) (73) (151)
Non-Cash Impairment —
 (1) (7)
Total Consolidated Net Income (Loss) $3,433
 $314

$(109)

The following table presents capital expenditures by segment and reconciles capital expenditures to consolidated capital expenditures for each of the years ended December 31:

(dollars in millions) 2015 2014 2013
Capital Expenditures:      
North America $752
 $495
 $398
EMEA 158
 117
 128
Latin America 155
 153
 134
Unallocated Corporate Capital Expenditures 164
 145
 100
Consolidated Capital Expenditures $1,229
 $910
 $760

The following table presents total assets by segment:

  As of December 31,
(dollars in millions) 2015 2014
Assets:    
North America $19,961
 $16,242
EMEA 1,796
 1,970
Latin America 2,131
 2,451
Other 257
 284
Total Consolidated Assets $24,145
 $20,947


(16) Commitments, Contingencies and Other Items

The Company is subject to various legal proceedings and other contingent liabilities that individually or in the aggregate could materially affect its financial condition, future results of operations or cash flows.

F-45
Table of Contents

Amounts accrued for such contingencies aggregate to $129 million and are included in "Other" current liabilities and "Other liabilities" in the Company's Consolidated Balance Sheet at December 31, 2015. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued would have no effect on the Company's results of operations but could materially adversely affect its cash flows for the affected period.

The Company reviews its accruals at least quarterly and adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. Below is a description of material legal proceedings and other contingencies pending at December 31, 2015. Although the Company believes it has accrued for these matters in accordance with the accounting guidance for contingencies, contingencies are inherently unpredictable and it is possible that results of operations or cash flows could be materially and adversely affected in any particular period by unfavorable developments in, or resolution or disposition of, one or more of these matters. For those contingencies in respect of which the Company believes that it is reasonably possible that a loss may result that is materially in excess of the accrual (if any) established for the matter, the Company has either provided an estimate of such possible loss or range of loss or included a statement that such an estimate cannot be made. In addition to the contingencies described below, the Company is party to many other legal proceedings and contingencies, the resolution of which is not expected to materially affect its financial condition or future results of operations beyond the amounts accrued.

Rights-of-Way Litigation

The Company is party to a number of purported class action lawsuits involving its right to install fiber optic cable network in railroad right-of-ways adjacent to plaintiffs' land. In general, the Company obtained the rights to construct its networks from railroads, utilities, and others, and has installed its networks along the rights-of-way so granted. Plaintiffs in the purported class actions assert that they are the owners of lands over which the fiber optic cable networks pass, and that the railroads, utilities, and others who granted the Company the right to construct and maintain its network did not have the legal authority to do so. The complaints seek damages on theories of trespass, unjust enrichment and slander of title and property, as well as punitive damages. The Company has also received, and may in the future receive, claims and demands related to rights-of-way issues similar to the issues in these cases that may be based on similar or different legal theories. The Company has defeated motions for class certification in a number of these actions but expects that, absent settlement of these actions, plaintiffs in the pending lawsuits will continue to seek certification of statewide or multi-state classes. The only lawsuit in which a class was certified against the Company, absent an agreed upon settlement, occurred in Koyle, et. al. v. Level 3 Communications, Inc., et. al., a purported two state class action filed in the United States District Court for the District of Idaho. The Koyle lawsuit has been dismissed pursuant to a settlement reached in November 2010 as described further below.

The Company negotiated a series of class settlements affecting all persons who own or owned land next to or near railroad rights of way in which it has installed its fiber optic cable networks. The United States District Court for the District of Massachusetts in Kingsborough v. Sprint Communications Co. L.P. granted preliminary approval of the proposed settlement; however, on September 10, 2009, the court denied a motion for final approval of the settlement on the basis that the court lacked subject matter jurisdiction and dismissed the case.

In November 2010, the Company negotiated revised settlement terms for a series of state class settlements affecting all persons who own or owned land next to or near railroad rights of way in which the Company has installed its fiber optic cable networks. The Company is currently pursuing presentment of the settlement in applicable jurisdictions. The settlements affecting current and former landowners have received final federal court approval in multiple states and the parties are engaged in the claims process for those states, including payments of claims. The settlement has also been presented to federal courts in additional states and approval is pending.

F-46
Table of Contents


Management believes that the Company has substantial defenses to the claims asserted in all of these actions and intends to defend them vigorously if a satisfactory settlement is not ultimately approved for all affected landowners.

Peruvian Tax Litigation

Beginning in 2005, one of the Company's Peruvian subsidiaries received a number of assessments for tax, penalties and interest for calendar years 2001 and 2002. Peruvian tax authorities ("SUNAT") took the position that the Peruvian subsidiary incorrectly documented its importations resulting in additional income tax withholding and value-added taxes ("VAT"). The total amount of the asserted claims, including potential interest and penalties, was $26 million, consisting of $3 million for income tax withholding in connection with the import of services for calendar years 2001 and 2002, $7 million for VAT in connection with the import of services for calendar years 2001 and 2002, and $16 million in connection with the disallowance of VAT credits for periods beginning in 2005. Due to accrued interest and foreign exchange effects, and taking into account the developments described below, the total amount of exposure is $46 million at December 31, 2015.

The Company challenged the tax assessments during 2005 by filing administrative claims before SUNAT. During August 2006 and June 2007, SUNAT rejected the Company's administrative claims, thereby confirming the assessments. Appeals were filed in September 2006 and July 2007 with the Tribunal Fiscal, the highest level of administrative review, which is not part of the Peru judiciary (the "Tribunal"). The 2001 and 2002 assessed withholding tax assessments were resolved in favor of the Company in separate administrative resolutions; however, the penalties with respect to withholding tax remain at issue in the administrative appeals.

In October 2011, the Tribunal issued its administrative resolution with respect to the calendar year 2002 tax period regarding VAT, associated penalties and penalties associated with withholding taxes, deciding the central issue underlying the assessments in the government's favor, while confirming the assessment in part and denying a portion of the assessment on procedural grounds. The Company appealed the Tribunal's October 2011 administrative resolutions to the judicial court in Peru. In September 2014, the first judicial court rendered a decision largely in the Company’s favor on the central issue underlying the assessments. SUNAT appealed the court’s decision to the next judicial level. The court of appeal remanded the case to the first judicial court for further development of the facts and legal analysis supporting its decision.

In October 2013, the Tribunal notified the Company of its July 2013 administrative resolution with respect to the calendar year 2001 tax period regarding VAT, associated penalties and penalties associated with withholding taxes, determining the central issue underlying the assessments in the government's favor, while confirming the assessment in part and denying a portion of the assessment on procedural grounds. The Company appealed the Tribunal's July 2013 administrative resolutions to the judicial court in Peru. In April 2015, the first judicial court rendered a decision largely in SUNAT’s favor on the central issue underlying the assessments. The Company has appealed the court’s decision to the next judicial level.

In December 2013, SUNAT initiated an audit of calendar year 2001. In June 2014, the Company was served with SUNAT’s assessments of the 2001 VAT credits declared null by the Tribunal and the corresponding fine. In July 2014, the Company challenged these assessments by filing administrative claims before SUNAT. In January 2015, SUNAT rejected the administrative claims, thereby confirming the assessments. The Company filed an appeal with the Tribunal in February 2015. In May 2015, the Tribunal notified the Company of its administrative resolution declaring the assessments and corresponding fines null. The time for SUNAT to appeal this resolution has closed. While the Company is not yet aware of any appeal filed by SUNAT, under local practice, notification of an appeal can take several months. Nevertheless, SUNAT retains the right to reissue the assessments declared null or start a new audit.

F-47
Table of Contents


Employee Severance and Contractor Termination Disputes

A number of former employees and third-party contractors have asserted a variety of claims in litigation against certain Latin American subsidiaries of the Company for separation pay, severance, commissions, pension benefits, unpaid vacation pay, breach of employment contracts, unpaid performance bonuses, property damages, moral damages and related statutory penalties, fines, costs and expenses (including accrued interest, attorneys fees and statutorily mandated inflation adjustments) as a result of their separation from the Company or termination of service relationships. The Company is vigorously defending itself against the asserted claims, which aggregate to approximately $42 million at December 31, 2015.

Brazilian Tax Claims

In December 2004, March 2009, April 2009 and July 2014, the São Paulo state tax authorities issued tax assessments against one of the Company's Brazilian subsidiaries for the Tax on Distribution of Goods and Services ("ICMS") with respect to revenue from leasing movable properties (in the case of the December 2004, March 2009 and July 2014 assessments) and revenue from the provision of Internet access services (in the case of the April 2009 and July 2014 assessments), by treating such activities as the provision of communications services, to which the ICMS tax applies. During the third quarter of 2014, the Company released a reserve of$6 millionfor tax, penalty and associated interest corresponding to the ICMS applicable on the provision of Internet access services due to the expiration of the statute of limitations for the January 2008 to June 2009 tax periods. In September 2002, July 2009 and May 2012, the Rio de Janeiro state tax authorities issued tax assessments to the same Brazilian subsidiary on similar issues. The Company has filed objections to these assessments, arguing that the lease of assets and the provision of Internet access are not communication services subject to ICMS. The objections to the September 2002, December 2004 and March 2009 assessments were rejected by the respective state administrative courts, and the Company has appealed those decisions to the judicial courts. In October 2012 and June 2014, the Company received favorable rulings from the lower court on the December 2004 and March 2009 assessments regarding equipment leasing, but those rulings are subject to appeal by the state. No ruling has been obtained with respect to the September 2002 assessment. The objections to the April and July 2009 and May 2012 assessments are still pending final administrative decisions. The July 2014 assessment was confirmed during the fourth quarter of 2014 at the first administrative level and the Company appealed this decision to the second administrative level. During the fourth quarter of 2014, the Company entered into an amnesty with the Rio de Janeiro state tax authorities with respect to potential ICMS liability for the 2008 tax period. As a result, the Company paid $5 million and released a reserve of $3 million of tax corresponding to the ICMS applicable on the provision of Internet access services.

The Company is vigorously contesting all such assessments in both states, and in particular, views the assessment of ICMS on revenue from leasing movable properties to be without merit. Nevertheless, the Company believes that it is reasonably possible that these assessments could result in a loss of up to $42 million at December 31, 2015 in excess of the accruals established for these matters.

Letters of Credit

It is customary for the Company to use various financial instruments in the normal course of business. These instruments include letters of credit. Letters of credit are conditional commitments issued on behalf of the Company in accordance with specified terms and conditions. As of December 31, 2015 and December 31, 2014, the Company had outstanding letters of credit or other similar obligations of approximately $46 million and $28 million, respectively, of which $43 million and $23 million, are collateralized by cash, that is reflected on the Consolidated Balance Sheets as restricted cash. The Company does not believe exposure to loss related to its letters of credit is material.


F-48
Table of Contents

Operating Leases

The Company is leasing rights-of-way, facilities and other assets under various operating leases which, in addition to rental payments, may require payments for insurance, maintenance, property taxes and other executory costs related to the lease. Certain leases provide for adjustments in lease cost based upon adjustments in various price indexes and increases in the landlord's management costs.

The right-of-way agreements have various expiration dates through 2060. Payments under these right-of-way agreements were $211 million in 2015, $173 million in 2014 and $161 million in 2013.

The Company has obligations under non-cancelable operating leases for certain colocation, office facilities and other assets, including lease obligations for which facility related restructuring charges have been recorded. The lease agreements have various expiration dates through 2119. Rent expense, including common area maintenance, under non-cancelable lease agreements was $357 million in 2015, $318 million in 2014 and $311 million in 2013.

Certain non-cancelable right of way agreements provide for automatic renewal on a periodic basis. The Company includes payments due during these automatic renewal periods given the significant cost to relocate the Company's network and other facilities.

Future minimum payments for the next five years and thereafter under network and related right-of-way agreements and non-cancelable operating leases for facilities and other assets consist of the following as of December 31, 2015 (dollars in millions):

  
Right-of-Way
Agreements
 Operating Leases Total Future Minimum Sublease Receipts
2016 $151
 $278
 $429
 $4
2017 72
 245
 317
 4
2018 69
 209
 278
 3
2019 59
 157
 216
 2
2020 54
 123
 177
 —
Thereafter 295
 578
 873
 —
  $700
 $1,590
 $2,290
 $13

Certain right-of-way agreements include provisions for increases in payments in future periods based on the rate of inflation as measured by various price indexes. The Company has not included estimates for these increases in future periods in the amounts included above.

Certain other right-of-way agreements are currently cancelable or can be terminated under certain conditions by the Company. The Company includes the payments under such cancelable right-of-way agreements in the table above for a period of 1 year from January 1, 2016, if the Company does not consider it likely that it will cancel the right of way agreement within the next year.

Cost of Access and Third-Party Maintenance

In addition, the Company has purchase commitments with third-party access vendors that require it to make payments to purchase network services, capacity and telecommunications equipment. Some of these access vendor commitments require the Company to maintain minimum monthly and/or annual billings, in certain cases based on usage. In addition, the Company has purchase commitments with third parties that require it to make payments for maintenance services for certain portions of its network.


F-49
Table of Contents

The following table summarizes the Company's purchase commitments at December 31, 2015 (dollars in millions):

  Total 
Less than
1 Year
 
2 - 3
Years
 
4 - 5
Years
 
After 5
Years
Cost of Access Services $930
 $497
 $402
 $24
 $7
Third-Party Maintenance Services 222
 60
 44
 38
 80
  $1,152
 $557
 $446
 $62
 $87


(17) Condensed Consolidating Financial Information

Level 3 Financing has issued Senior Notes that are unsecured obligations of Level 3 Financing, Inc.; however, they are also fully and unconditionally and jointly and severally guaranteed on an unsecured senior basis by Level 3 Communications, Inc. and Level 3 Communications, LLC.

In conjunction with the registration of the Level 3 Financing, Inc. Senior Notes, the accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered."

The operating activities of the separate legal entities included in the Company’s Consolidated Financial Statements are interdependent. The accompanying condensed consolidating financial information presents the statements of operations, balance sheets and statements of cash flows of each legal entity and, on an aggregate basis, the other non-guarantor subsidiaries based on amounts incurred by such entities, and is not intended to present the operating results of those legal entities on a stand-alone basis. Level 3 Communications, LLC leases equipment and certain facilities from other wholly owned subsidiaries of Level 3 Communications, Inc. These transactions are eliminated in the consolidated results of the Company.



F-50
Table of Contents

Condensed Consolidating Statements of Operations
For the year ended December 31, 2015

 Level 3 Communications, Inc. Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
(dollars in millions)
Revenue$—
 $—
 $3,325
 $5,077
 $(173) $8,229
Costs and Expenses:           
Network access costs—
 —
 1,243
 1,763
 (173) 2,833
Network related expenses—
 —
 947
 485
 —
 1,432
Depreciation and amortization—
 —
 309
 857
 —
 1,166
Selling, general and administrative expenses4
 —
 1,064
 399
 —
 1,467
Total costs and expenses4
 —
 3,563
 3,504
 (173) 6,898
Operating Income (Loss)(4) —
 (238) 1,573
 —
 1,331
Other Income (Expense):           
Interest income—
 —
 —
 1
 —
 1
Interest expense(51) (574) (3) (14) —
 (642)
Interest income (expense) affiliates, net1,310
 1,984
 (3,041) (253) —
 —
Equity in net earnings (losses) of subsidiaries2,162
 (1,693) 177
 —
 (646) —
Other, net(18) (200) 3
 (192) —
 (407)
Total other expense3,403
 (483) (2,864) (458) (646) (1,048)
Income (Loss) before Income Taxes3,399
 (483) (3,102) 1,115
 (646) 283
Income Tax (Expense) Benefit34
 2,645
 (1) 472
 —
 3,150
Net Income (Loss)3,433
 2,162
 (3,103) 1,587
 (646) 3,433
Other Comprehensive Income (Loss), Net of Income Taxes(154) —
 —
 154
 (154) (154)
Comprehensive Income (Loss)$3,279
 $2,162
 $(3,103) $1,741
 $(800) $3,279


F-51
Table of Contents

Condensed Consolidating Statements of Operations
For the year ended December 31, 2014

 Level 3 Communications, Inc. Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
(dollars in millions)
Revenue$—
 $—
 $3,073
 $3,918
 $(214) $6,777
Costs and Expenses:           
Network access costs—
 —
 1,177
 1,566
 (214) 2,529
Network related expenses—
 —
 762
 484
 —
 1,246
Depreciation and amortization—
 —
 277
 531
 —
 808
Selling, general and administrative expenses21
 2
 735
 423
 —
 1,181
Total costs and expenses21
 2
 2,951
 3,004
 (214) 5,764
Operating Income (Loss)(21) (2) 122
 914
 —
 1,013
Other Income (Expense):           
Interest income—
 —
 —
 1
 —
 1
Interest expense(143) (492) (2) (17) —
 (654)
Interest income (expense) affiliates, net1,227
 1,827
 (2,890) (164) —
 —
Equity in net earnings (losses) of subsidiaries(710) (2,047) 663
 —
 2,094
 —
Other, net(53) —
 7
 (76) —
 (122)
Total other expense321
 (712) (2,222) (256) 2,094
 (775)
Income (Loss) before Income Taxes300
 (714) (2,100) 658
 2,094
 238
Income Tax (Expense) Benefit14
 4
 (1) 59
 —
 76
Net Income (Loss)314
 (710) (2,101) 717
 2,094
 314
Other Comprehensive Income (Loss), Net of Income Taxes(183) —
 —
 (183) 183
 (183)
Comprehensive Income (Loss)$131
 $(710) $(2,101) $534
 $2,277
 $131

F-52
Table of Contents

Condensed Consolidating Statements of Operations
For the year ended December 31, 2013

 Level 3 Communications, Inc. Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
(dollars in millions)
Revenue$—
 $—
 $2,825
 $3,734
 $(246) $6,313
Costs and Expenses:           
Network access costs—
 —
 1,068
 1,649
 (246) 2,471
Network related expenses—
 —
 753
 461
 —
 1,214
Depreciation and amortization—
 —
 289
 511
 —
 800
Selling, general and administrative expenses3
 1
 791
 367
 —
 1,162
Total costs and expenses3
 1
 2,901
 2,988
 (246) 5,647
Operating Income (Loss)(3) (1) (76) 746
 —
 666
Other Income (Expense):           
Interest income—
 —
 —
 —
 —
 —
Interest expense(151) (497) (3) 2
 —
 (649)
Interest income (expense) affiliates, net1,091
 1,706
 (2,679) (118) —
 —
Equity in net earnings (losses) of subsidiaries(1,039) (2,164) 550
 —
 2,653
 —
Other, net—
 (85) 4
 (7) —
 (88)
Total other expense(99) (1,040) (2,128) (123) 2,653
 (737)
Income (Loss) before Income Taxes(102) (1,041) (2,204) 623
 2,653
 (71)
Income Tax (Expense) Benefit(7) 2
 —
 (33) —
 (38)
Net Income (Loss)(109) (1,039) (2,204) 590
 2,653
 (109)
Other Comprehensive Income (Loss), Net of Income Taxes10
 10
 —
 10
 (20) 10
Comprehensive Income (Loss)$(99) $(1,029) $(2,204) $600
 $2,633
 $(99)


F-53
Table of Contents

Condensed Consolidating Balance Sheets
December 31, 2015

 Level 3 Communications, Inc. Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
(dollars in millions)
Assets           
Current Assets:           
Cash and cash equivalents$12
 $6
 $727
 $109
 $—
 $854
Restricted cash and securities—
 —
 1
 7
 —
 8
Receivables, less allowances for doubtful accounts—
 —
 47
 710
 —
 757
Due from affiliates12,415
 22,759
 —
 2,816
 (37,990) —
Other1
 18
 56
 55
 —
 130
Total Current Assets12,428
 22,783
 831
 3,697
 (37,990) 1,749
Property, Plant, and Equipment, net—
 —
 3,423
 6,455
 —
 9,878
Restricted Cash and Securities27
 —
 14
 1
 —
 42
Goodwill and Other Intangibles, net—
 —
 363
 8,513
 —
 8,876
Investment in Subsidiaries16,772
 17,714
 3,734
 —
 (38,220) —
Deferred Tax Assets38
 2,847
 —
 556
 —
 3,441
Other Assets, net8
 100
 12
 39
 —
 159
Total Assets$29,273
 $43,444
 $8,377
 $19,261
 $(76,210) $24,145
            
Liabilities and Stockholders' Equity (Deficit)           
Current Liabilities:           
Accounts payable$—
 $1
 $195
 $433
 $—
 $629
Current portion of long-term debt—
 —
 2
 13
 —
 15
Accrued payroll and employee benefits—
 —
 186
 32
 —
 218
Accrued interest11
 90
 —
 7
 —
 108
Current portion of deferred revenue—
 —
 119
 148
 —
 267
Due to affiliates—
 —
 37,990
 —
 (37,990) —
Other—
 —
 115
 64
 —
 179
Total Current Liabilities11
 91
 38,607
 697
 (37,990) 1,416
Long-Term Debt, less current portion600
 10,210
 15
 169
 —
 10,994
Deferred Revenue, less current portion—
 —
 680
 297
 —
 977
Other Liabilities15
 —
 133
 484
 —
 632
Commitments and Contingencies           
Stockholders' Equity (Deficit)28,647
 33,143
 (31,058) 17,614
 (38,220) 10,126
Total Liabilities and Stockholders' Equity (Deficit)$29,273
 $43,444
 $8,377
 $19,261
 $(76,210) $24,145

F-54
Table of Contents

Condensed Consolidating Balance Sheets
December 31, 2014

 Level 3 Communications, Inc. Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
(dollars in millions)
Assets           
Current Assets:           
Cash and cash equivalents$7
 $5
 $307
 $261
 $—
 $580
Restricted cash and securities—
 —
 1
 6
 —
 7
Receivables, less allowances for doubtful accounts—
 —
 34
 703
 —
 737
Due from affiliates14,522
 21,270
 —
 —
 (35,792) —
Other2
 21
 45
 89
 —
 157
Total Current Assets14,531
 21,296
 387
 1,059
 (35,792) 1,481
Property, Plant, and Equipment, net—
 —
 3,152
 6,708
 —
 9,860
Restricted Cash and Securities3
 —
 16
 1
 —
 20
Goodwill and Other Intangibles, net—
 —
 373
 8,730
 —
 9,103
Investment in Subsidiaries16,686
 14,777
 3,729
 —
 (35,192) —
Deferred Tax Assets—
 —
 —
 300
 —
 300
Other Assets, net28
 129
 9
 17
 —
 183
Total Assets$31,248
 $36,202
 $7,666
 $16,815
 $(70,984) $20,947
            
Liabilities and Stockholders' Equity (Deficit)           
Current Liabilities:           
Accounts payable$—
 $—
 $215
 $449
 $—
 $664
Current portion of long-term debt333
 —
 3
 13
 —
 349
Accrued payroll and employee benefits—
 —
 174
 99
 —
 273
Accrued interest12
 158
 —
 4
 —
 174
Current portion of deferred revenue—
 —
 118
 169
 —
 287
Due to affiliates—
 —
 34,401
 1,391
 (35,792) —
Other—
 2
 62
 95
 —
 159
Total Current Liabilities345
 160
 34,973
 2,220
 (35,792) 1,906
Long-Term Debt, less current portion900
 9,893
 16
 175
 —
 10,984
Deferred Revenue, less current portion—
 —
 617
 304
 —
 921
Other Liabilities16
 24
 125
 608
 —
 773
Commitments and Contingencies           
Stockholders' Equity (Deficit)29,987
 26,125
 (28,065) 13,508
 (35,192) 6,363
Total Liabilities and Stockholders' Equity (Deficit)$31,248
 $36,202
 $7,666
 $16,815
 $(70,984) $20,947


F-55
Table of Contents

Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2015

 Level 3 Communications, Inc. Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
(dollars in millions)
Net Cash Provided by (Used in) Operating Activities$(40) $(617) $193
 $2,319
 $—
 $1,855
Cash Flows from Investing Activities:           
Capital expenditures—
 —
 (453) (776) —
 (1,229)
Cash related to deconsolidated Venezuela operations—
 —
 —
 (83) —
 (83)
Change in restricted cash and securities, net(25) —
 3
 —
 —
 (22)
Proceeds from sale of property, plant and equipment and other assets—
 —
 —
 4
 —
 4
Other—
 —
 (14) —
 —
 (14)
Net Cash Provided by (Used in) Investing Activities(25) —
 (464) (855) —
 (1,344)
Cash Flows from Financing Activities:           
Long-term debt borrowings, net of issuance costs—
 4,832
 —
 —
 —
 4,832
Payments on and repurchases of long-term debt, including current portion and refinancing costs(313) (4,725) (2) (11) —
 (5,051)
Increase (decrease) due from/to affiliates, net383
 511
 693
 (1,587) —
 —
Net Cash Provided by (Used in) Financing Activities70
 618
 691
 (1,598) —
 (219)
Effect of Exchange Rates on Cash and Cash Equivalents—
 —
 —
 (18) —
 (18)
Net Change in Cash and Cash Equivalents5
 1
 420
 (152) —
 274
Cash and Cash Equivalents at Beginning of Year7
 5
 307
 261
 —
 580
Cash and Cash Equivalents at End of Year$12
 $6
 $727
 $109
 $—
 $854


F-56
Table of Contents

Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2014

 Level 3 Communications, Inc. Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
(dollars in millions)
Net Cash Provided by (Used in) Operating Activities$(178) $(458) $625
 $1,172
 $—
 $1,161
Cash Flows from Investing Activities:           
Capital expenditures—
 —
 (362) (548) —
 (910)
Change in restricted cash and securities, net—
 —
 2
 (12) —
 (10)
Proceeds from sale of property, plant and equipment and other assets—
 —
 —
 3
 —
 3
Investment in tw telecom, net of cash acquired(474) —
 —
 307
 —
 (167)
Other—
 —
 —
 (2) —
 (2)
Net Cash Provided by (Used in) Investing Activities(474) —
 (360) (252) —
 (1,086)
Cash Flows from Financing Activities:           
Long-term debt borrowings, net of issuance costs590
 —
 —
 (1) —
 589
Payments on and repurchases of long-term debt, including current portion and refinancing costs(647) —
 —
 (24) —
 (671)
Increase (decrease) due from/to affiliates, net708
 457
 (305) (860) —
 —
Net Cash Provided by (Used in) Financing Activities651
 457
 (305) (885) —
 (82)
Effect of Exchange Rates on Cash and Cash Equivalents—
 —
 —
 (44) —
 (44)
Net Change in Cash and Cash Equivalents(1) (1) (40) (9) —
 (51)
Cash and Cash Equivalents at Beginning of Year8
 6
 347
 270
 —
 631
Cash and Cash Equivalents at End of Year$7
 $5
 $307
 $261
 $—
 $580

F-57
Table of Contents

Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2013

 Level 3 Communications, Inc. Level 3 Financing, Inc. Level 3 Communications, LLC Other Non-Guarantor Subsidiaries Eliminations Total
(dollars in millions)
Net Cash Provided by (Used in) Operating Activities$(169) $(557) $710
 $729
 $—
 $713
Cash Flows from Investing Activities:           
Capital expenditures—
 —
 (312) (448) —
 (760)
Change in restricted cash and securities, net9
 —
 (1) 5
 —
 13
Other—
 —
 1
 1
 —
 2
Net Cash Provided by (Used in) Investing Activities9
 —
 (312) (442) —
 (745)
Cash Flows from Financing Activities:           
Long-term debt borrowings, net of issuance costs—
 1,502
 —
 —
 —
 1,502
Payments on and repurchases of long-term debt, including current portion and refinancing costs(173) (1,586) (4) (33) —
 (1,796)
Increase (decrease) due from affiliates, net88
 642
 (433) (297) —
 —
Net Cash Provided by (Used in) Financing Activities(85) 558
 (437) (330) —
 (294)
Effect of Exchange Rates on Cash and Cash Equivalents—
 —
 —
 (22) —
 (22)
Net Change in Cash and Cash Equivalents(245) 1
 (39) (65) —
 (348)
Cash and Cash Equivalents at Beginning of Year253
 5
 386
 335
 —
 979
Cash and Cash Equivalents at End of Year$8
 $6
 $347
 $270
 $—
 $631




F-58
Table of Contents

(18) Unaudited Quarterly Financial Data
  Three Months Ended
  March 31, June 30, September 30, December 31,
  2015 2014 2015 2014 2015 2014 2015 2014
             
(dollars in millions except per share data)
Revenue $2,053
 $1,609
 $2,061
 $1,625
 $2,062
 $1,629
 $2,053
 $1,914
Costs and Expenses:                
Network Access Costs 723
 614
 696
 613
 706
 607
 708
 695
Network Related Expenses 356
 292
 363
 302
 369
 307
 344
 345
Depreciation and Amortization 288
 184
 288
 187
 296
 187
 294
 250
Selling, General and Administrative Expenses 370
 255
 364
 267
 364
 266
 369
 393
Total Costs and Expenses 1,737
 1,345
 1,711
 1,369
 1,735
 1,367
 1,715
 1,683
Operating Income 316
 264
 350
 256
 327
 262
 338
 231
Other Income (Expense):                
Interest Income 1
 —
 —
 —
 —
 1
 —
 —
Interest Expense (180) (151) (165) (149) (145) (159) (152) (195)
Loss on Modification and Extinguishment of Debt —
 —
 (163) —
 —
 —
 (55) (53)
Venezuela Deconsolidation Charge —
 —
 —
 —
 (171) —
 —
 —
Other, net (10) 6
 (17) (44) 6
 (11) 3
 (20)
Total Other Expense (189) (145) (345) (193) (310) (169) (204) (268)
Income (Loss) Before Income Taxes 127
 119
 5
 63
 17
 93
 134
 (37)
Income Tax (Expense) Benefit (5) (7) (18) (12) (16) (8) 3,189
 103
Net Income (Loss) $122
 $112
 $(13) $51
 $1
 $85
 $3,323
 $66
Net Income (Loss) Per Share - Basic $0.35
 $0.48
 $(0.04) $0.21
 $—
 $0.36
 $9.33
 $0.22
Net Income (Loss) Per Share - Diluted $0.35
 $0.47
 $(0.04) $0.21
 $—
 $0.35
 $9.24
 $0.21

Net income (loss) per share for each quarter is computed using the weighted-average number of shares outstanding during that quarter, while net income (loss) per share for the year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the income (loss) per share for each of the four quarters may not equal the net income (loss) per share for the year.

During the fourth quarter of 2015, the Company recognized a $3.3 billion income tax benefit primarily related to the release of U.S. federal and state deferred tax valuation allowances.

During the fourth quarter of 2015, the Company recognized a loss on extinguishment of debt of $55 million, related to the refinancing of the 8.625% Senior Notes due 2020.

During the second quarter of 2015, the Company recognized a loss on extinguishment of debt of $36 million, related to the refinancing of the 9.375% Senior Notes due 2019.

During the second quarter of 2015, the Company recognized a loss on extinguishment of debt of $82 million, related to the refinancing of the 8.125% Senior Notes due 2019.

F-59
Table of Contents


During the second quarter of 2015, the Company recognized a loss on extinguishment of debt of $18 million, related to the refinancing of the 8.875% Senior Notes due 2019.

During the second quarter of 2015, the Company recognized a loss on modification and extinguishment of debt of $27 million, related to the refinancing of the senior secured Tranche B Term Loan due 2022.

During the fourth quarter of 2014, the Company recognized a loss on extinguishment of debt of $53 million, related to the refinancing of the 11.875% Senior Notes due 2019.

During the fourth quarter of 2014, the Company completed its acquisition of tw telecom and therefore the results of operations for the fourth quarter of 2014 include the results of tw telecom for November and December. Additionally, the Company incurred $70 million in expenses related to the acquisition of tw telecom that was recognized in Selling, General and Administrative Expenses .

During the fourth quarter of 2014, the Company increased its senior secured credit facility by adding a $2 billion Tranche B 2022 Term Loan. The proceeds were used for the tw telecom acquisition.

During the fourth quarter of 2014, the Company also recognized a $100 million income tax benefit primarily related to the release of a foreign deferred tax valuation allowance.

During the third quarter of 2014, the Company entered into an indenture totaling $1 billion for 5.375% Senior Notes due 2022. The proceeds were used for the tw telecom acquisition.

During the second quarter of 2014. the Company recognized a loss of approximately $34 million resulting from the devaluation of Venezuelan bolivar denominated monetary assets and liabilities from the official rate of 6.3 to the SICAD 1 rate of 10.6.





F-60
Table of Contents


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, this February 26, 2016March 18, 2019

     
  LEVEL 3 COMMUNICATIONS, INC.PARENT, LLC
  
By:/s/ Sunit S. Patel
 /s/ Eric J. Mortensen
  Name: Sunit S. PatelEric J. Mortensen
  
Title: Executive
Senior Vice President - Controller (Principal Accounting Officer) and Chief
          Financial Officer
Director

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 dates indicated.

NameSignature Title Date
/s/ James O. Ellis, Jr.
James O. Ellis, Jr.
Jeff K. Storey		 Chairman of the BoardFebruary 26, 2016
_________________
Jeff K. Storey



President and Chief Executive Officer and DirectorPresident (Principal Executive Officer)
 February 26, 2016March 18, 2019
/s/ Sunit S. Patel
Sunit S. Patel
Jeff K. Storey		 

Interim Chief Executive Officer,
/s/ Indraneel DevExecutive Vice President and
Chief Financial Officer
(Principal (Principal Financial Officer)
 February 26, 2016March 18, 2019
Indraneel Dev
/s/ Stacey W. GoffExecutive Vice President, General Counsel and DirectorMarch 18, 2019
Stacey W. Goff
/s/ Eric J. Mortensen
Eric J. Mortensen
 

Senior Vice President and- Controller (Principal Accounting Officer)
February 26, 2016
/s/ Kevin P. Chilton
Kevin P. Chilton
 and Director February 26, 2016March 18, 2019
/s/ Steven T. Clontz
Steven T. Clontz
Eric J. Mortensen		 Director February 26, 2016
/s/ Irene M. Esteves
Irene M. Esteves
DirectorFebruary 26, 2016
/s/ T. Michael Glenn
T. Michael Glenn
DirectorFebruary 26, 2016
/s/ Spencer B. Hays
Spencer B. Hays
DirectorFebruary 26, 2016
/s/ Michael J. Mahoney
Michael J. Mahoney
DirectorFebruary 26, 2016
/s/ Kevin W. Mooney
Kevin W. Mooney
DirectorFebruary 26, 2016
/s/ Peter Seah Lim Huat
Peter Seah Lim Huat
DirectorFebruary 26, 2016
/s/ Peter van Oppen
Peter van Oppen
DirectorFebruary 26, 2016


118