UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-K
| FORM 10-K |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Likewise, CenturyLink uses our telecommunications network to transport data and voice traffic in order to fulfill services to its customers and a variety of internal communications functions. Operating revenues Operating expenses Operating income Net income Balance sheet data: Total assets Total long-term debt(1) Total stockholder's equity (deficit) Operational metrics:(1) Total broadband subscribers Total access lines(2) We group our products and services among three major categories: strategic services, legacy services and affiliates and other services. See descriptions of these categories below in the section Strategic services Legacy services Affiliates and other services Total operating revenues As such, we have one reportable segment. We offer our customers the ability to bundle together several products and services, such as broadband, video (including see "Business—Network Architecture" below. Video. Our video services include primarily satellite digital television under intrastate voice transmissions. Our approach to our business and governmental customers includes a commitment to deliver communications office, mid-sized and select enterprise business and governmental customers. We market our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties. We support our distribution with direct mail, bill inserts, newspaper and television advertising, website promotions, telemarketing and third parties. As of December 31, 2013, we maintained over 434 thousand miles of copper plant and approximately 78 thousand miles of fiber optic plant in our local exchange networks. We also maintain separate networks in connection with providing fiber transport and CLEC services. changes in customer demands and technology. In particular, we anticipate that continued increases in broadband usage by our customers will require us to make significant capital expenditures to increase network capacity or to implement network management practices to alleviate network capacity shortages, either of which could adversely impact our results of operation and financial condition. For additional information, see "Risk Factors", generally, in Item 1A of this annual report, and, in particular, "Risk Factors—Risks Affecting Our Business—Increases in broadband usage may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower transmission speeds for our customers." Federal Regulation intrastate switched access rates in several of our states. On Moreover, the growing prevalence of electronic mail, text messaging, social networking and similar digital communications continues to reduce the demand for traditional landline voice services. At December 31, We have adopted CenturyLink's written codes of conduct that serve as the code of ethics applicable to our directors, officers and employees, and Related Matters or that are not specific to us, such as general economic conditions. services, or to provide more comprehensive customer service. may not be able to obtain adequate access to credit, which could expand and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new service offering initiatives. Our failure to expand or upgrade our technology infrastructure could have adverse consequences, which could include the delayed implementation of new service offerings, decreased competitiveness of existing service offerings, increased acquisition integration costs, service or billing interruptions, and the diversion of development resources. our business practices, results of operations, and financial condition. We rely on reseller and sales agency arrangements with other communications companies to provide some of the services that we sell to our customers, including video services and wireless products and services. If we fail to extend or renegotiate these arrangements as they expire from time to time or if these other companies fail to fulfill their contractual obligations to us or our customers, we may have difficulty finding alternative arrangements and our customers may experience disruptions to their services. In addition, as a reseller or sales agent, we do not control the availability, retail price, design, function, quality, reliability, customer service or branding of these products and services, nor do we directly control all of the marketing and promotion of these products and services. To the extent that these other companies make decisions that negatively impact our ability to market and sell their products and services, our business plans and goals and our reputation could be negatively impacted. If these reseller and sales agency arrangements are unsuccessful due to one or more of these risks, our business and operating results may be adversely affected. We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure. Our local exchange carrier networks consist of central office and remote sites, all with advanced digital switches. If any of these suppliers experience interruptions or other problems delivering or servicing these network components on a timely basis, our operations could suffer significantly. To the extent that proprietary technology of a supplier is an integral component of our network, we may have limited flexibility to purchase key network components from alternative the extent that these entities are successful in increasing the amount we pay for these attachments, our future operating costs will increase. "Risk Factors—Risks Relating to our Recent Acquisition." anticipated benefits of the acquisition, or could otherwise adversely affect our business and financial results. There are other material proceedings pending against CenturyLink, . We are subject to significant regulation by (i) the On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order ("CAF order") intended to reform the existing regulatory regime to recognize ongoing shifts to new technologies, including VoIP, and gradually re-direct federal universal service funding to foster nationwide broadband coverage. This initial ruling provides for a multi-year transition over the next decade as intercarrier compensation charges are reduced, federal universal service funding is explicitly targeted to broadband deployment, and subscriber line charges paid by proceedings, various state commissions may consider changes to their universal service funds or intrastate access rates. Moreover, rulemaking designed to implement the CAF order is not complete, and several FCC proceedings relating to the order remain pending. For these and other reasons, we cannot predict the ultimate impact of these proceedings at this time. Moreover, 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. Regulations continue to create significant All of our operations are also subject to a variety of environmental, safety, health and other governmental regulations. We monitor our compliance with federal, state and local regulations governing the management, discharge and disposal of hazardous and environmentally sensitive materials. Although we believe that we are in compliance with these regulations, our management, discharge or disposal of hazardous and environmentally sensitive materials might expose us to claims or actions that could have a material adverse effect on our business, financial condition and operating results. copyright infringement. If we need to take costly measures to reduce our exposure to these risks, or are required to defend ourselves against such claims, our financial results could be negatively affected. these franchises may require us to pay franchise fees. These franchising requirements generally apply to our fiber transport and competitive local exchange carrier operations, and to our facilities-based video services. These requirements could delay us in expanding our operations or increase the costs of providing these services. our reputation with investors, lenders or others. and Capital Resources arise from a default or acceleration of a single debt instrument. Any such event could adversely affect our ability to conduct business or access the capital markets and could adversely impact our credit ratings. See Increased spending could, among other things, adversely affect our operating margins, cash flows, results of operations and financial position. agreements and applicable tax law. We have not generally provided for liabilities attributable to former affiliated companies or for claims they have asserted or may assert against us. Land Fiber, conduit and other outside plant(1) Central office and other network electronics(2) Support assets(3) Construction in progress(4) Gross property, plant and equipment Operating revenues Operating expenses Operating income Income before income tax expense Net income Selected financial information from the consolidated balance sheets is as Goodwill Total assets Total long-term debt(1) Total stockholder's equity (deficit) Other data: Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities Payments for property, plant and equipment and capitalized software Broadband subscribers(1) Access lines Certain statements in this annual report constitute forward-looking statements. See "Special Note Regarding Forward-Looking selling, general and administrative expenses. discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this annual report. Operating revenues Operating expenses Operating income Other income (expense) Income tax expense Net income Employees The following table summarizes certain of our Operational metrics: Broadband subscribers Access lines Strategic services Legacy services Affiliates and other services Total operating revenues services revenues. date. combined year ended December 31, 2011 is attributable to telecommunications services we provided to affiliates since CenturyLink's April 1, 2011 indirect acquisition of us. Cost of services and products (exclusive of depreciation and amortization) Selling, general and administrative Operating expenses—affiliates Depreciation and amortization Total operating expenses requirements, and decreases in marketing and advertising expenses and acquisition-related integration costs. These decreases were offset partially by increases in facility costs and an increase in USF contribution rates. these decreases. parent. This methodology results in certain overhead costs incurred by us and by our direct parent that were previously assessed to us on a net basis now being assessed on a gross basis both to and from our ultimate parent, resulting in both higher affiliate revenues and expenses for us. We believe this change, resulting from systems integration activities, did not have a significant impact to our net income for the successor years ended December 31, 2013 and 2012. Depreciation Amortization Total depreciation and amortization the addition of new plant. As of Interest expense Other income (expense) Total other income (expense) Income tax expense approximately $18.639 billion impairment October 31, 2014. the assets. This method requires the periodic revision of depreciation rates. In computing the periodic pension and post-retirement assets. Changes in Income Taxes Our reported deferred tax assets and liabilities 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. CenturyLink does have the right to change their policy regarding settlement of these assets and liabilities at any time. CenturyLink if and to the extent CenturyLink has available funds that it is willing and able to contribute or advance. subsidiaries. CenturyLink also maintains a separate letter of credit arrangement with a financial institution amounting to $160 million to which we have access. As of the successor date of December 31, 2012. $754 million was outstanding as of the successor date of December 31, 2013. The revolving promissory note is due on demand and ranked equally to our Senior Notes. Interest is accrued on the outstanding balance using a weighted average per annum interest rate of CenturyLink's outstanding borrowings for the interest period. As of the successor date of December 31, 2013, the weighted average interest rate was 6.765%. This revolving promissory note is reflected on our consolidated balance sheets under "Note payable-affiliate". Long-term debt, including current maturities and capital lease obligations Interest on long-term debt and capital leases(1) Operating leases Purchase commitments(2) Non-qualified pension obligation Other Total future contractual obligations(3) Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities equipment and proceeds received from the sale of property and equipment in 2012. Us and severance. The final amounts and timing of the compensation costs to be paid is partially dependent upon personnel decisions that continue to be made as part of the continuing integration. These amounts may be material. successor date of December 31, 2013 will reduce interest expense in future periods, unless otherwise extinguished. 2013. OPERATING REVENUES Operating revenues Operating revenues—affiliates Total operating revenues OPERATING EXPENSES Cost of services and products (exclusive of depreciation and amortization) Selling, general and administrative Operating expenses—affiliates Depreciation and amortization Total operating expenses OPERATING INCOME OTHER INCOME (EXPENSE) Interest expense Other income (expense) Total other income (expense) INCOME BEFORE INCOME TAX EXPENSE Income tax expense NET INCOME NET INCOME OTHER COMPREHENSIVE INCOME Unrealized gain (loss) on investments and other, net of tax Other comprehensive income COMPREHENSIVE INCOME ASSETS CURRENT ASSETS Cash and cash equivalents Accounts receivable, less allowance of $42 and $48 Short-term affiliate loans Deferred income taxes, net Other Total current assets NET PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment Accumulated depreciation Net property, plant and equipment GOODWILL AND OTHER ASSETS Goodwill Customer relationships, net Other intangible assets, net Other Total goodwill and other assets TOTAL ASSETS LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) CURRENT LIABILITIES Current maturities of long-term debt Accounts payable Accounts payable—affiliates, net Dividends payable—Qwest Services Corporation Accrued expenses and other liabilities Salaries and benefits Other taxes Other Advance billings and customer deposits Total current liabilities LONG-TERM DEBT DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes, net Affiliates obligations, net Other Total deferred credits and other liabilities COMMITMENTS AND CONTINGENCIES (Note 16) STOCKHOLDER'S EQUITY (DEFICIT ) Common stock—one share without par value, owned by Qwest Services Corporation Accumulated deficit Total stockholder's equity (deficit) TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Provision for uncollectible accounts Long-term debt (premium) discount amortization Changes in current assets and liabilities: Accounts receivable Accounts payable Accounts receivable and payable—affiliates, net Accrued income and other taxes Other current assets and other current liabilities, net Changes in other noncurrent assets and liabilities Changes in other noncurrent assets and liabilities—affiliates Other, net Net cash provided by operating activities INVESTING ACTIVITIES Payments for property, plant and equipment and capitalized software Changes in interest in investments managed by Qwest Services Corporation Changes in short-term affiliate loans Other, net Net cash used in investing activities FINANCING ACTIVITIES Payments of long-term debt Net proceeds from issuance of long-term debt Dividends paid to Qwest Services Corporation Other, net Net cash used in financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow information: Income taxes (paid to) refunded from Qwest Services Corporation, net Interest paid (net of capitalized interest of $8, $3, $12 and $10) COMMON STOCK Balance at beginning of period Asset transfers Balance at end of period ACCUMULATED DEFICIT Balance at beginning of period Net income Dividends declared to Qwest Services Corporation Change in other comprehensive income Balance at end of period TOTAL STOCKHOLDER'S EQUITY (DEFICIT) years ended December 31, 2012 and 2011. statements of cash flows. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 12—Income Taxes and Note 16—Commitments and Contingencies for additional information. upon its relative selling price is recognized ratably over the longer of the contractual period or the expected customer relationship period. flows. Advertising Costs Our advertising expense was $88 million for the successor year ended December 31, 2013, liabilities at any time. assets. See Note 12—Income Taxes for additional information. statements of operations only if a disposal is abnormal or unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as incurred. Interest is capitalized during the construction phase of network and other internal-use capital projects. Employee-related costs for construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification. be recoverable. We method. Cash, accounts receivable and other current assets Property, plant and equipment Identifiable intangible assets: Customer relationships Capitalized software Other noncurrent assets Current liabilities, excluding current maturities of long-term debt Current maturities of long-term debt Long-term debt Deferred credits and other liabilities Goodwill Aggregate consideration Goodwill Customer relationships, less accumulated amortization of $598 and $— Other intangible assets subject to amortization Capitalized software, less accumulated amortization of $354 and $1,741 Amortization expense for intangible assets Year ending December 31, 2012 2013 2014 2015 2016 2017 and thereafter assess goodwill recorded in business combinations for impairment at least annually, or more frequently, if events or circumstances indicate there may be impairment. Our annual goodwill impairment assessment date was September 30. We equity of 8.3%). Based on our Notes(1) Debentures Capital lease and other obligations Unamortized premiums (discounts) Total long-term debt Less current maturities Long-term debt, excluding current maturities principal amount redeemed plus accrued interest. these notes, or 2012 2013 2014 2015 2016 2017 and thereafter Total notes and debentures affiliate”. Interest expense on long-term debt: Gross interest expense Capitalized interest Total interest expense on long-term debt Trade receivables Earned and unbilled receivables Purchased and other receivables Total accounts receivable Less: allowance for doubtful accounts Accounts receivable, less allowance accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables. Balance at January 1, 2009 (Predecessor) Charged to expense-net Deductions Balance at December 31, 2009 (Predecessor) Charged to expense-net Deductions Balance at December 31, 2010 (Predecessor) Charged to expense-net Deductions Balance at March 31, 2011 (Predecessor) Fair value adjustment Balance at April 1, 2011 (Successor) Charged to expense-net Deductions Balance at December 31, 2011 (Successor) Property, plant and equipment: Land Fiber, conduit and other outside plant(1) Central office and other network electronics(2) Support assets(3) Construction in progress(4) Gross property, plant and equipment Accumulated depreciation Net property, plant and equipment We recorded depreciation expense of 10 year lease term. Balance at January 1, 2009 (Predecessor) Accrued to expense Payments, net Reversal and adjustments Balance at December 31, 2009 (Predecessor) Accrued to expense Payments, net Reversals and adjustments Balance at December 31, 2010 (Predecessor) Accrued to expense Payments, net Reversals and adjustments Balance at March 31, 2011 (Predecessor) Fair value adjustment Balance at April 1, 2011 (Successor) Accrued to expense Payments, net Reversals and adjustments Balance at December 31, 2011 (Successor) The unfunded status of QCII's qualified pension plan for accounting purposes was 2009. 401(k) Plan Due to CenturyLink's acquisition of QCII, we now record the stock-based compensation expense that is allocated to us from CenturyLink which is included in operating expenses-affiliates in our consolidated statements of operations. Based on CenturyLink through affiliate transactions. Strategic services Legacy services Affiliates and other services Total operating revenues Taxes and surcharges included in operating revenues and expenses improving, maintaining and operating our operations support systems and shared internal communications Effective on April 1, 2011 in conjunction with CenturyLink's indirect acquisition of us, we changed our accounting policy to recognize interest expense and penalties related to income taxes as income tax expense. Prior to April 1, 2011, interest expense and penalties related to income taxes were included in the other income (expense) line of our consolidated statements of operations. Income tax expense: Current tax provision: Federal State and local Total current tax provision Deferred tax expense (benefit): Federal State and local Total deferred tax expense (benefit) Income tax expense Effective income tax rate: Federal statutory income tax rate State income taxes—net of federal effect Medicare subsidiary Excess compensation Other Effective income tax rate Deferred tax assets and liabilities: Deferred tax liabilities: Property, plant and equipment Intangibles assets Receivable from an affiliate due to pension plan participation Other Total deferred tax liabilities Deferred tax assets: Payable to affiliate due to post-retirement benefit plan participation Debt premiums Other Total deferred tax assets Net deferred tax liabilities realized. Financial Accounting Standards Board ("FASB"). We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates. Assets—Investments securities Liabilities—Long-term debt excluding capital lease obligations Balance at January 1, 2010 Additions Dispositions and settlements Included in other comprehensive income (expense) Balance at December 31, 2010 (Predecessor) Dispositions and settlements Included in other comprehensive income (expense) Balance at March 31, 2011 (Predecessor) Fair value adjustment Balance at April 1, 2011 (Successor) Assignments to CenturyLink Balance at December 31, 2011 (Successor) For the assets and liabilities measured at fair value on our acquisition date, we employed a variety of methods to determine these fair values, including quoted market price, observable market values of comparable assets, current replacement costs and discounted cash flow analysis. The factors that most significantly impact our estimate of fair value included forecasted cash flows and a market participant discount rate. The applicable market participant discount rate is impacted by the market risk free rate of return and risk premium associated with a group of peer telecommunication companies which have been deemed to be market participants for determining the fair value. The discount rates used in our valuations ranged from 7.5% Non-cash dividend to QSC(1) Cash dividend declared to QSC Cash dividend paid to QSC The timing of cash payments for declared dividends to QSC is at our discretion in consultation with QSC. We may declare and pay dividends to QSC in excess of our earnings to the extent permitted by applicable law. Our debt covenants do not limit the amount of dividends we can pay to QSC. 2011 Operating revenues Operating income Income tax expense Net income 2010 Operating revenues Operating income Income tax expense Net income consider all settlement opportunities. Assets acquired through capital leases Depreciation expense Cash payments towards capital leases Assets included in property, plant and equipment Accumulated depreciation Capital lease obligations: 2012 2013 2014 2015 2016 2017 and thereafter Total minimum payments Less: amount representing interest and executory costs Present value of minimum payments Less: current portion Long-term portion that are reasonably assured. For the successor years ended December 31, 2013 and 2012 and the successor nine months ended December 31, 2011, our gross rental expense was $83 million, $93 million, and $125 million, Operating leases: 2012 2013 2014 2015 2016 2017 and thereafter Total future minimum payments(1) Purchase Obligations Prepaid expenses Deferred activation and installation charges Other Total other current assets Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management concluded that our internal control over financial reporting was effective as of December 31, 2013. Audit fees Audit-related fees Total fees 2012. year, comfort letters, consents and assistance with and review of documents filed with the SEC. Audit fees for each year shown include amounts that have been billed through the date of this filing and any additional amounts that are expected to be billed thereafter. (1) Report of Independent Registered Public Accounting Firm Financial Statements covered by the Report of Independent Registered Public Accounting Firm: Consolidated Statements of Operations for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009 Consolidated Statements of Comprehensive Income for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009 Consolidated Balance Sheets as of the successor date of December 31, 2011 and the predecessor date of December 31, 2010 Consolidated Statements of Cash Flows for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009 Consolidated Statements of Stockholder's Equity (Deficit) for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009 Notes to the Consolidated Financial Statements 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. Financial statements from the Annual Report on Form 10-K of Qwest Corporation for the 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 on March (318) 388-9000(Registrant's telephone number, including area code)Title of Each Class Name of Each Exchange on Which Registered 6.5% Notes Due 2017 New York Stock Exchange 7.375% Notes Due 2051 New York Stock Exchange 7.5% Notes Due 2051 New York Stock Exchange 6.125% Notes Due 2053 New York Stock Exchange ýxýxýx No oýx No oýo ý(Dox ýx2, 2012,7, 2014, one share of common stock was outstanding. None of Qwest Corporation's common stock is held by non-affiliates.TABLE OF CONTENTS Business1
Risk Factors
Unresolved Staff CommentsProperties26
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement SchedulesSignaturesinetwork access,broadband, private line (including special access), broadband, data,network access, Ethernet, wireless and video services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers.carriers ("CLEC"). We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.The recognitionOn the date of the acquisition, April 1, 2011, our assets and liabilities were recognized at their fair valuevalue. This revaluation has been reflected in our consolidated financial statements and, therefore, has resulted in a new basis of accounting for the "successor period" beginning on April 1, 2011.. This new basis of accounting means that our consolidated financial statements for the successor periods are not comparable to our previously reportedconsolidated financial statements relating to periods prior to the acquisition, including the predecessor period consolidated financial statements in this annual report.financial condition and results of operations, see "Risk Factors" in Item 1A of this annual report. The summary financial information in this section should be read in conjunction with, and is qualified by reference to, our consolidated financial statements and notes thereto in Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this annual report.operations.operations: Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 (Dollars in millions) $ 6,635 2,268 9,271 9,731 5,436 1,630 6,788 7,169 1,199 638 2,483 2,562 543 299 1,082 1,197 Successor Predecessor December 31, 2011 December 31, 2010 (Dollars in millions) $ 24,932 12,570 8,325 8,012 9,887 (831 ) Successor Predecessor Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) Statements of operations summary data: Operating revenues $ 8,753 8,848 6,635 2,268 Operating expenses 6,675 6,943 5,436 1,630 Operating income $ 2,078 1,905 1,199 638 Net income $ 964 849 543 299
the following dates:(1)Total long-term debt is the sum of current maturities of long-term debt and long-term debt onThe following table summarizes certain selected financial information from our consolidated balance sheets. For total obligations, see "Management's Discussion and Analysissheets as of Financial Condition and Results of Operations—Future Contractual Obligations" in Item 7 of this report. Successor December 31, 2013 December 31, 2012 (Dollars in millions) Balance sheets summary data: Total assets $ 23,218 23,947 7,558 7,625 Total stockholder's equity 9,613 9,974 Total long-term debt is the sum of current maturities of long-term debt and long-term debt (excluding note payable-affiliate) on our consolidated balance sheets. For total obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Future Contractual Obligations" in Item 7 of this annual report. presents somesummarizes certain of our operational metrics:metrics as of the following dates: Successor December 31, 2013 (in thousands) Operational metrics: 3,429 3,318 3,185 7,641 8,058 8,536 Successor Predecessor December 31, 2011 December 31, 2010 (in thousands) 3,084 2,940 8,533 9,193 Broadband subscribers are customers that purchase high-speed Internet connection service through their existing telephone lines and fiber-optic cables, and access lines are lines reaching from the customers' premises to a connection with the public network. The prior year numbers have been adjusted to include the operational metrics of our wholly owned subsidiary, El Paso County Telephone Company, which had been previously excluded. The increase (in thousands) related to including El Paso County Telephone Company's broadband subscribers and access lines, in the table above, is approximately 2 and 3, respectively. (1)We have updated our methodology for counting our broadband subscribers and access lines and have reclassified prior year amounts to conform to the current period presentation. For additional information see "Results of Operations—Overview" in Item 7 in this report.(2)Access lines are telephone lines reaching from the customers' premises to a connection with the public switched telephone network, or PSTN.Operations"Products "Products and Services". The following table provides a summary of our operating revenues by category: Successor Predecessor Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010
Year Ended
December 31,
2009 Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) (Dollars in millions) $ 2,406 793 3,059 2,900 $ 3,342 3,265 2,406 792 2,796 1,003 4,323 4,922 3,208 3,471 2,796 1,003 1,433 472 1,889 1,909 2,203 2,112 1,433 473 $ 6,635 2,268 9,271 9,731 $ 8,753 8,848 6,635 2,268 States and substantially all of our long-lived assets are located in the United States. Since the April 1, 2011 closing of CenturyLink's indirect acquisition of us, our are reported as part of the segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") has becomeis 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 ("SEC"). Consequently, we do not provide our discrete financial information to the CODM on a regular basis.a variety of voice,local, broadband, data,private line (including special access, which we market to our business and wholesale customers), network access, Ethernet, information technology ("IT"), video and other communications services. Through our strategic partnership with DIRECTV, we offer satellite digital television to customers in our local service area. We also offer wireless services to customers through CenturyLink's strategic partnership with Verizon Wireless.DIRECTV)DIRECTV through CenturyLink's strategic partnership), voice and Verizon Wireless (through CenturyLink's strategic partnership) services. We believe our customers value the convenience of and price discounts associated with receiving multiple services through a single company.8.57.6 million access lines in 14 states and forms a portion of the public switched telephone network. For more information on our network, or PSTN.strategic"strategic" services to access the Internet, connect to private networks and transmit data. We also provide value-added services and integrated solutions that make communications more secure, reliable and efficient for our customers. We focus our marketing and sales efforts on these services:services, commonly referred to asor wireless backhaul services, to support their next generation wireless networks; Broadband. Our broadband services allow customers to connect to the Internet through their existing telephone lines and fiber-optic cables at high speeds. Substantially all of our broadband subscribers are located within our local service area.anCenturyLink's arrangement with DIRECTV that allows us to market, sell and bill for its services under its brand name.name; andhas a five-year term ending inruns through 2015 and is terminable by either party thereafter.legacy"legacy" services represent our traditional voice, data and network services, which include the following:or ISDN (which("ISDN") services, which uses regular telephone lines to support voice, video and data applications), switched access and traditionalapplications;or WAN,("WAN") services, (which allowwhich allows a local communications network to link to networks in remote locations). Welocations; and transport and terminate local services within our local service area. Local services consist primarily of basic local exchange unbundled network elements, or UNEstheir interstate and switching services. We also provide the following services with our local exchange services: caller ID, call waiting, call return, 3-way calling, call forwarding, network transport, billing services, access to our network by other telecommunications services that originate or terminate on our network and voicemail.affiliates:affiliates IT support and services, which includes computer system development and support services, network support and technical services. We also generate other operating revenues from Universal Service Fund ("USF") revenues and surcharges and the leasing and subleasing of space in our office buildings, warehouses and other properties. The majority of our real estate properties are located in ourthe local service area.Importance, Duration and Effectarea of our wireline operations.own severalhave rights in various patents, tradenames,trade names, trademarks, copyrights and other intellectual property necessary to conduct our business. Our services often use the intellectual property of others, including licensed software. We also occasionally license our intellectual property to others.build upon our reputation and to further enhance customer loyalty.events.events and sports venues.solutionsand network products and services that meet existing and future business needs through bundles of services and integrated service offerings. Our focus is to be a comprehensive customer communications solution for our small businesses to large enterprises.providers' needsproviders through bandwidth growth and quality of services.as broadband enabledby deploying broadband-enabled technologies are being deployed to provide significantadditional capacity to our customers. Rapid and significant changes in technology are expected to continue in the telecommunications industry. Our future success will depend, in part, on our ability to anticipate and adapt to technological changes.communications in our local service area.communications. These agencies (i) issue rules to protect consumers and promote competition; theycompetition, (ii) set the rates that telecommunication companies charge each other for exchanging traffic;traffic, and they(iii) have traditionally established funds (called universal service funds or USF)USF to support the provision of services to high-cost areas. In most states, local voice service, switched and special access services and interconnection services are subject to price regulation, although the extent of regulation varies by type of service and geographic region. In addition, we are required to maintain licenses with the FCC and with thestate utility commissions of most of the states in our local service area.commissions. Laws and regulations in many states restrict the manner in which a licensed entity can interact with affiliates, transfer assets, issue debt and engage in other business activities and many mergersacquisitions and acquisitionsdivestitures require approval by the FCC and some state commissions.or ILECs,("ILECs") operated as regulated monopolies having the exclusive right and responsibility to provide local telephone services in their franchised service territories. As we discuss in greater detail below, passage of the Telecommunications Act of 1996, coupled with state legislative and regulatory initiatives and technological change, fundamentally altered the telephone industry by generally reducing the regulation of ILECs and creating a substantial increase in the number of competitors. We are considered an ILEC. The following description discusses some of the major industry regulations that affect our traditional telephone operations, but numerous other regulations not discussed below could also impact us. Some legislation and regulations are currently the subject of judicial, proceedings, legislative hearings and administrative proceedings which could substantially change the manner in which the telecommunications industry operates and the amount of revenues we receive for our services. Neither the outcome of these proceedings, nor their potential impact on us, can be predicted at this time. The impact of regulatory changes in the telecommunications industry could have a substantial impact on our operations. For additional information, see "Risk Factors" in Item 1A of this annual report below.report.State Regulation In recent years, most states have substantially reduced their regulation of ILECs. Nonetheless, state regulatory commissions generally continue to regulate local service rates, intrastate access charges, and in some cases service quality, as they continue to grant and revoke certifications authorizing companies to provide communications services. State commissions traditionally regulated pricing through "rate of return" regulation that focused on authorized levels of earnings by ILECs. Several states continue to regulate us in this manner. In most of our states, we are generally regulated under various forms of alternative regulation that typically limit our ability to increase rates for basic local voice service, but relieve us from the requirement to meet certain earnings tests. In a few states, we have recently gained pricing freedom for the majority of retail services except for the most basic of services, such as stand-alone basic residential voice service. In most of the states in which we operate, we have gained pricing flexibility for certain enhanced calling services, such as caller identification and for bundled services that also include local voice service. State commissions periodically conduct proceedings to review the rates that we charge other telecommunications providers for using our network or reselling our service pursuant to the Telecommunications Act of 1996, and those proceedings can result in revenue reductions. We are currently responding to carrier complaints, legislation or generic investigations regarding our intrastate switched access charge rates in several of our states. In particular, certain long-distance providers have disputed existing intercarrier compensation rates payable to us and other ILECs with respect to VoIP traffic or refused to pay access charges, based on the contention that tariffed switched access charges should not apply to VoIP traffic. On October 27, 2011, the FCC adopted an order comprehensively reforming federal intercarrier compensation and universal service policies and rules, as discussed further below under the heading "Federal Regulation." Among other things, this order preempted state regulatory commissions' jurisdiction over all terminating access charges, however, intrastate access charges have historically been subject to exclusive state jurisdiction. Furthermore, the FCC decreed that on a prospective basis, intercarrier compensation rates for VoIP traffic are established at interstate access rates in the event intrastate switched access rates exceed interstate rates. The FCC order requires all terminating access rates including intrastate, interstate and reciprocal compensation rates to be reduced and unified over time. Excluding the rate implications contemplated on a prospective basis by the recent FCC order, we will continue to vigorously defend and seek to collect our intrastate switched access revenue subject to outstanding disputes. These historical disputes are primarily over access charge compensation for VoIP traffic terminating on the public switched telephone network. The outcomes of these disputes cannot be determined at this time. If we are required to reduce our intrastate switched access rates as a result of any of these disputes or state initiatives, we will seek to recover displaced switched access revenues from state universal service funds or other services. However, the amount of such recovery, particularly from residential customers, is not assured. Under state law, our telephone operating subsidiaries are typically governed by laws and regulations that (i) regulate the purchase and sale of ILECs, (ii) prescribe certain reporting requirements, (iii) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (iv) limit ILECs' ability to borrow and establish asset liens (v) regulate transactions between ILECs and their affiliates, and (vi) impose various other service standards. As an ILEC, we generally face "carrier of last resort" obligations which include an ongoing requirement to provide service to all prospective and current customers in our service area who request service and are willing to pay rates prescribed in our tariffs. In competitively-bid situations, such as newly-constructed housing developments or multi-tenant dwellings, this may constitute a competitive disadvantage to us if competitors can choose to focus on low-risk profitable customers and withholdservice from high-risk unprofitable customers. Strict adherence to carrier of last resort requirements may force us to construct facilities with a low likelihood of positive economic return. In certain cases, we seek to mitigate these risks by receiving regulatory approval to use less costly alternative technologies, such as fixed wireless, or by sharing network construction costs with our customers. In addition, a few of our states provide relief from these obligations under certain specific circumstances, and in certain areas our costs to build and maintain network infrastructure are partially offset by payments from universal service programs. We operate in states where traditional cost recovery mechanisms, including rate structures, are under evaluation or have been modified. There can be no assurance that these states will continue to provide for cost recovery at current levels.provided by us,we provide, including the special access charges we bill for wholesale network transmission and the interstate access charges that we bill to long-distance companies and other communications companies in connection with the origination and termination of interstate voice and data transmissions.phone calls. Additionally, the FCC regulates a number of aspects of our business related to privacy, homeland security and network infrastructure, including access to and use of local telephone numbers. The FCC has responsibility for maintaining and administering the federal USF, which provides substantial support for maintaining networks in high-cost areas, as well as supporting service to low-income households, schools and libraries, and rural health carehealthcare providers. Like other communications network operators, ILECs must obtain FCC approval to use certain radio frequencies, or to transfer control of any such licenses. The FCC retains the right to revoke these licenses if a carrier materially violates relevant legal requirements. We, like other large and mid-sized ILECs, operate under price-cap regulation of interstate access rates. Under price-cap regulation, limits imposed on a company's interstate rates are adjusted periodically to reflect inflation, productivity improvement and changes in certain non-controllable costs. Ourallother telecommunications carriers also may behave been further impacted by legislation and regulation imposing new or greateradditional obligations on us. The most likely areas of impact include regulations or laws relatedus, particularly with regards to providing broadband service, bolstering homeland security, increasing disaster recovery requirements, minimizing environmental impacts and enhancing privacy, or addressing other issues that impact our business, includingprivacy. These laws include the Communications Assistance for Law Enforcement Act, and laws governing local telephone number portability and customer proprietary network information requirements. These laws and regulations may cause us to incur additional costs and could impact our ability to compete effectively. From time-to-time,reviews the rates and terms under which ILECs provideinitiated a special access services. Ifproceeding and has requested data, information and documents to allow it to conduct a comprehensive evaluation of competition in the special access market. The ultimate impact of this proceeding on the Company is currently unknown. However, if the FCC were to adopt significant changes in regulations affecting special access services, this could adversely impact our operations or financial results.Universal Service Fund and Other Related Matterstraffic. traffic and (ii) administrated the federal USF.connection therewith, the FCC has received intercarrier compensation proposals from severalindustry groups, and solicited public comments on a variety of topics related to access charges and intercarrier compensation. In early 2011, the FCC issued a notice of proposed rulemaking focused on modernizing its universal service policies and intercarrier compensation rules. On October, 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order ("CAF order") intended to reform the existing regulatory regime to recognize ongoing shifts to new technologies, including VoIP, and gradually re-direct universal service funding to foster nationwide broadband coverage. This initial rulingThe CAF order provides for a multi-year transition over the next decade as terminating intercarrier compensation charges are reduced, universal service funding is explicitly targeted to broadband deployment, and subscriber line charges paid by end user customers are gradually increased. TheseWe anticipate that these changes will substantially increase the pace of reductions in the amount of switched access revenues we receive,in our wholesale business, while creating opportunities for increases in federal USF and retail revenue streams. The ultimate effect the CAF order went into effect. At the same time, numerous parties filed a Petition For Reconsideration ("PFR")petition for reconsideration with the FCC seeking numerous revisions to the CAF order. In January 2012, CenturyLink joined more than two dozen parties in appealingchallenging certain aspects of the CAF order by filing a PFRseparate appeal that will bewas heard by the United States Tenth Circuit Court of Appeals.Appeals in November 2013, and we are awaiting the Court's decision. Future judicial challenges to the CAF order are also possible, which could alter or delay the FCC's proposed changes. In addition, based on the outcome of the FCC proceedings, various state commissions may consider changes to their universal service funds or intrastate access rates. Moreover, rulemaking designed to implement the CAF order is not complete, and several FCC proceedings relating to the CAF order remain pending. For these and other reasons, we cannot predict the ultimate impact of these proceedings on us at this time.could increasehas increased competition in selected areas, which may increase our marketing costs and decrease our revenues in those areas. This trend may intensify if program participation increases.cannot at this time estimate the impactoperate in states where traditional cost recovery mechanisms, including rate structures, are under evaluation or have been modified. As laws and regulations change, there can be no assurance that these programs maymechanisms will continue to provide us with any cost recovery.onfaced various carrier complaints, legislation or other investigations regarding our operations.January 31, 2012October 27, 2011, the FCC adopted an order modernizingthat, among other things, preempted state regulatory commissions' jurisdiction over all terminating access charges, including intrastate access charges that have historically been subject to exclusive state jurisdiction. Excluding the program that provides assistancerate implications contemplated on a prospective basis by this FCC order, we will continue to qualifying low-income individuals for local voice service. These changes also affect state-specific programs that provide assistancevigorously defend and seek to qualifying individuals.collect our intrastate switched access revenue subject to outstanding disputes. The impactoutcomes of these changesdisputes cannot be quantifieddetermined at this time, buttime. If we may face increased administrative costs and audit requirementsare required to reduce our intrastate switched access rates as a result of this FCC order and its implementation. For several years, Congress has passed bills granting successive short-term exemptionsany of these disputes or state initiatives, we will seek to recover displaced switched access revenues from a federal law that could otherwise delaystate universal service funds or block fundingother services. However, the amount of the USF's E-rate program, including a bill extending the exemption through December 31, 2012. Although we expect fundingsuch recovery particularly from this program to continue, we cannot assure you that the lack of a definitive resolution of this issue willresidential customers, is not delay or impede the disbursement of funds in the future.and VoIP services compete on bandwidth and quality of service. Some of our competitors are subject to fewer regulations than we are which affords them competitive advantages against us. Under federal regulations, telecommunication providers are able to interconnect their networks with ours, resell our services or lease separate parts of our network in order to provide competitive services. Generally, we have been required to provide these functions and services at wholesale rates, which allow our competitors to sell their services at lower prices. However, these rules have been and continue to be reviewed by state and federal regulators. In addition, wireless and broadband service providers generally are subject to fewer regulations, which may allow them to operate with lower costs than we are able to operate. For additional discussion of regulations affecting our business, see "Regulation" above. In providing long-distance services to our customers, we compete primarily with national telecommunications and VoIP providers. Competition in the long-distance market is based primarily on price; however customer service, quality and reliability can also be influencing factors. Our resale and UNE customers are experiencing the same competition with competitive local exchange carriers, or CLECs, for local services customers as we are, as discussed above. We also compete with some of our own customers that are deploying their own networks to provide customers with local services. By doing so, these competitors take traffic off of our network. Although our status as an ILEC continues to provide us some advantages in providing local services in our local service area, we increasingly face significant competition as an increasing number of consumers are willing to substitute cable, wireless, and electronic communications for traditional voice telecommunications services. This has led to an increase in the number and type of competitors within our industry and a decrease in our market share. As a result of this product substitution, we face greater competition in providing local services from wireless providers, resellers and sales agents (including ourselves) and from broadband service providers, including cable companies. We also continue to compete with traditional telecommunications providers, such as national carriers, smaller regional providers, CLECs and independent telephone companies.residentialconsumer customers, which comprise 61% of our access line customers. We anticipate this trend will continue, particularly if wireless service providers continue to expand their coverage areas, reduce their rates, improve the quality of their services and offer enhanced new services. Substantially all of our access line customers are currently capable of receiving wireless services from at least one competitive service provider. Technological and regulatory developments in wireless services, personal communications services, digital microwave, satellite, coaxial cable, fiber optics, local multipoint distribution services, WiFi and other wired and wireless technologies are expected to further permit the development of alternatives to traditional landline services.LEClocal exchange carriers services. For all these reasons, we cannot assure that VoIP providers will not successfully compete for our customers. WAN services and ISDN, we compete primarily with national telecommunications providers and cable companies. Competition for these other legacy services is based primarily on price and bundled offerings.the operationowning or operating of vehicle fleets or power supplies for our communications equipment. Although we cannot assess with certainty the impact of any future compliance and remediation obligations or provide you with any assurances regarding the ultimate impact thereof, we do not currently believe that future environmental compliance and remediation expenditures will have a material adverse effect on our financial condition or results of operations.Employees2011,2013, we had approximately 25,00022,800 employees, of which approximately 13,000 were12,000 are members of either the International Brotherhood of Electrical Workers ("IBEW") or the Communications Workers of America ("CWA"). We believe that relations with our employees continue to be generally good. However, our current four-year agreements with the IBEW and CWA will expire October 6, 2012.America. See the discussion of risks relating to our labor relations in "Risk Factors—Other Risks"Risks Affecting Our Business" in Item 1A of this annual report. We including our principal executive officer and senior financial officers, in accordance with applicable laws and rules promulgated by the SEC and the New York Stock Exchange. In the event that CenturyLink makes any changes (other than by a technical, administrative or non-substantive amendment) to, or provide any waivers from, the provisions of its code of conduct applicable to our directors or executive officers, CenturyLink intends to disclose these events on our website or in a report on Form 8-K filed with the SEC. These codes of conduct, as well as copies of CenturyLink's guidelines on significant governance issues and the charters of their audit committee, compensation committee, nominating and corporate governance committee and risk evaluation committee, are also available in the "Corporate Governance" section of our website atwww.centurylink.com/Pages/AboutUs/Governance/ or in print to any shareholder who requests them by sending a written request to our Corporate Secretary at CenturyLink, Inc., 100 CenturyLink Drive, Monroe, Louisiana, 71203. In addition, during 2011, our chief executive officer certified to the New York Stock Exchange that he was unaware of any violations by us of the New York Stock Exchange's corporate governance listing standards.business.prospects. These statements include, among others:businessoperations, investments, transactions and other activities, and certain transactions we have completed, such as increased revenue andor decreased capital or operating expenditures;outside ofbeyond our control. These forward-looking statements, and the assumptions upon which they are based, are inherently speculative and are subject to uncertainties thata number of risks and uncertainties. Actual events and results may cause our actual results to bediffer materially different from any future results expressedthose anticipated, estimated, projected or implied by us in those statements. Somestatements if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect. Factors that could affect actual results include but are not limited to:"Risk Factors"greater detail in Item 1A of this report.annual report, which is subject to updating and supplementing by our subsequent SEC reports.Further, theFurthermore, any information about our intentions contained in this document is a statementany of our forward-looking statements reflects our intentions as of the date of this documentsuch forward-looking statement and is based upon, among other things, the existing regulatory and technological environment, industry and competitive conditions, and economic and market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise. Anyfollowingmost significant risks or uncertainties that could (i) materially and adversely affect our business, financial condition, results of operations, liquidity or prospects.prospects or (ii) cause our actual results to differ materially from our anticipated results or other expectations. The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this annual report. Please note that the following discussion is not intended to comprehensively list all risks described below are not the only risks facingor uncertainties faced by us. PleaseOur operations or actual results could also be aware thatsimilarly impacted by additional risks and uncertainties that are not currently known to us, or that we currently deem to be immaterial could also materially and adversely affect our business operations.line losses,lines, which has adversely affected and couldis expected to continue to adversely affect our operating results and financial condition. We compete in a rapidly evolvinghighlyother developments over the past several years have caused us to continue to lose access lines and to experience increased competitive market,pressures impacting each of our business segments, and we expect these trends will continue. In addition to competition to continue to intensify. Wefrom larger national telecommunications providers, we are facing greaterincreasing competition from a variety of other sources, including cable and satellite companies, wireless providers, information technology companies, broadband companies,providers, device providers, resellers, and sales agents (including ourselves) and facilities-based providers using their own networks as well as those leasing parts of our network. In addition, regulatory developments over the past several years have generally increased competitive pressures on our business. Due to some of these and other factors, we continue to lose access lines.(ii)(iii) have market presence, engineering and technical capabilities, and financial and other resources greater than ours, (iii)(iv) own larger andor more diverse networks (iv)with greater transmission capacity or other advantages, (v) conduct operations or raise capital at a lower cost than us, (v)(vi) are subject to less regulation,(vi)customers, (viii) offer greater online content services or (vii)(ix) have substantially stronger brand names. Consequently, these competitors may be better equipped to provide more attractive offerings, to charge lower prices for their products and services, to provide more attractive offerings, to develop and expand their communications and network infrastructures more quickly, to adapt more swiftly to new or emerging technologies and changes in customer requirements, and to devote greater resources to the marketing and sale of their products and services.significantly without corresponding cost reductions. If this occurred, our ability to service debt and pay other obligations would also be adversely affected.generateexperience declining revenues, and our efforts to offset these declines may not be successful. The•including broadband, satellite television provided by DIRECTVwhich are described in detail elsewhere in this annual report;wireless voice services provided by Verizon Wireless;wholesale customers; and• provided by others could constrain our flexibility, as described further below.the current credit market, environment, could negatively affect our business. Worldwide economic growth has been sluggish since 2008, and many experts believe that a confluence of factors in the United States, Europe, Asia and developing countries may result in a prolonged period of economic downturn,stagnation, slow growth or economic uncertainty. While it is difficult to predict the ultimate impact of these general economic conditions, these conditionsthey could adversely affect the affordability of and consumer demand for some of our products and services and could cause customers to shift to lower priced products and services or to delay or forgoforego purchases of our products and services. OneThese conditions impact, in particular, our ability to sell discretionary products or services to business customers that are under pressure to reduce costs or to governmental customers that have recently suffered substantial budget cuts with the prospect of additional future budget cuts. Any one or more of these circumstances could cause our revenues to continue declining. Also, our customers may encounter financial hardships oraffectnegatively impact their ability to make timely payments to us. In addition, as discussed further below, unstable economic and credit markets may preclude us from refinancing maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us, or at all. For these reasons, among others, if the current economic conditions persist or decline, this could adversely affect our operating results, and financial condition, and liquidity could be adversely affected.well asdoes any company, of a security breach or significant disruption of our information technology infrastructure and related systems (including our billing systems). As a communications and information technology company, we face an added risk that a security breach or other significant disruption of our public networks or information technology infrastructure and related systems that we develop, install, operate and maintain for certain of our business and governmental customers could lead to material interruptions or curtailments of service. Moreover, due to the nature of our customers and services, we face a heightened risk that a security breach or disruption could result in unauthorized access to our customers' proprietary or classified information on our public networks or internal systems or the systems that we operate and maintain for certain of our customers.raise capital.may receive similarare currently responding to several of these notices or be involved in similar lawsuitsand claims. Like other communications companies, we have received an increasing number of these notices and claims in the future.past several years, and expect this industry-wide trend will continue. Responding to these claims may require us to expend significant time and money defending our use of affectedthe applicable technology, and divert management’s time and resources away from other business. In certain instances, we may require usbe required to enter into licensing agreements requiring royalty payments that we would not otherwise have to pay or, may require usin the case of litigation, to pay damages. If we are required to take one or more of these actions, our profit margins may decline. In addition, in responding to these claims, we may be required to stop selling or redesign one or more of our products or services, which could significantly and adversely affect the way we conduct business.reselleroperations, financial performance and sales agency arrangements expose us to a number of risks, one or more of which may adversely affect our business and operating results.liquidity are materially reliant on various third parties.We could be harmed by network disruptions, security breaches,other significant disruptions or failures of our IT infrastructure and related systems or of those we operate fordata services in certain of our customers. Tomarkets, we must either lease network capacity from, or interconnect our network with the infrastructure of, other communications companies who typically compete against us in those markets. Similar to the risks summarized in the prior paragraph, our reliance on these lease or interconnection arrangements limits our control over the quality of our services and exposes us to the risk that the other carrier may be successful, we will needunwilling to continue providing our customers with a high capacity, reliable and secure network. We faceor renew these arrangements in the risk, as does any company, of a security breach, whether through cyber attack, malware, computer viruses, sabotage,future on terms favorable to us, or other significant disruption of our IT infrastructure and related systems. We face an added risk of a security breach or other significant disruption of the IT infrastructure and related systems that we develop, install, operate and maintain forat all.business and governmental customers. Asoperations carry a significant amount of voice or data traffic for other communications and IT company, we face a heightened risk of a security breach or disruption from unauthorized access to our and our customers' proprietary or classified informationproviders. Their reliance on our systemsservices exposes us to the risk that they may transfer all or the systems that we operate and maintain for certaina portion of our customers. Although we make significant efforts to maintain the security and integrity of these types of information and systems, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging, especially in light of the growing sophistication of cyber attacks and intrusions. We may be unable to anticipate all potential types of attacks or intrusions or to implement adequate security barriers or other preventative measures. Additional risks tothis traffic from our network and infrastructure include:•power lossesto networks built, owned or physical damage, whether causedleased by fire, adverse weather conditions, terrorism or otherwise;•capacity limitations;•software and hardware defects or malfunctions;•programming, processing and other human error; and•other disruptions that are beyondthem, thereby reducing our control. Network disruptions, security breaches and other significant failures of the above-described systems could:•disrupt the proper functioning of these networks and systems and therefore ourrevenues. or those of certain of our customers;•result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or our customers, including trade secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;•require significant management attention or financial resources to remedy the damages that result or to change our systems;•subject us to claims for contract breach, damages, credits, fines, penalties, termination or other remedies, particularly with respect to service standards set by state regulatory commissions; or•result in a loss of business, damage our reputation among our customers and the public generally, subject us to additional regulatory scrutiny or expose us to litigation. Any or all of which could have a negative impact on our results of operations, financial condition and cash flows.Any failure or inadequacy of our information technology infrastructure could harm our business. The capacity, reliability and security of our internal information technology hardware and software infrastructure (including our billing systems) are important to the operation of our current business, which would suffer in the event of system failures. Likewise, our ability to expand and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new service offering initiatives. Our inability to expand or upgrade our technology infrastructure could have adverse consequences, which could include the delayed implementation of new service offerings, service or billing interruptions, and the diversion of development resources.Rapid changes in technology and markets could require substantial expenditure of financial and other resources in excess of contemplated levels, and any inability to respond to those changes could reduce our market share and adversely affect our operating results and financial condition. The communications industry is experiencing significant technological changes, many of which are reducing demand for our traditional voice services or are enabling our current customers to reduce or bypass use of our networks. Technological change could also require us to expend capital or other resources in excess of currently contemplated levels, or to forego the development or provision of products or services that others can provide more efficiently. If we are not able to develop new products and services to keep pace with technological advances, or if those products and services are not widely accepted by customers, our ability to competeperformance could be adversely affected andif our market share could decline. Any inabilityrelationships with any of these other communications companies are disrupted or terminated for any other reason, including if such other companies:keep up with changes in technology and markets could also adversely affect our operating results and financial condition, as well as our ability to service debt and pay other obligations.Consolidation among other participants inreceive payments or services under applicable regulations or the telecommunications industry may allow our competitors to compete more effectively against us, which could adversely affect our operating results and financial condition. The telecommunications industry has experienced substantial consolidation over the last decade, and someterms of our competitors have combined withexisting contract arrangements; or telecommunications providers, resulting in competitors that are larger, have more financial and business resources, and have broader service offerings. Further consolidation could increase competitive pressures, and could adversely affect our operating results and financial condition, as well as our ability to service debt and pay other obligations.We have a significant amount of goodwill on our balance sheet. If our goodwill becomes impaired, we may be required to record a significant charge to earnings and reduce our stockholder's equity. Under generally accepted accounting principles, goodwill is reviewed for impairment on an annual basis or more frequently whenever events or circumstances indicate that its carrying value may not be recoverable. If our goodwill is determined to be impaired in the future, we may be required to record a significant, non-cash charge to earnings during the period in which the impairment is determined.We rely on a limited number of key suppliers, vendors landlords and other third parties to operate our business.landlords. suppliers. Similarly,suppliers and may be adversely affected if third parties assert patent infringement claims against our data center operations are materially reliant on leasing space from landlords and power services from utility companies, and being able to renew these arrangements from time to time on favorable terms.suppliers or us. In addition, we rely on a limited number of software vendors to support our business management systems. In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement supplies, services, space or utilities on economically attractive terms, on a timely basis, or at all, which could increase costs or cause disruptions in our services.mergers,acquisition, please see the risks described below under the heading "Risks Relating to Our Recent Acquisitions."Acquisitionsthe Legacy CenturyLink and Qwest businessesinto CenturyLink's operations and realize the anticipated benefits of the recent acquisition.Legacy CenturyLink and Qwest. We may encounter difficulties in the integration process, including the following:•currently anticipated or at all;•lost sales as a result of customers of eithertwo companies deciding not to do business withmultiplicity of different legacy systems, network and processes used by each of the combined company;companies;•the twomultiple companies, while at the same time attempting to provide consistent, high quality products and services under a unified culture;• additional complexities of combining two companies with different histories, regulatory restrictions, productcost structures, products, sales forces, markets, marketing strategies, and customer bases;•••it is possible that the integration processour remaining efforts to integrate these companies and businesses could result in the distraction ofdistract our management, the disruption ofdisrupt our ongoing business or create inconsistencies in our products, services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve theOur final determinations of the acquisition date fair value of our assets and liabilities may be significantly different from our current estimates, which could have a material adverse effect on our operating results. CenturyLink has accounted for its indirect acquisition of us under the acquisition method of accounting, which resulted in the assignment of the purchase price to the assets acquired and liabilities assumed based on our preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As such, we have not completed our valuation analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of the assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets. As such, all information presented in this report is preliminary and subject to revision pending the final valuation analysis. We expect to complete our final fair value determinations no later than the first quarter of 2012. Our final fair value determinations may be significantly different than those reflected in this report, which could have a material adverse effect on our operating results.QCII cannot assure you whether, when or in what amounts they will be able to use their net operating losses. At December 31, 2011, QCII had federal NOLs of approximately $6.3 billion of federal NOLs. These NOLs can be used to offset their future federal taxable income. CenturyLink's acquisition of QCII caused an "ownership change" under federal tax laws relating to the use of NOLs. As a result, these laws could limit CenturyLink's ability to use QCII's NOLs and certain other deferred tax attributes to reduce future federal taxable income. QCII currently expects to realize substantially all of their NOLs and certain other deferred tax attributes. However, if QCII is unable to realize these benefits, its and CenturyLink's future income tax payments would be higher than expected, which would adversely affect its financial results and liquidity. As a wholly owned subsidiary of these companies, our financial results and liquidity could be similarly affected.Anyof the KPNQwest litigation, or otherin any material litigation of CenturyLink or QCII could have a material adverse impact on our financial condition and operating results, on the trading price of our debt securities and on our ability to access the capital markets.CenturyLink's and QCII'sCenturyLink’s Annual ReportsReport on Form 10-K, CenturyLink and QCII are involved in several legal proceedings that, if resolved against them, could have a material adverse effect on their business and financial condition.condition, including the KPNQwest lawsuit brought against QCII by Cargill Financial Markets, Plc and Citibank, N.A. As a wholly owned subsidiary of CenturyLink and QCII, our business and financial condition could be similarly affected. These matters include certain KPNQwest matters, which present material and significant risks to QCII and us. In the aggregate, the plaintiffs in the KPNQwest matters seek billions of euros (equating to billions of dollars) in damages. In addition, the outcome of one of the two pending matters could have a negative impact on the other. QCII continues to defend against these matters vigorously and is currently unable to provide any estimate as to the timing of their resolution. We can give no assurance as to the impacts on QCII's and our financial results or financial condition that may ultimately result from these matters. The ultimate outcomes of these matters are still uncertain, and substantial settlements or judgments in these matters could have a significant impact on QCII and us. The magnitude of such settlements or judgments resulting from these matters could materially and adversely affect QCII's financial condition and ability to meet its debt obligations, potentially impacting its credit ratings, its ability to access capital markets and its compliance with debtcovenants. In addition, the magnitude of any such settlements or judgments may cause QCII to draw down significantly on its cash balances, which might force it to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional debt securities or selling assets. As a wholly owned subsidiary of QCII, our business operations and financial condition could be similarly affected.and QCII, as described in Item 8 of CenturyLink's and QCII's Annual ReportsReport on Form 10-K. Depending on their outcome, any of these matters could have a material adverse effect on our financial position or operating results. We can give you no assurances as to the impact of these matters on our operating results or financial condition.manner of doing businessoperations and a variety of claims relating to such regulation.FCC,Federal Communications Commission (“FCC”), which regulates interstate communications, and(ii) state utility commissions, which regulate intrastate communications.communications, and (iii) various foreign governments and international bodies, which regulate our international operations. Generally, we must obtain and maintain certificates of authority or licenses from the FCC and regulatorythese bodies in most statesterritories where we offer regulated services,services. We cannot assure you that we will be successful in obtaining or retaining all licenses necessary to carry out our business plan, and, even if we are, the prescribed service standards and conditions imposed on us in connection with obtaining or acquiring control of these licenses may impose on us substantial costs and limitations. We are also subject to numerous and often quite detailed, requirements and interpretations under various international, federal, state and local laws, rules and regulations.regulations, which are often quite detailed and occasionally in conflict with each other. Accordingly, we cannot ensure that we are always considered to be in compliance with all these requirements at any single point in time. The agencies responsible for the enforcement of these laws, rules and regulations may initiate inquiries or actions based on customer complaints or on their own initiative.is changingcontinues to change rapidly, and the regulatory environment varies substantially from jurisdiction to jurisdiction. Notwithstanding a recent movement towards alternative regulation, a substantial portion of our local voice services revenue remains subject to FCC and state utility commission pricing regulation, which periodically exposes us to pricing or earnings disputes and could expose us to unanticipated price declines. Interexchange carriers have filed complaints in various forums requesting reductions in our access rates. In addition, several long distancelong-distance providers are disputing or refusing to pay amounts owed to us for carrying VoIPVoice over Internet Protocol ("VoIP") traffic, or traffic they claim to be VoIP traffic, and are refusing to pay such amounts.traffic. There can be no assurance that future regulatory, judicial or legislative activities will not have a material adverse effect on our operations, or that regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations.regulationregulation.end userend-user customers are gradually increased. TheseWe expect these changes will substantially increase the pace of reductions in the amount of switched access revenues we receive with respect to some ofin our various services,wholesale business, while creating opportunities for increases in federal USFUniversal Service Fund ("USF") and retail revenue streams. The ultimate effect of this order on communications companies is largely dependent on future FCC proceedings designed to implement the order, the most significant of which are scheduled to be determined in 2012 and 2013. Several judicial challenges to the CAF order are pending and additional future challenges are possible, any of which could alter or delay the FCC's proposed changes. In addition, based on the outcome of the FCC Under other pending proceedings,may implementhas initiated various other changes, including (i) broadband stimulus projects, support funds and similar plans and (ii) new "network neutrality" rules. The FCC is also considering changes in the regulation or pricing of special access services, anyservices. Any of whichthese recent or pending initiatives could adversely affect our operations or financial results.posed by costs of regulatory compliancehigher costs. compliance costs for us. Challenges to our tariffs by regulators or third parties or delays in obtaining certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and, if successful, such challenges could adversely affect the rates that we are able to charge our customers. Our business also may be impacted by legislation and regulation imposing new or greater obligations related to regulations or laws related to broadband deployment, bolstering homeland security or cyber security, increasing disaster recovery requirements, minimizing environmental impacts, enhancing privacy, protecting intellectual property rights of third parties, or addressing other issues that impact our business, including the Communications Assistance for Law Enforcement Act (which requires communications carriers to ensure that their equipment, facilities, and services are able to facilitate authorized electronic surveillance), and laws governing local number portability and customer proprietary network information requirements. We expect our compliance costs to increase if future laws or regulations continue to increase our obligations to assist other governmental agencies.regulationsregulations.Regulatory changescommunications industryfuture. Any such measures could adversely affectimpact our business by facilitating greater competition against us. Beginning in 1996, Congressability to operate our high-speed data network profitably and to implement the FCC have taken several stepsupgrades and network management practices that have resulted in increased competition among service providers. Manymay be needed to continue to provide high quality high-speed data services, and could therefore negatively impact our ability to compete effectively.the FCC's regulations remain subject to judicial review and additional rulemakings, thus making it difficult to predict what effect any changes in interpretation of the 1996 Act may ultimately have onprivate network operators, such as us, and our competitors. Weis not entirely clear. As such, we could be adversely affected by programsexposed to legal claims relating to third party content disseminated on our networks. Claims could challenge the accuracy of materials on our network, or initiatives recently undertaken by Congresscould involve matters such as defamation, invasion of privacy or the FCC, including (i) the federal broadband stimulus projects authorized by Congress in 2009; (ii) the FCC's 2010 National Broadband Plan; (iii) new "network neutrality" rules; (iv) the proposed broadband "Connect America" replacement support fund, and (v) the FCC's above-described October 27, 2011 order.significant regulationsfranchising requirements that limit our flexibility. As a diversified full service ILEC, we have traditionally been subject to significant regulation that does not apply to many of our competitors. This regulation imposes substantial compliance costs on us and restricts our ability to change rates, to compete and to respond rapidly to changing industry conditions. As our business becomes increasingly competitive, regulatory disparities between us and our competitors could impede our abilityexpansion opportunities.compete.by the SEC, the New York Stock Exchange and the Public Company Accounting Oversight Board,thereunder, are increasing legal and financial compliance costs and making some activities more time consuming. Any future failure to successfully or timely complete annual assessments of our internal controls required by Section 404 of the Sarbanes-Oxley Act could subject us to sanctions or investigation by regulatory authorities. Any such action could adversely affect our financial results or investors' confidence in us.2011,2013, our consolidated debt was approximately $8.3$7.6 billion (excluding note payable-affiliate), which was included in CenturyLink's consolidated debt of approximately $21.8$21.0 billion as of that date. Approximately $4.3$2.6 billion of CenturyLink's consolidated debt securities, which includes approximately $1.4 billion$927 million of our debt obligations, comessecurities, come due over the next three years.thirty-six months following the date of this annual report. While we currently believe that CenturyLink and we will have the financial resources to meet or refinance our obligations when they come due, we cannot fully anticipate our future financial condition or thatthe condition of CenturyLink, the credit markets or the economy generally.economy. We may haveincur unexpected expenses andor liabilities, and we may have limited access to financing.the current credit market, environment, we may not be able to refinance maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at all. We may also need to obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets) under a variety of circumstances, including if revenues and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase, if regulatory requirements change, if CenturyLink or QCII areis required to contribute a material amount of cash to their collectiveits pension plans, if CenturyLink or QCII areis required to begin to pay other post-retirement benefits significantly earlier than is anticipated, if CenturyLink or QCII becomebecomes subject to significant judgments or settlements in one or more of the matters discussed in Note 16—Commitments and Contingencies to our consolidated financial statements in Item 8 of this report.annual report or in Item 8 of CenturyLink's Annual Report on Form 10-K. We can give no assurance that this additional financing will be available on terms that are acceptable to us or at all. If we are able to obtain additional financing, our credit ratings could be adversely affected, which could further raise our borrowing costs and further limit our future access to capital and our ability to satisfy our debt obligations. Our significant levels of debt can adversely affect us in several other respects, including (i) exposing us to the risk of credit rating downgrades, which would raise our borrowing costs, (ii) hindering our ability to adjust to changing market, industry or economic conditions, (iii) limiting our ability to access the capital markets, (iv) limiting the amount of free cash flow available for future operations, acquisitions, dividends, or other uses, (v) making us more vulnerable to economic or industry downturns, including interest rate increases, and (vi) placing us at a competitive disadvantage compared to less leveraged competitors.and QCII's debt issuesinstruments have cross payment default or cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise"Liquidity"Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" in Item 7 of Part II of this annual report for additional information about CenturyLink's credit facility. The degree to which we, together with CenturyLink, are leveraged may have other important limiting consequences, including the following:•placing us at a competitive disadvantage as compared with our less leveraged competitors;•making us more vulnerable to downturns general economic conditions or in any of our businesses;•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and•impairing our credit ratings orcould limit our ability to obtain additionalfuture financing, inincrease our borrowing costs and adversely affect the future for working capital, capital expendituresmarket price of our existing debt securities or general corporate purposes.We may be unable to significantly reduce the substantial capital requirements or operating expenses necessary to continue to operateotherwise impair our business, financial condition and results of operations.may in turn affect our operating results. The industryare the lowest investment-grade ratings issued by each of these agencies. Credit rating agencies continually review their ratings for the companies that they follow, including us. Credit rating agencies also evaluate the industries in which we operate as a whole and may change their credit rating for us based on their overall view of such industries. There can be no assurance that any rating assigned to any of our debt securities will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by a rating agency if, in that rating agency's judgment, circumstances so warrant. A downgrade of our credit ratings could adversely affect the market price of some or all of our outstanding debt securities, limit our access to the capital markets or otherwise adversely affect the availability of other new financing on favorable terms, if at all, result in more restrictive covenants in agreements governing the terms of any future indebtedness that we may incur, increase our cost of borrowing, and impair our business, financial condition and results of operations.AlthoughAs discussed further under "Risk Factors—Risks Affecting Our Business—Increases in broadband usage may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower transmission speeds for our customers," increased bandwidth consumption by consumers and businesses have placed increased demands on the transmission capacity of our networks. If we have reduceddetermine that our operating expenses over the past few years,networks must be expanded to handle these increased demands, we may be unablerequired to further significantly reduce these costs,make substantial capital expenditures, even if revenues in some areasthough there is no assurance that the return on our investment will be satisfactory. In addition, many of our businessgrowth and modernization initiatives are decreasing.capital intensive and changes in technology could require further spending. In addition to investing in expanded networks, new products or new technologies, we must from time to time replace some of the equipment that supports our traditional services as that equipment ages, even though the revenue base from those services is not growing. While we believe that our planned level of capital expenditures will meet both our maintenance and our core growth requirements, going forward, this may not be the case if demands on our network continue to accelerate or other circumstances underlying our expectations change.planplans could negatively impact CenturyLink's and QCII's liquidity, which may in turn affect our business and liquidity. Substantially allplan isplans are the difference between the value of planthe plans' assets and the benefit obligation.obligations. The accounting unfunded status of CenturyLink's qualified pension plans was $995 million, which includes the unfunded status of QCII's qualified pension plan was $627of $159 million, as of December 31, 2011.2013. Adverse changes in interest rates or market conditions, among other assumptions and factors, could cause a significant increase in CenturyLink's and QCII's benefit obligationobligations or a significant decrease in the value of planthe plans' assets. These adverse changes could require CenturyLink and QCII to contribute a material amount of cash to itstheir pension planplans or could accelerate the timing of required cash payments. The amounts contributed by us through QCII are not segregated or restricted and may be used to provide benefits to employees of QCII's other subsidiaries. QCII determines our cash contribution and, historically, has only required us to pay our portion of its required pension contribution. Current fundingBased on current laws and regulations require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall.circumstances, (i) QCII optedwas not required to make a cash contribution of $307 millionto this plan in December 2011,2013 and therefore,(ii) QCII does not expect it will not be required to make a contribution in 2012. Although potentially significant2014. CenturyLink expects to make required contributions of $123 million to its qualified pension plans in the aggregate, QCII currently expects that plan contributions in 2013 and beyond will decrease from the 2011 contribution amount. However, the2014. The actual amount of required contributions to the plantheir plans in 20132015 and beyond are subject to several variables, many of which are beyond our control, includingwill depend on earnings on plan investments, prevailing interest and discount rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. Any future material cash contributions could have a negative impact on CenturyLink's and QCII's liquidity by reducing itstheir cash flows, which in turn could affect our liquidity.Our debt agreements and the debt agreements of CenturyLink and its other subsidiaries allow us to incur significantly more debt, which could exacerbate the other risks described in this report. The terms of our debt instruments and the debt instruments of CenturyLink and its other subsidiaries permit additional indebtedness. Additional debt may be necessary for many reasons, including to adequately respond to competition, to comply with regulatory requirements related to our service obligations or for financial reasons alone. Incremental borrowings on terms that impose additional financial risks could exacerbate the other risks described in this report.CenturyLink planswe plan to access the public debt markets, and we cannot assure you that these markets will remain free of disruptions.Qwest Corporation ("QC")us or both. CenturyLink's ability to arrange additional financing will depend on, among other factors, itsthe financial position, performance, and performance,credit ratings of CenturyLink and QC, as well as prevailing market conditions and other factors beyond its control. Prevailing market conditions could be adversely affected by the ongoing disruptions in the European sovereign debt crises in Europe,markets, the failure of the United States to reduce its deficit in amounts deemed to be sufficient, possible further downgrades in the credit ratings of the U.S. debt, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad. As a result, CenturyLink cannot assure you that it will be ableInstability in the global financial markets has from time to time resulted in periodic volatility in the capital markets. This volatility could limit CenturyLink's access to the credit markets, leading to higher borrowing costs or, in some cases, the inability to obtain additional financing on terms that are acceptable to us, or at all. Any such failure to obtain additional financing could jeopardize its and our ability to repay, refinance or reduce debt obligations.the accuracy of our consolidated financial statements and related disclosures could be materially affected.report,Annual Report on Form 10-K, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that are considered "critical" because they require judgments, assumptions and estimates that materially impact our consolidated financial statements and related disclosures. As a result, if future events or assumptions differ significantly from the judgments, assumptions and estimates in our critical accounting policies, these events or assumptions could have a material impact on our consolidated financial statements and related disclosures. We were included in the consolidated federal income tax return of QCII for thebeforeafter the April 1, 2011 closing of CenturyLink's acquisition of QCII, and we are included in the consolidated federal income tax return of CenturyLink for periods on or after that date.CenturyLink. As such, we could be severally liable for tax examinations and adjustments attributable to other members of the QCII or CenturyLink affiliated groups, as applicable. As a significant taxpayer,Significant taxpayers (such as QCII is (andfor periods prior to the CenturyLink will be)acquisition and CenturyLink for periods after the CenturyLink acquisition) are subject to frequent and regular audits by the Internal Revenue Service as well as state and local tax authorities. These audits could subject us to tax liabilities if adverse positions are taken by these tax authorities.recordedrecognized 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.Our agreements and organizational documents and applicable law could limit another party's ability to acquire us. A number of provisions in our agreements and organizational documents and various provisions of applicable law may delay, defer or prevent a future takeover of CenturyLink unless the takeover is approved by its Board of Directors. This could deprive our shareholders of any related takeover premium.If we fail to extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, or if our unionized employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed. As of December 31, 2011, we had approximately 25,000 employees, of which approximately 13,000 were members of either the International Brotherhood of Electrical Workers ("IBEW") or the Communications Workers of America ("CWA"). From time to time, our labor agreements with these unions lapse, and we typically negotiate the terms of new agreements. Our current four-year agreements with the IBEW and CWA will expire October 6, 2012. We may be unable to reach new agreements, and union employees may engage in strikes, work slowdowns or other labor actions, which could materially disrupt our ability to provide services and result in increased cost to us. In addition, new labor agreements may impose significant new costs on us, which could impair our financial condition or results of operations in the future. To the extent they contain benefit provisions; these agreements also limit our flexibility to change benefits in response to industry or competitive changes. In particular, the post-employment benefits provided under these agreements cause us to incur costs not faced by many of our competitors, which could ultimately hinder our competitive position. Not applicable. and land and buildings related to our telephone operations. The components of ourOur gross property, plant and equipment consisted of the following: Successor Predecessor December 31,
2011 December 31,
2010 4 % nm 39 % 47 % 26 % 43 % 29 % 10 % 2 % nm 100 % 100 % nm–Represents less than 1% of gross property, plant and equipment.
following dates:(1)Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.(2)Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.(3)Support assets consist of buildings, computers and other administrative and support equipment.(4)Construction in progress includes propertyfollowing components as of the foregoing categories that has not been placed in service as it is still under construction. Successor December 31, 2013 December 31, 2012 Land 3 % 4 % 40 % 38 % 30 % 28 % 24 % 26 % 3 % 4 % Gross property, plant and equipment 100 % 100 % Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures. Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers. Support assets consist of buildings, computers and other administrative and support equipment. 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. equipmentsoftware under various capital lease arrangements when the leasing arrangements are more favorable to us than purchasing the assets. On April 1, 2011, Outside of our indirect parent, QCII, became a wholly owned subsidiary of CenturyLink. On the date of the acquisition,local service area, our assets and liabilities were recognized at fair value. This revaluation has been reflected inare generally located on real property pursuant to an agreement with the property owner or another person with rights to the property. It is possible that we may lose our financial statements and, therefore, has resulted in a new basisrights under one or more of accounting for the successor period beginning on April 1, 2011. these agreements, due to their termination or expiration.datedates of December 31, 20112013 and the predecessor date of December 31, 2010,2012, our total net property, plant and equipment was approximately $7.5$7.2 billion and approximately $10.2 billion, respectively. for both fiscal years. For additional information, see Note 2—Acquisition of QCII by CenturyLink and Note 6—Property, Plant and Equipment to our consolidated financial statements in Item 8 of this annual report.tabletables of selected consolidated financial data should be read in conjunction with and are qualified by reference to theour consolidated financial statements and notes thereto in Item 8 of this annual report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this annual report.tabletables presents certain selected consolidated financial data for two periods: predecessor and successor, which relate to the periods preceding the acquisition and the period succeeding the acquisition, respectively. The selected financial data shown below are derived from our audited consolidated financial statements. These historical results are not necessarily indicative of results that you can expect for any future period. Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) Operating revenues $ 8,753 8,848 6,635 2,268 9,271 9,731 Operating expenses 6,675 6,943 5,436 1,630 6,788 7,169 Operating income $ 2,078 1,905 1,199 638 2,483 2,562 Income before income tax expense $ 1,566 1,391 892 490 1,873 1,921 Net income 964 849 543 299 1,082 1,197 See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" in Item 7 of this annual report for a discussion of unusual items affecting the results for the successor years ended December 31, 2013 and 2012, the successor nine months ended December 31, 2011, and the predecessor three months ended March 31, 2011. Successor(1) Predecessor(1) Nine Months Ended
December 31,
2011 Three Months Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Year Ended
December 31,
2008 Year Ended
December 31,
2007 (Dollars in millions) $ 6,635 2,268 9,271 9,731 10,388 10,691 5,436 1,630 6,788 7,169 7,525 7,631 1,199 638 2,483 2,562 2,863 3,060 892 490 1,873 1,921 2,267 2,440 543 299 1,082 1,197 1,438 1,527 (1)See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" in Item 7 of this report for a discussion of unusual items affecting the results for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011, as well as the predecessor year ended December 31, 2010.follows: Successor Predecessor December 31, 2013 December 31, 2012 December 31, 2011 (Dollars in millions) $ 9,354 9,354 9,354 — — Total assets 23,218 23,947 24,811 12,570 13,997 7,558 7,625 8,325 8,012 8,386 Total stockholder's equity (deficit) 9,613 9,974 9,865 (831 ) 312 Successor Predecessor December 31,
2011 December 31,
2010 December 31,
2009 December 31,
2008 December 31,
2007 (Dollars in millions) $ 9,453 — — — — 24,932 12,570 13,997 14,252 15,416 8,325 8,012 8,386 7,588 7,911 9,887 (831 ) 312 786 1,370 (1)Total long-term debt is the sum of current maturities of long-term debt and long-term debt on our consolidated balance sheets. For total obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Future Contractual Obligations" in Item 7 of this report.Total long-term debt is the sum of current maturities of long-term debt and long-term debt (excluding note payable-affiliate) on our consolidated balance sheets. For total contractual obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Future Contractual Obligations" in Item 7 of this annual report. Successor Predecessor Nine Months Ended
December 31,
2011 Three Months Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Year Ended
December 31,
2008 Year Ended
December 31,
2007 Successor Predecessor Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) (Dollars in millions) $ 2,201 869 3,235 3,167 3,479 3,670 $ 2,713 2,774 2,201 869 3,235 3,167 (1,191 ) (335 ) (1,256 ) (1,100 ) (1,402 ) (1,254 ) (1,381 ) (1,528 ) (1,191 ) (335 ) (1,256 ) (1,100 ) (1,208 ) (525 ) (2,801 ) (1,286 ) (2,136 ) (2,400 ) (1,326 ) (1,241 ) (1,208 ) (525 ) (2,801 ) (1,286 ) (1,036 ) (341 ) (1,240 ) (1,106 ) (1,404 ) (1,270 ) (1,264 ) (1,266 ) (1,036 ) (341 ) (1,240 ) (1,106 ) consolidated operating dataof our operational metrics as of the following dates: Successor December 31, 2013 (in thousands) 3,429 3,318 3,185 7,641 8,058 8,536 Successor Predecessor December 31, 2011 December 31, 2010 (in thousands) 3,084 2,940 8,533 9,193 (1)We have updated our methodology for counting our broadband subscribers and access lines and have reclassified prior year amounts to conform to the current period presentation. For additional information see "Results of Operations—Overview" in Item 7 in this report.Broadband subscribers are customers that purchase high-speed Internet connection service through their existing telephone lines and fiber-optic cables. and access lines are lines reaching from the customers' premises to a connection with the public network. The prior year numbers have been adjusted to include the operational metrics of our wholly owned subsidiary, El Paso County Telephone Company, which had been previously excluded. The increase (in thousands) related to including El Paso County Telephone Company's broadband subscribers and access lines, in the table above, is approximately 2 and 3, respectively. Statements"Statements and Related Matters" in Item 1 of this annual report for factors relating to these statements and see "Risk Factors" in Item 1A of this annual report for a discussion of certain risk factors applicable to our business, financial condition and results of operations.network access,broadband, private line (including special access), broadband, data,network access, Ethernet, wireless and video services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. We expect to complete our final fair value determinations no later than the first quarter of 2012. Our final fair value determinations may be significantly different than those reflected in our consolidated financial statements as of the successor date of December 31, 2011. Based on our preliminary estimate, the aggregate consideration exceedsexceeded the aggregate estimated fair value of the assets acquired assets and liabilities assumed liabilities of us by $9.453$9.354 billion, which has beenwe have recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that we expect CenturyLink and its consolidated subsidiaries, including us, to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes. The recognition of assets and liabilities at fair value is reflected in our consolidated financial statements and therefore has resulted in a new basis of accounting for the "successor period" beginning on April 1, 2011. This new basis of accounting means that our consolidated financial statements for the successor periods will not be comparable to our previously reported consolidated financial statements, including the predecessor period consolidated financial statements in this annual report.recognized $146 million ofincurred certain non-recurring operating expenses associated with activities related to CenturyLink's indirect acquisition of us, during the successor nine months ended December 31, 2011. Thesewhich consist primarily of integration and severance expenses. The table below summarizes our acquisition-related expenses: Successor Predecessor Combined Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) Acquisition-related expenses $ 24 39 146 2 148 were comprised of primarily severance, retention bonuses, share-based compensation allocated to us by QCII and system integration consulting. During the predecessor three months ended March 31, 2011, weare recognized $2 million of expenses associated with our activities related to the acquisition. As part of the acquisition accounting on April 1, 2011, we also included in our goodwill$22 million for certain performance awardsservices and $14 million related to retention bonuses, all of which were contingent on the completion of the acquisitionproducts and had no benefit to CenturyLink after the acquisition.including us,that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates. Amounts outstanding under whichthese lines of credit and intercompany obligations vary from time to time. Under these arrangements, the majority of our cash balance is transferredadvanced on a daily basis to CenturyLinkCenturyLink. From time to time we may declare and pay dividends to Qwest Services Corporation ("QSC"), our direct parent, using cash repaid to us under these advances, which has the net effect of reducing the amount of these advances. We report the balance of these transfers on our consolidated balance sheet as a short-term affiliate loan. Since the April 1, 2011 closingadvances to affiliates. are reported as part of the segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") has becomeis 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 ("SEC"). Consequently, we do not provide our discrete financial information to the CODM on a regular basis. During the second quarter of 2011, certain USF surcharges were reclassified from our legacy services to affiliates and other services revenues to better align with the classifications that our new ultimate parent, CenturyLink, uses. As a result,such we reclassified previously reported amounts to conform to the current period presentation. For the predecessor three months ended March 31, 2011, this reclassification resulted in a reduction of legacy service revenues and an increase to affiliates and other services revenues of $34 million. For the predecessor years ended December 31, 2010 and 2009, the reclassification resulted in a reduction of legacy service revenues and an increase of affiliates and other services revenues of $133 million and $74 million, respectively. have one reportable segment.•DIRECTV)resold satellite video services) and Verizon Wireless services;•integrated services digital networkvoice, Integrated Services Digital Network ("ISDN") (which uses regular telephone lines to support voice, video and data applications), switched access and traditional wide area network ("WAN") services (which allows a local communications network to link to networks in remote locations); and•USFUniversal Service Fund ("USF") revenues and surcharges and services we provide to our non-consolidated affiliates. We provide to our affiliates data, local services and billing and collectionstelecommunication services that we also provide to external customers. In addition, we provide to our affiliates: marketing, sales and advertising services;affiliates computer system development and support services;services as well as network support and technical services; and other support services, such as legal, regulatory, finance and accounting, tax and human resources.services.2011,2013, we served approximately 3.13.4 million broadband subscribers. We also operated approximately 8.57.6 million access lines, which are telephone lines reaching from the customers' premises to a connection with the PSTN. During the second quarter of 2011, we updated ourpublic switched telephone network. Our methodology for counting our broadband subscribers and access lines to conform to the methodology used by CenturyLink, our ultimate parent. We now count access lines when we install the service. Our new methodology includes only those access lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. It also excludes unbundled loops and includes stand-alone broadband subscribers. We count access lines when we install the service. Our new methodology for counting our broadband subscribers and access lines may not be comparable to those of other companies.MD&A"Management's Discussion and Analysis of Financial Condition and Results of Operations" is presented on a combined basis for the successor periods innine months ended December 31, 2011, with the predecessor three months ended March 31, 2011. We believe that the discussion on a combined basis is more meaningful as it allows the results of operations for the twelve months ended December 31, 2011 to be analyzed to the annual period in 2010.2012. This•36%38%, 37%, and 33%36% of our total revenues for the successor years ended December 31, 2013 and 2012 and the combined year ended December 31, 2011, and the predecessor year ended December 31, 2010, respectively, and we expect that this percentage continueswill continue to grow. We continue to focus on increasing subscribers of our broadband services, particularly among consumer and small business customers. As of the successor date of December 31, 2011,2013, we reached approximately 3.13.4 million broadband subscribers compared to approximately 2.93.3 million as of the predecessorsuccessor date of December 31, 2010.2012 and 3.2 million as of the successor date of December 31, 2011. We believe that continually increasing connection speeds is important to remaining competitive in our industry. As a result, we continue to invest in our fiber to the node, or FTTN, deployment,broadband network, which allows for the delivery of higher speed broadband services than would otherwise generally be available through a more traditional telecommunications network made up of only copper wires. In addition to our FTTN deployment,broadband network, we continue to expand our product offerings, including Ethernet, and enhance our marketing efforts as we compete in a maturing market in which most consumers already have broadband services. While traditional ATM based broadband services are declining, they have been more than offset by growth in fiber based broadband services. We expect these efforts will improve our ability to compete and increase our broadband revenues. Demand forAnother trend impacting our private linestrategic services continuesis the deployment of fiber-based special access services provided to increase, despite our customers' optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue to impact our business, we ultimatelywireless carriers, which in many cases replaces existing copper-based special access services. We believe the growth in fiber-based special access services provided to wireless carriers for backhaul will, ultimately, over time, offset the decline in copper-based special access services provided to wireless carriers as they migrate to Ethernet services, although the timing and magnitude of this technological migration is uncertain.uncertain;•43%37%, 39%, and 47%43% of our total revenues for the successor years ended December 31, 2013 and 2012 and the combined year ended December 31, 2011, and for the predecessor year ended December 31, 2010, respectively, and we expect that this percentage will continue to decline. Our legacy services revenues have been, and we expect they will continue to be, adversely affected by access line losses.losses, which declined 5% and 6% in 2013 and 2012, respectively. Intense competition and product substitution continue to drive our access line losses. For example, many consumers are substitutingreplacing traditional voice telecommunications service with substitute services, including (i) cable and wireless voice services and (ii) electronic mail, texting and social networking services for traditional voice telecommunications services. We expect that these factors will continue to negatively impact our business. ServiceAs a result of the expected loss of revenues associated with access lines, we continue to offer service bundling and other product promotions to help mitigate this trend, as described below, continue to be some of our responses to offset the loss of revenues as a result of access line losses.below;•our video and wireless services are an important piece of our customer retention strategy, they do not make a large contribution to strategic services revenues. However, we believe customers value the convenience of, and price discounts associated with, receiving multiple services through a single company. While bundle price discounts have resulted in lower average revenues for our individual products, we believebundled service bundles continue to positively impact our customer retention. In addition to our bundlediscounts, we also offer limited time promotions on our broadband service for prospective customers who want our broadband product in their bundle which further aids our ability to attract andofferings can help retain customers, and increase usage ofthey also tend to lower our services.•conditions.conditions;•allocatesallocate the income and expenses of these plans to us and certain of itstheir other affiliates. The allocation of income and expenses to us is based upon the demographics of our employees and retirees. Changes in CenturyLink's and QCII's assumptions can cause significant changes in the net periodic pension and post-retirement benefits income and expenses we recognize.recognize; and•fiberthe deployment of "fiber to the tower, or FTTT. FTTTtower", which is a type of telecommunications network consisting of fiber-optic cables that run from a telecommunication provider's broadband interconnection pointswireless carrier's mobile telephone switching office to cellular towers. FTTT allows fortowers to enable the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional copper-based telecommunications network. Successor Predecessor Combined Predecessor Increase/
(Decrease) % Change Successor Predecessor Combined % Change Nine Months
Ended
December 31,
2011 Three
Months
Ended
March 31,
2011 Year Ended
December 31,
2011 Year Ended
December 31,
2010 Combined
2011 v
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2010 Combined
2011 v
Predecessor
2010 Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 (Dollars in millions) (Dollars in millions) $ 6,635 2,268 8,903 9,271 (368 ) (4 )% $ 8,753 8,848 6,635 2,268 8,903 (1 )% (1 )% 5,436 1,630 7,066 6,788 278 4 % 6,675 6,943 5,436 1,630 7,066 (4 )% (2 )% 1,199 638 1,837 2,483 (646 ) (26 )% 2,078 1,905 1,199 638 1,837 9 % 4 % (307 ) (148 ) (455 ) (610 ) (155 ) (25 )% Other (expense) income (512 ) (514 ) (307 ) (148 ) (455 ) — % 13 % 349 191 540 791 (251 ) (32 )% 602 542 349 191 540 11 % — % $ 543 299 842 1,082 (240 ) (22 )% $ 964 849 543 299 842 14 % 1 % 24,697 26,050 (1,353 ) (5 )% broadband subscribers and access lines: Successor Predecessor % Change December 31, 2011 December 31, 2010 Successor 2011 v
Predecessor 2010 (in thousands) 3,084 2,940 5 % 8,533 9,193 (7 )% Successor % Change December 31, 2013
2011(2) (in thousands) Operational metrics: 3,429 3,318 3,185 3 % 4 % 7,641 8,058 8,536 (5 )% (6 )% Employees 22.8 22.7 24.7 — % (8 )% During the second quarter of 2011, we updated our methodology for counting our subscribers and access lines where we provide the services. We historically counted access lines at the point we billed them. However, now we count access lines when we install the service. This change in our methodology has resulted in an approximately 69,000 decrease in our successor June 30, 2011 access lines. We have not retrospectively adjusted our predecessor period access lines for this methodology adjustment as it was not reasonably practicable for us to do so. Our access line methodology includes only those access lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. Our new methodology also excludes unbundled loops and includes stand-alone broadband subscribers. We have conformed prior periods to our current presentation, unless noted above.Broadband subscribers are customers that purchase high-speed Internet connection service through their existing telephone lines and fiber-optic cables, and access lines are lines reaching from the customers' premises to a connection with the public network. The prior year numbers have been adjusted to include the operational metrics of our wholly owned subsidiary, El Paso County Telephone Company, which had been previously excluded. The increase (in thousands) related to including El Paso County Telephone Company's broadband subscribers and access lines, in the table above, is approximately 2 and 3, respectively. Successor Predecessor Combined Predecessor Increase/
(Decrease) % Change Successor Predecessor Combined % Change Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2011 Year Ended
December 31,
2010 Combined
2011 v
Predecessor
2010 Combined
2011 v
Predecessor
2010 Year
Ended
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2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 (Dollars in millions) (Dollars in millions) $ 2,406 793 3,199 3,059 140 5 % $ 3,342 3,265 2,406 792 3,198 2 % 2 % 2,796 1,003 3,799 4,323 (524 ) (12 )% 3,208 3,471 2,796 1,003 3,799 (8 )% (9 )% 1,433 472 1,905 1,889 16 1 % 2,203 2,112 1,433 473 1,906 4 % 11 % $ 6,635 2,268 8,903 9,271 (368 ) (4 )% $ 8,753 8,848 6,635 2,268 8,903 (1 )% (1 )% primarilyby $77 million, or 2%, for the successor year ended December 31, 2013 as compared to the successor year ended December 31, 2012 and strategic services revenues increased by $67 million, or 2%, for the successor year ended December 31, 2012 as compared to the combined year ended December 31, 2011. The increases for both periods were principally due to higherincreases in the number of broadband revenues resulting from new subscribers as well as an improving mix of higher priced, higher speed broadband services and increased volumesvolume increases in our Ethernet services. These increases were partially offset by a decline in our private line services.certain predecessor deferred installation and activation revenue being assigned no value at the acquisition date, as well as lower revenues from our traditional WAN services, due to customer migration, product substitution and increased competition.support an affiliate's growth in its strategic service offerings. This was partially offsetaffiliates. Affiliates and other services revenues increased by reduced support provided$206 million, or 11%, for the successor year ended December 31, 2012 as a result of a decline in customer demand for our affiliate's legacy telecommunicationservice offerings driven by technological migration and competition. We estimate that the profit from services providedcompared to our affiliates was approximately $200 million and $280 million, before income taxes for the combined year ended December 31, 2011 primarily due a change in methodology effective January 1, 2012 that resulted in both higher affiliate revenues and the predecessor year ended December 31, 2010, respectively.Operating Expenses As discussed inexpenses for us. See Note 1—Basis of Presentation and Summary of Significant Accounting Policiesto our consolidated financial statements in Item 8 of this report, duringannual report. A portion of the first quarter of 2011, we changedincrease in affiliates and other services revenues for the definitions we use to classify expenses as cost of services and products and selling, general and administrative and as a result, we reclassified previously reported amounts to conformsuccessor year ended December 31, 2012 compared to the current period presentation. Successor Predecessor Combined Predecessor Increase/
(Decrease) % Change Successor Predecessor Combined % Change Nine Months
Ended
December 31,
2011 Three Months
Ended
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2011 Year Ended
December 31,
2011 Year Ended
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Combined
2011 (Dollars in millions) (Dollars in millions) $ 1,833 626 2,459 2,585 (126 ) (5 )% $ 2,790 2,868 2,171 742 2,913 (3 )% (2 )% 1,499 501 2,000 2,136 (136 ) (6 )% 1,062 1,166 1,161 385 1,546 (9 )% (25 )% 238 52 290 194 96 49 % Operating expenses-affiliates 695 619 238 52 290 12 % 113 % 1,866 451 2,317 1,873 444 24 % 2,128 2,290 1,866 451 2,317 (7 )% (1 )% $ 5,436 1,630 7,066 6,788 278 4 % $ 6,675 6,943 5,436 1,630 7,066 (4 )% (2 )% universal service funds ("USF")USF (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things and to which we are often required to contribute); litigation expenses associated with our operations; and other expenses directly related to our network.the amortization of certain deferred expenses beingdecreases in active and retiree benefits costs related to lower pension benefits expense and lower active and retiree healthcare benefits as a result of assigning no valuebetter than expected returns on plan assets and from favorable change to these predecessor assets at the acquisition date. Costdiscount rates, due to a reduction in severance expenses and due to lower access expense. These decreases were offset partially by increases in professional fees, network expenses and real estate and power costs. Costs of services and products also(exclusive of depreciation and amortization) decreased by $45 million, or 2%, for the successor year ended December 31, 2012 as compared to the combined year ended December 31, 2011 primarily due to lowerdecreases in salaries and wages and employee benefits related to employee headcount reductions, in our network operations as we continue to managewhich resulted from reevaluations of our workforce to our workload.taxes (such as property and other taxes)operating taxes and fees; external commissions; litigation expenses associated with general matters; bad debt expense; and other selling, general and administrative expenses. TheseSelling, general and administrative expenses decreased by $104 million, or 9%, for the successor year ended December 31, 2013 as compared to the successor year ended December 31, 2012 primarily due to decreases in active and retiree benefits costs, as further described above in costs of services and products, due to a reduction in severance expenses, decreases in bad debt expenses and property and other operating taxes. Higher external commissions partially offset these decreases. Selling, general and administrative expenses decreased pension expense, professional feesby $380 million, or 25%, for the successor year ended December 31, 2012 as compared to the combined year ended December 31, 2011 primarily due to decreases in salaries and wages and employee benefits related to employee headcount reductions and decreases in marketing and advertising expense. This decrease wasexpenses and acquisition-related integration costs. Higher insurance premiums and fees, external commissions and professional fees partially offset by an increase in severance related to employee reductions, a majority of which was due to CenturyLink's indirect acquisition of us.allocatesallocate the expense orand income of itstheir pension and post-retirement benefit plans to us based upon demographics of our employees compared to all the remaining participants. The expense isand income are a function of the amount of benefits earned, interest on benefit obligations, expected return on plan assets, amortization of costs and credits from prior benefit changes and amortization of actuarial gains and losses. We recorded combined net periodic benefits expensesincome of $88 million and $11 million in 2013 and 2012, respectively, and combined net periodic benefits expense of $61 million in 2011 as compared to $125 million in 2010.2011. The decrease in combined net periodic benefits expense in 2011 is primarily due to acquisition accounting. We expect to record combined net periodic income of approximately $7$56 million in 2012.2014. The shift from recording combined net periodic expense to recording combined net periodic income was primarily due to a decrease in net actuarial losses. For additional information on our pension and post-retirement benefit plans, see Note 8—Employee Benefits to our consolidated financial statements in Item 8 of this annual report.Expenses—Affiliates AffiliatesExpenses-Affiliatesinclude charges forrelated to our use of long-distancetelecommunication services, wholesale accessmarketing and insurance, occupancy charges and certain retiree benefitsemployee related support services provided by CenturyLink and its subsidiaries.affiliates. Successor Predecessor Combined Predecessor Increase/
(Decrease) % Change Nine Months
Ended
December 31,
2011 Three Months
Ended
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2011 Year Ended
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2011 Year Ended
December 31,
2010 Combined
2011 v
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2010 Combined
2011 v
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2010 (Dollars in millions) $ 914 393 1,307 1,652 (345 ) (21 )% 952 58 1,010 221 789 nm $ 1,866 451 2,317 1,873 444 24 % nm—Percentages greater Successor Predecessor Combined % Change Year
Ended
December 31,
2013 Year
Ended
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2011 Three Months
Ended
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Ended
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2011 (Dollars in millions) Depreciation $ 1,099 1,175 914 393 1,307 (6 )% (10 )% Amortization 1,029 1,115 952 58 1,010 (8 )% 10 % Total depreciation and amortization $ 2,128 2,290 1,866 451 2,317 (7 )% (1 )% 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.April��April 1, 2011, our property, plant and equipment was recorded at fair value and as a result net property, plant and equipment decreased $2.499$2.535 billion due to CenturyLink's indirect acquisition of us. The decrease in asset value from the acquisition resulted in $100 million lower depreciation expense for the successor year ended December 31, 2012 as compared to the combined year ended December 31, 2011. Effective January 1, 2012, we also changed our estimates of the economic lives of certain telecommunications equipment. These changes resulted in an additional decrease to depreciation expense of approximately $52 million, and net of tax, had the effect of increasing net income by approximately $32 million for the successor year ended December 31, 2012.$598$172 million of amortization expense for the successor year ended December 31, 2012, as compared to the combined year ended December 31, 2011. In addition, at the acquisition date our capitalized software was also recorded at a fair value of $1.702 billion, an increase of $887$815 million, resulting inwhich increased amortization expense of $412by $59 million for the combinedsuccessor year ended December 31, 20112012 as compared to $221 millionthe previous period. Excluding the effects of CenturyLink's acquisition of us, amortization expense decreased for both comparative periods reflected in the predecessor year ended December 31, 2010.table above due to annual updates of our amortization rates for capitalized software, partially offset by net growth in amortizable intangible assets. Successor Predecessor Combined % Change Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
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2011 Three Months
Ended
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2011 Year
Ended
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2011 Successor
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Successor
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2011 (Dollars in millions) Interest expense $ (450 ) (443 ) (300 ) (150 ) (450 ) 2 % (2 )% Interest (expense) income-affiliates (64 ) (24 ) 1 — 1 167 % nm Net loss on early retirement of debt — (47 ) (8 ) — (8 ) nm nm Other income 2 — — 2 2 nm nm Total other income (expense) $ (512 ) (514 ) (307 ) (148 ) (455 ) — % 13 % Income tax expense $ 602 542 349 191 540 11 % — % Successor Predecessor Combined Predecessor Increase/
(Decrease) % Change Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2011 Year Ended
December 31,
2010 Combined
2011 v
Predecessor
2010 Combined
2011 v
Predecessor
2010 (Dollars in millions) $ (299 ) (150 ) (449 ) (615 ) (166 ) (27 )% (8 ) 2 (6 ) 5 nm nm $ (307 ) (148 ) (455 ) (610 ) (155 ) 25 % $ 349 191 540 791 (251 ) (32 )% nm—Percentagesnm-Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.Other Income (Expense)amortizationestablishment of the net premium associated witha note payable-affiliate in 2012.long-term debt,7.50% Notes due 2023, which resulted from the accountingin an immaterial loss.CenturyLink's indirect acquisition$722 million including a premium, fees and accrued interest. With respect to our 7.625% Notes due 2015, we received and accepted tenders of us.
$308 million aggregate principal amount of these notes, or 77%, for $369 million including a premium, fees and accrued interest. The completion of this tender offer resulted in a loss of $46 million. income tax rate is primarily due to a decrease in the provision for income taxes as a percentage of income before income taxes. Our effective incomestate deferred rate.rateexpense for the combined year ended December 31, 2011 and the predecessor years ended December 31, 2010 and 2009 was 39%, 42% and 38%, respectively. Income tax expense for the year ended December 31, 2010 increased by $67$540 million, as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 and the tax treatment of the expenses allocated to us when QCII accelerated the vesting of certain stock-based compensation. Among other things, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will disallow federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program. Although this tax increase does not take effect until 2013, under accounting principles generally accepted in the U.S. we recognize the full accounting impact in the period in which the laws are enacted, which increased ouror an effective tax rate for the year ended December 31, 2010 by 2.9 percentage points. On December 21, 2010, QCII accelerated the vesting of certain restricted stock and performance share awards issued under its Equity Incentive Plan39.1%.order to preserve certain economic benefits to its stockholders that otherwise would have been lost in connection with CenturyLink's acquisitionItem 8 of QCII. However, certain of the expenses that were allocated to us for this acceleration are not deductible for income tax purposes and as such they increased our effective tax rate for the year ended December 31, 2010 by 1.1 percentage points.annual report.intercompany revenues and expenses; (vi) affiliates transactions; and (vii)(vi) income taxes. These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require significant judgments, assumptions or estimates. We believe that the estimates, judgments and assumptions made when accounting for the items described below are reasonable, based on information available at the time they are made. However, there can be no assurance that actual results will not differ from those estimates.allocationestimates of fair value and resulting assignment of the purchase price related to CenturyLink's indirect acquisition of us involvesinvolved significant estimates and judgments by our management that may be adjusted during the measurement period, but in no case beyond one year from the acquisition date. The fair values recorded are made based on management's best estimates and assumptions.management. In arriving at the fair values of assets acquired and liabilities assumed, we considerconsidered the following generally accepted valuation approaches: the cost approach, income approach and market approach. Our estimates may also includeincluded assumptions about projected growth rates, cost of capital, effective tax rates, tax amortization periods, technology life cycles, the regulatory and legal environment, and industry and economic trends. Small changes in the underlying assumptions can impact the estimates of fair value by material amounts, which can in turn materially impact our results of operations. preliminary estimates of their acquisition date fair values. The fair value of the aggregate consideration transferred exceeded the acquisition date fair value of the recorded tangible and intangible assets and assumed liabilities by an estimated $9.453$9.354 billion, which has been recognized as goodwill. The determinationThis 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 fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As such, we have not completed our valuation analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair values of the acquired assets and assumed liabilities, alonggoodwill associated with the related allocations to goodwill and intangible assets.this acquisition is deductible for income tax purposes. The amounts recorded related to the acquisition are preliminary and subject to revision pending the final fair valuation analysis. We expect to completeaggregate consideration assignment is based on our final fairanalysis of enterprise value determinations no later than the first quarter of 2012. Our final fair value determinations may be significantly different than those reflected in our consolidated financial statements as of the successor date of December 31, 2011.reviewassess goodwill recorded in business combinations for impairment at least annually, or more frequently if events or a change in circumstances indicate that an impairment may have occurred. We are required to write-down the value of goodwill only in periods in which the recorded amount of goodwill exceeds the implied fair value.value of goodwill. Our annual measurementassessment date for testing goodwilliswas September 30. The impairment testingassessment is done at the reporting unit level; in reviewing the criteria for reporting units when allocatingassigning the goodwill resulting from CenturyLink's indirect acquisition of us, we have determined that we are one reportablereporting unit. We early adoptedprovisions of Accounting Standards Update ("ASU") 2011-08, Testing Goodwill for Impairment, during the thirdfourth quarter of 2011, which permits us to make a qualitative2013, we completed our annual impairment assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two step goodwill impairment test. If, after completing our qualitative assessment we determine that it is more likely than not that the carrying value exceeds estimated fair value, we compare the fair value to ourcarrying value (including goodwill). If the estimated fair valueis greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second calculation is required in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value. We elected to early adopt the provisions of ASU 2011-8 and perform a qualitative assessment as of our September 30 measurement date given the six month proximity of the goodwill impairment measurement date and the acquisition date resulting in the creation of the goodwill. As a result of CenturyLink's indirect acquisition of us and the related acquisition accounting, the carrying value of our assets and liabilities equaled our fair value as of April 1, 2011. A decrease in our fair value in excess of a reduction in our carrying value will result in us having a carrying value in excess of our fair value, which may result in an impairment of our goodwill. There is significant judgment in estimating the fair value of the company. The factors that most significantly impact our estimate of fair value include forecasted cash flows and a risk adjusted discount rate. The applicable risk adjusted discount rate is impacted by the market risk free rate of return and our risk rating. The qualitative analysis included assessing the impact of changes in certain factors from April 1, 2011 (the acquisition date on which all assets and liabilities were assigned a fair value) to September 30, 2011 (the goodwill impairment testing date), including (i) changes in forecasted operating results and comparing actual results to those utilized in the April 1, 2011 fair value assignment; (ii) changes in our weighted average cost of capital from April 1, 2011 to September 30, 2011; (iii) changes in the industry or our competitive environment since the acquisition date; (iv) changes in the overall economy, our market share and interest rates since the acquisition date; (v) trends in the stock price of CenturyLink and related market capitalization and enterprise values; (vi) trends in peer companies total enterprise value metrics; (vii) control premiums paid for recent industry transactions; and (viii) additional factors such as a management turnover, changes in regulation and changes in litigation matters. Based on our qualitative assessment, we concluded that itour goodwill was more likely than not thatimpaired and the estimated fair value of our reporting unit exceeded itsequity is substantially in excess of our carrying value of equity.the successor date of September 30, 2011October 31 and thus, determined itconcluded that our goodwill was not necessary to perform the two step goodwill impairment test. We believe the more impactful assessments include our actual results compared to those forecastedimpaired as of the successor date of April 1, 2011 and the decline in our weighted average cost of capital since April 1, 2011. To date, our actual operating results have been comparable to those forecasted as of April 1, 2011 and, as of December 31, 2011, we believe the forecasted results of future periods are not materially different than those used as of April 1, 2011. Our weighted average cost of capital declined 100 basis points from the April 1, 2011 valuation to the September 30, 2011 testing date, which would serve to increase the estimated fair value of the reporting unit when utilizing a discounted cash flow methodology. Based on our review of all other qualitative factors, we concluded there were no other significant economic, industry, operational or performance-related changes from April 1, 2011 to September 30, 2011 that would adversely impact our qualitative assessment. Should our future operating results not meet forecasted expectations or should our weighted average cost of capital increase significantly in the future, weprior to thebefore our next required testingassessment date of September 30, 2012.October 31, 2014 under certain circumstances, including any failure of our future operating results to meet forecasted expectations or any significant increases in our weighted average cost of capital. In addition, we cannot assure that other adverse conditions will not trigger future goodwill impairment testingassessment or an impairment charge. A number of factors, many of which we have no ability to control, could affect our financial condition, operating results and business prospects and could cause our actual results to differ from the estimates and assumptions we employed in our goodwill impairment testing.assessment. These factors include, but are not limited to, (i) further weakening in the overall economy; (ii) a significant decline in our ultimate parent's, CenturyLink, stock price and resulting market capitalization; (iii) changes in the discount rate; (iv) successful efforts by our competitors to gain market share in our markets; (v) adverse changes as a result of regulatory actions; and (vi) a significant adverse change in legal factors or in the overall business climate.climate; and (vii) recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of our reporting unit. For additional information, see "Risk Factors" in Item 1A of this annual report. We will continue to monitor certain events that impact our operations to determine if an interim assessment of goodwill impairment should be performed prior to the next required testingassessment date of September 30, 2012. Property,acquired sincewas recorded based on its estimated fair value as of the acquisition datedate. Purchased and constructed property, plant and equipment is statedrecorded at original cost pluscost. Renewals and betterments of plant and equipment are capitalized while repairs, as well as renewals of minor items, are charged to operating expense. Depreciation of property, plant and equipment is provided on the estimatedstraight-line method using class or overall group rates. The group method provides for the recognition of the remaining net investment, less anticipated net salvage value, over the remaining useful life of any associated legally or contractually required retirement obligations. and assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining life of our asset base. The changes in our estimates incorporated as a result of our most recent review did not have a material impact on the level of our depreciation expense.selectingdetermining the estimated economic life of telecommunications plant, equipment and software requires a significant amount of judgment. We regularly review data on utilization of equipment, asset retirements and salvage values to determine adjustments to our depreciation rates. The effect of a hypothetical one year increase or decrease in the estimated remaining useful lives of our property, plant and equipment would have decreased depreciation by approximately $180$160 million or increased depreciation by approximately $260$220 million, respectively. We periodically perform evaluations of the recoverability of the carrying value of our long-lived assets using gross undiscounted cash flow projections. These evaluations require identification of the lowest level of identifiable, largely independent, cash flows for purposes of grouping assets and liabilities subject to review. The cash flow projections include long-term forecasts of revenue growth, gross margins and capital expenditures. All of these items require significant judgment and assumptions. Substantially allQCII'sCenturyLink's post-retirement health care and life insurance benefit plans. CenturyLink and QCII allocatesallocate the income and expense relating to pension, non-qualified pension, and post-retirement health care and life insurance benefits and the associated obligations and assets to us and determines our cash contribution.us. The amounts contributed by us through QCII are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of QCII's affiliates. Historically, QCII has only required us to pay our portion of its required pension contribution. The allocation of income and expense to us is based upon demographics of our employees and retirees compared to all the remaining participants. However, significant year over year changes inQCII's funded status affecting accumulated other comprehensive income may not have a significant initial impact on the affiliate receivable or payable that is allocated to us.health carebenefits income and life insurance benefits expenses and obligations,expense, the most significant assumptions CenturyLink and QCII makes includemake are the discount rate and the expected rate of return on plan assets, health care trend rates and QCII's evaluation of the legal basis for plan amendments. The plan benefits covered by collective bargaining agreements as negotiated with our employees' unions can also significantly impact the amount of expense we record.anyeither of the above factors QCII made in computing the pension and post-retirement health care and life insurance benefit expensesthese assumptions could significantly impact general, administrative and other operating expenses and the affiliate benefits receivable or payable allocated to us as described above.expenses. For further discussion of the QCII pension, non-qualified pension and post-retirement benefit plans and the critical accounting estimates, see QCII'sCenturyLink's Annual Report on Form 10-K for the year ended December 31, 2011.Intercompany Revenue and Expenses We charge our affiliates based on tariffed rates for telecommunications and data services and either fully distributed cost or market rates for other services. Our fully distributed costs methodology includes employee costs, facilities costs, overhead costs and a return on investment component. Our affiliates charge us for services rendered by their employees primarily by applying the fully distributed cost methodology discussed above. Our affiliates also contract services from third parties on our behalf. For these services, the third parties bill our affiliates who in turn charge us for our respective share of these third-party expenses. The methodologies discussed above for determining affiliates revenue and charges are based on rules that the FCC adopted pursuant to the Communications Act, as amended by the Telecommunications Act. We believe the accounting estimates related to affiliates revenue and charges are "critical accounting estimates" because determining market rates and determining the allocation methodology and the supporting allocation factors: (i) requires judgment and is subject to refinement as facts and circumstances change or as new cost drivers are identified, (ii) are based on regulatory rules which are subject to change and (iii) QCII occasionally changes which affiliates provide them services which can impact overall costs and related affiliates charges, all of which require significant judgment and assumptions.Affiliates2013.paysettle our tax liabilities through a change in cashour general intercompany obligation 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.anthe exercise of considerable judgment related to the realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken in filed tax returns and the resulting tax basis are more likely than not to be sustained if they are audited by taxing authorities. Also, assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of our income among the states in which we operate. These and other matters involve the exercise of significant judgment. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations. We record deferred income tax assets and liabilities as described above. Valuation allowances are established when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be recovered. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate. In making this evaluation, we rely on our recent history of pre-tax earnings, estimated timing of future deductions and benefits represented by the deferred tax assets and our forecasts of future earnings, the latter two of which involve the exercise of significant judgment. As of the successor date of December 31, 2011, we concluded that it was more likely than not that we would realize the majority of our deferred tax assets; therefore, our valuation allowance did not require material adjustments. 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- 12—Income Taxes for additional information.Recently Issued Accounting Pronouncements In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update simplifies the goodwill impairment assessment by allowing a company to first review qualitative factors to determine the likelihood of whether the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a company would not be required to perform the two-step goodwill impairment test for that reporting unit. This update is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. This ASU, which we adopted during the third quarter of 2011, did not have any impact on our consolidated financial statements as
in Item 8 of this annual report for additional information.our qualitative analysis as of September 30, 2011, indicated that more likely than not, the fair value of our single reporting unit exceeded its carrying value as of that date. In October 2009, the FASB issued ASU 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update requires the use of the relative selling price method when allocating revenue in these types of arrangements. This method requires a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update was effective for us on January 1, 2011 and we have adopted it prospectively for revenue arrangements entered into or materially modified after January 1, 2011. This standard update has not had and is not expected to have a material impact on our consolidated financial statements since the allocation of revenue has historically been based upon the relative fair value of the elements as determined by reference to vendor specific objective evidence of fair value when the elements have been sold on a stand-alone basis.a wholly owned subsidiary of QSC, which is a direct wholly owned subsidiary of QCII and as of April 1, 2011, became an indirectindirectly 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.time and are classified as short-term loans.time. Under these arrangements, the majority of our cash balance is transferredadvanced on a daily basis to CenturyLink as a short-term affiliate loan.CenturyLink. From time to time we may declare and pay dividends to QSC, in excessusing cash repaid to us under these advances, which has the net effect of our earnings toreducing the extent permitted by applicable law. Given our upgrade to an investment grade rating on April 1, 2011, ouramount of these advances. Our debt covenants do not currently limit the amount of dividends we can pay to QSC. Given our cash management arrangement with our ultimate parent, CenturyLink, and the resulting amounts due to us from CenturyLink, a significant component of our liquidity is dependent upon CenturyLink's ability to repay its obligation to us.2011, our2013, we had a working capital deficit of $0.9 billion, reflecting current liabilities exceeded ourof $2.7 billion and current assets by $918 millionof $1.8 billion, compared to $3.734a working capital deficit of $1.2 billion as of April 1, 2011. Ourthe successor date of December 31, 2012. The increase in our working capital deficit decreased $2.816 billionposition is primarily due to net income before depreciation, amortizationa decrease in the current maturities of long-term debt of $167 million and net proceeds froman increase in our long term debt issuances,advances to affiliates, which were partially offset by capital expenditures and dividends declared to QSC.an increase in our note payable-affiliate. We have historically operated with a working capital deficit due to our practice of declaring and paying regular cash dividends to QSC. As long as we continue declaring cash dividends to QSC, it is likely that we will continue to operate with a working capital deficit in the future. We anticipate that any future liquidity needs not met through our cash provided by operating activities and amounts due to us from CenturyLink could be met through capital contributions or loansadvances from CenturyLink. Until April 1, 2011, QCII had revolving credit facility, which made available to us $1.035 billion of additional credit subject to certain restrictions. That credit facility was terminated in conjunction with CenturyLink's acquisition of QCII. In January 2011, CenturyLink entered into a new four-year revolving credit facility (the "Credit Facility") maturing April 2017 that allows CenturyLink to borrow up to $1.700$2 billion including $400 million of letter of credit capacity, for the general corporate purposes of itself and its2011,2013, CenturyLink had approximately $1.4$1.3 billion and $31$28 million available for future use under the Credit Facility and the separate letter of credit arrangement, respectively.2011,2013, our long-term debt (including current maturities)maturities and excluding note payable to affiliate discussed in "Revolving Promissory Note") totaled $8.325$7.558 billion, compared to $8.012$7.625 billion outstanding as of the predecessorsuccessor date of December 31, 2010. Substantially all of the $313 million increase in our debt is attributable to our recent debt issuances offset by repayments of maturing long-term debt. On October 4, 2011, issued $950 million aggregate principal amount of our 6.75% Notes due 2021 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $927 million. The notes are our senior unsecured obligations and may be redeemed, in whole or in part, at a redemption price equal to the greater of their principal amount or the present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rate specified in the indenture agreement plus 50 basis points. In October 2011, we used the net proceeds from this offering, together with the $557 million of net proceeds received on September 21, 2011 from the debt issuance described below and available cash, to redeem the $1.500 billion aggregate principal amount of our 8.875% Notes due 2012 and to pay all related fees and expenses, which resulted in an immaterial loss. On September 21, 2011, we issued $575 million aggregate principal amount of our 7.50% Notes due 2051 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $557 million. The notes are our senior unsecured obligations and may be redeemed, in whole or in part, on or after September 15, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date. On June 8, 2011, we issued $661 million aggregate principal amount of our 7.375% Notes due 2051 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $642 million. The notes are our unsecured obligations and may be redeemed, in whole or in part, on or after June 1, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date. We used the net proceeds, together with available cash, to redeem $825 million aggregate principal amount of our 7.875% Notes due 2011 and to pay related fees and expenses. We were in compliance with all provisions and covenants of our debt agreements as of the successor date of December 31, 2011.2013. See Note 4—Long-Term Debt to our consolidated financial statements in Item 8 of this annual report for additional information about our long-term debt.Agency QC Standard & Poor's BBB- Moody's Investors Service, Inc. Baa3 Fitch Ratings BBB- 2011:2013: 2014 2015 2016 2017 2018 2019 and thereafter Total (Dollars in millions) $ 637 122 237 500 — 5,987 7,483 511 474 457 431 417 9,088 11,378 Note payable-affiliate 754 — — — — — 754 Interest on note payable-affiliate 51 — — — — — 51 Operating leases 59 51 46 41 34 61 292 100 90 44 38 8 4 284 2 2 2 2 2 6 16 Other 2 2 1 2 2 28 37 $ 2,116 741 787 1,014 463 15,174 20,295 2012 2013 2014 2015 2016 2017 and
thereafter Total (Dollars in millions) $ 64 805 634 420 812 5,270 8,005 553 536 518 458 408 6,207 8,680 50 33 27 22 18 36 186 70 47 33 30 30 35 245 2 2 2 2 2 18 28 2 2 2 2 1 31 40 $ 741 1,425 1,216 934 1,271 11,597 17,184 Long-term debt, including current maturities and capital lease obligation (excluding unamortized premiums, discounts and other , net and excluding note payable-affiliate). Actual principal and interest paid in all years may differ due to future refinancing of attributing debt or issuance of new debt. We have various long-term, non-cancelable purchase commitments for advertising and promotion services, including advertising and marketing at sports arenas and other venues and events. We also have service related commitments with various vendors for data processing, technical and software support services. Future payments under certain service contracts will vary depending on our actual usage. In the table above we estimated payments for these service contracts based on the level of services we expect to receive. Reflects only the portion of total obligation that is contractual in nature, see Note 5 below. The table is limited to contractual obligations only and does not include: (1)Interest paid in all years may differ due to future refinancing of debt. Interest on our floating rate debt was calculated for all years using the rates effective at December 31, 2011.(2)We have various long-term, non-cancelable purchase commitments for advertising and promotion services, including advertising and marketing at sports arenas and other venues and events. We also have service related commitments with various vendors for data processing, technical and software support services. Future payments under certain service contracts will vary depending on our actual usage. In the table above we estimated payments for these service contracts based on the level of services we expect to receive.(3)The table does not include:•2011.2012. These purchase orders are generally issued at fair value, and are generally cancelable without penalty;••QCII'sQCII’s qualified pension plan are paid through a trust. Cash funding requirements for this trust are not included in this table as QCII is not able to reliably estimate required contributions to the trust. QCII'sQCII’s cash funding projections are discussed further below;•QCII'sCenturyLink’s post-retirement benefit obligation amount is a contractual obligation and are not contractual obligations of ours and therefore are not reported in the table. See additional information on QCII'sCenturyLink’s benefits plans in Note 8—Employee Benefits to the consolidated financial statements in Item 8 of QCII'sCenturyLink’s annual report on Form 10-K;•exitedterminate these contracts in 2012,2014, termination fees for these contracts to purchase goods and services would be $56 million.$160 million. In the normal course of business, we do not believe the payment of these fees is likely to be remote;likely; and•Capital Expenditures We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand our service offerings. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted revenue growth or productivity, expense and service impacts) and our expected return on investment. The amount of capital investment is influenced by, among other things, demand for our services and products, cash generated by operating activities and regulatory considerations. Our capital expenditures continue to be focused on our strategic services primarily our broadband services. In 2012, we anticipate that our fiber investment, which includes fiber to the tower, or FTTT, will be similar to that spent in 2011. FTTT is a type of telecommunications network consisting of fiber-optic cables that run from a telecommunication provider's broadband interconnection points to cellular towers. FTTT allows for the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional telecommunications network.Pension and Post-retirement Benefit Obligations QCII is subject to material obligations under its existing defined benefit pension and other post-retirement benefit plans. As of the April 1, 2011, the acquisition date, QCII recognized liabilities for the accounting unfunded status of pension and other post-retirement benefit obligations of $627 million and $2.706 billion, respectively. See Note 8—Employee Benefits to our consolidated financial statements in Item 8 of this report for additional information about our pension and other post-retirement benefit arrangements. A substantial portion of our employees participate in the QCII pension plan. Historically, QCII has only required us to pay our portion of its pension contribution. Our contributions are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of QCII's affiliates. Benefits paid by QCII's qualified pension plan are paid through a trust. Cash funding requirements can be significantly impacted by earnings on investments, discount rates, changes in plan benefits and funding laws and regulations. QCII opted to make a contribution of $307 million in December 2011, and therefore, will not be required to make a contribution in 2012 based on current funding laws and regulations. Although potentially significant in the aggregate, QCII currently expects that plan contributions in 2013 and beyond will decrease from the 2011 contribution amount. However, the actual amount of required plan contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. Certain of QCII's post-retirement health care and life insurance benefits plans are unfunded. A trust holds assets that are used to help cover the health care costs of certain retirees. As of the successor date of December 31, 2011, the fair value of the trust assets was $643 million; however, a portion of these assets is comprised of investments with restricted liquidity. QCII estimates that the more liquid assets in the trust will be adequate to provide continuing reimbursements for covered post-retirement health care costs for approximately four years. Thereafter, covered benefits will be paid either directly by QCII or from the trust as the remaining assets become liquid. This projected four year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits.Other Matters CenturyLink and QCII are involved in several legal proceedings to which we are not a party that, if resolved against them, could have a material adverse effect on their business and financial condition. As a wholly owned subsidiary of CenturyLink and QCII, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink's and QCII'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 Successor Predecessor Combined Predecessor Increase /
(Decrease) Successor Predecessor Combined % Change Nine
Months
Ended
December 31,
2011 Three
Months
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March 31,
2011 Year
Ended
December 31,
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December 31,
2010 Combined
2011 v
Predecessor
2010 Year
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December 31,
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December 31,
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December 31,
2011 Three Months
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2011 Year
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December 31,
2011 Successor
2013 v
Successor
2012 Successor
2012 v
Combined
2011 (Dollars in millions) (Dollars in millions) $ 2,201 869 3,070 3,235 (165 ) $ 2,713 2,774 2,201 869 3,070 (2 )% (10 )% (1,191 ) (335 ) (1,526 ) (1,256 ) 270 (1,381 ) (1,528 ) (1,191 ) (335 ) (1,526 ) (10 )% — % (1,208 ) (525 ) (1,733 ) (2,801 ) (1,068 ) (1,326 ) (1,241 ) (1,208 ) (525 ) (1,733 ) 7 % (28 )% primarily due to decreased cash payments received from customers as a result of decreased revenuesby $61 million in the combinedsuccessor year ended December 31, 20112013 as compared to the predecessorsuccessor year ended December 31, 2010.2012 primarily due to changes in other noncurrent assets and liabilities and other noncurrent assets and liabilities-affiliates, which were partially offset by increase in earnings, changes in current assets and liabilities, net. Net cash provided by operating activities decreased by $296 million in the successor year ended December 31, 2012 compared to the combined year December 31, 2011 primarily due to a decrease in net income adjusted for non-cash items. For additional information about our operating results, see "Results of Operations" above. as compared to the predecessor year ended December 31, 2010 primarily due to increases in short-term affiliate loans resulting from the majority of our cash balance being transferred on a daily basis to CenturyLink andour ultimate parent company, CenturyLink. This increase was offset by slightly less payments for purchases of property, plant and equipment.primarily dueby $492 million in the successor year ended December 31, 2012 as compared to $2.126 billion of net proceeds from the issuance of debt, as well as a $830 million decrease in dividends paid to QSC for the combined year ended December 31, 2011 as comparedprimarily due to the predecessor year ended December 31, 2010. This decrease wasproceeds from an affiliate note payable and a reduction in dividends paid partially offset by a $1.848 billionan increase in net debt paydowns, payments of long-termaccounts payable affiliates and payment of early debt for the combined year ended December 31, 2011 compared to the predecessor year ended December 31, 2010.retirement costs. For additional information regarding our financing activities, see Note 4—Long-Term Debt to our consolidated financial statements in Item 8 of this annual report.QCII As2011,2013, we hadhave paid certain costs that were associated with the CenturyLink acquisition.CenturyLink's indirect acquisition of us. These costs include compensation costs comprised of retention bonuses the CenturyLink's indirect acquisition of us, we recorded our debt securities at their estimated fair values, which totaled $8.688$8.498 billion as of April 1, 2011. Our acquisition date fair value estimates were based primarily on quoted market prices in active markets and other observable inputs where quoted market prices were not available. The fair value of our debt securities exceeded their stated principal balances on the acquisition date by $672$530 million, which is beingwe recorded as a premium.overor extinguished during the periods indicated: Successor Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
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December 31,
2011 (Dollars in millions) Amortized $ 53 66 135 254 — 128 59 187 Total premiums recognized $ 53 194 194 441 See "Debt and Other Financing Arrangements" for more information. termspremium of $89 million as of the debt. over the past several years, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates; however, asrates. As of the successor date of December 31, 20112013, we had no such instruments outstanding. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities. We do not hold or issue derivative financial instruments for trading or speculative purposes. Management periodically reviews our exposure to interest rate fluctuations and implements strategies to manage the exposure.2011,2013, we havehad approximately $8.1$7.4 billion (excluding capital lease and other obligations) of long-term debt outstanding, 91% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We also held $750 million of floating rate debt exposed to changes in the London InterBank Offered Rate (LIBOR). A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease our annual pre-tax earnings by $8 million.2011.(ii)(iii) discussed under the heading "Market Risk" above.2011(Successor date)2013 and 2010 (Predecessor date)2012 (Successor dates), and the related consolidated statements of operations, stockholder's (deficit) equity and comprehensive income, and cash flows, and stockholder's equity (deficit) for the periodsyears ended December 31, 2013 and 2012, the period from April 1, 2011 to December 31, 2011 (Successor period)periods), and the period from January 1, 2011 to March 31, 2011 (Predecessor period) and each of the years in the two-year period ended December 31, 2010 (Predecessor periods). 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.Qwest Corporation and subsidiariesthe Company as of December 31, 20112013 and 2012 (Successor period) and 2010 (Predecessor date)dates), and the results of their operations and their cash flows for the periodsyears ended December 31, 2013 and 2012, the period from April 1, 2011 to December 31, 2011 (Successor period)periods), and the period from January 1, 2011 to March 31, 2011 and each of the years in the two-year period ended December 31, 2010 (Predecessor periods)period), in conformity with U.S. generally accepted accounting principles.noteNote 2 to the consolidated financial statements, effective April 1, 2011, CenturyLink, Inc. acquired all of the outstanding stock of Qwest Corporation's indirect parent, Qwest Communications International Inc., 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.KPMG LLPDenver, Colorado2, 20127, 2014 Successor Predecessor Successor Predecessor Nine Months
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December 31,
2011 Three Months
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December 31,
2010 Year Ended
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December 31,
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March 31,
2011 (Dollars in millions) (Dollars in millions) $ 5,419 1,870 7,700 8,075 $ 6,818 7,031 5,419 1,870 1,216 398 1,571 1,656 Operating revenues-affiliates 1,935 1,817 1,216 398 6,635 2,268 9,271 9,731 8,753 8,848 6,635 2,268 1,833 626 2,585 2,796 2,790 2,868 2,171 742 1,499 501 2,136 2,222 1,062 1,166 1,161 385 238 52 194 175 Operating expenses-affiliates 695 619 238 52 1,866 451 1,873 1,976 2,128 2,290 1,866 451 5,436 1,630 6,788 7,169 6,675 6,943 5,436 1,630 1,199 638 2,483 2,562 2,078 1,905 1,199 638 (299 ) (150 ) (615 ) (632 ) (450 ) (443 ) (300 ) (150 ) (8 ) 2 5 (9 ) Interest (expense) income-affiliates (64 ) (24 ) 1 — Net loss on early retirement of debt — (47 ) (8 ) — Other income 2 — — 2 (307 ) (148 ) (610 ) (641 ) (512 ) (514 ) (307 ) (148 ) 892 490 1,873 1,921 1,566 1,391 892 490 349 191 791 724 602 542 349 191 $ 543 299 1,082 1,197 $ 964 849 543 299 Successor Predecessor Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Year
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December 31,
2013 Year
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December 31,
2011 Three Months
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March 31,
2011 (Dollars in millions) (Dollars in millions) $ 543 299 1,082 1,197 $ 964 849 543 299 — 1 (4 ) 9 Unrealized gain on investments and other, net of tax — — — 1 — 1 (4 ) 9 — — — 1 $ 543 300 1,078 1,206 $ 964 849 543 300 Successor Predecessor Successor December 31,
2011 December 31,
2010 December 31, 2013 December 31, 2012 (Dollars in millions) (Dollars in millions) $ 3 192 $ 14 8 712 720 198 — Accounts receivable, less allowance of $43 and $46 738 709 Advances to affiliates 712 593 168 159 161 166 98 181 126 114 1,179 1,252 1,751 1,590 8,457 44,205 10,193 9,242 (915 ) (34,045 ) (2,985 ) (2,011 ) 7,542 10,160 7,208 7,231 9,453 — 9,354 9,354 5,101 — 3,687 4,379 1,460 888 1,008 1,212 197 270 210 181 16,211 1,158 14,259 15,126 $ 24,932 12,570 $ 23,218 23,947 LIABILITIES AND STOCKHOLDER'S EQUITY $ 64 871 $ 637 804 654 679 440 456 189 205 310 140 Note payable-affiliate 754 701 257 326 217 253 221 193 Income and other taxes 206 215 129 170 126 102 273 372 320 301 2,097 2,956 2,700 2,832 8,261 7,141 6,921 6,821 Deferred revenue 161 130 2,860 1,327 2,473 2,631 1,572 1,602 1,263 1,442 255 375 87 117 4,687 3,304 3,984 4,320 9,972 11,425 (85 ) (12,256 ) 9,887 (831 ) $ 24,932 12,570 STOCKHOLDER'S EQUITY Common stock-one share without par value, owned by Qwest Services Corporation 10,050 10,050 Retained earnings (Accumulated deficit) (437 ) (76 ) Total stockholder's equity 9,613 9,974 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 23,218 23,947 Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Successor Predecessor (Dollars in millions) Year
Ended
December 31,
2013 Year
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December 31,
2012 Nine Months
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December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) $ 543 299 1,082 1,197 $ 964 849 543 299 1,866 451 1,873 1,976 2,128 2,290 1,866 451 150 76 241 (137 ) Deferred income taxes (benefits) (152 ) (201 ) 150 76 44 17 70 85 65 74 44 17 (133 ) 3 11 8 (52 ) (65 ) (133 ) 3 Net loss on early retirement of debt — 47 8 — (71 ) 18 (22 ) 48 (94 ) (76 ) (71 ) 18 (47 ) (20 ) 51 19 (1 ) (58 ) (47 ) (20 ) (108 ) 93 (81 ) — Accounts receivable and payable-affiliates, net — — (108 ) 93 (36 ) 50 (16 ) (122 ) (9 ) (9 ) (36 ) 50 (6 ) (89 ) 11 10 34 (17 ) (6 ) (89 ) 11 (36 ) 15 27 — 61 11 (36 ) (53 ) — 7 44 Changes in other noncurrent assets and liabilities-affiliates (179 ) (130 ) (53 ) — 41 7 (7 ) 12 9 9 33 7 2,201 869 3,235 3,167 2,713 2,774 2,201 869 (1,036 ) (341 ) (1,240 ) (1,106 ) (1,264 ) (1,266 ) (1,036 ) (341 ) — 4 (17 ) 13 — — — 4 (157 ) — — — Changes in advances to affiliates (119 ) (395 ) (157 ) — Proceeds from sale of property 2 133 — — 2 2 1 (7 ) — — 2 2 (1,191 ) (335 ) (1,256 ) (1,100 ) (1,381 ) (1,528 ) (1,191 ) (335 ) Net proceeds from issuance of long-term debt 752 896 2,126 — (2,368 ) (14 ) (534 ) (25 ) (806 ) (1,430 ) (2,368 ) (14 ) 2,126 — — 738 Early retirement of debt costs — (178 ) — — (900 ) (530 ) (2,260 ) (2,000 ) (1,325 ) (1,150 ) (900 ) (530 ) Changes in note payable-affiliate 53 701 — — Changes in advances to affiliates — (80 ) — — (66 ) 19 (7 ) 1 — — (66 ) 19 (1,208 ) (525 ) (2,801 ) (1,286 ) (1,326 ) (1,241 ) (1,208 ) (525 ) (198 ) 9 (822 ) 781 Net increase (decrease) in cash and cash equivalents 6 5 (198 ) 9 201 192 1,014 233 8 3 201 192 $ 3 201 192 1,014 $ 14 8 3 201 $ (327 ) 116 (677 ) (968 ) $ (464 ) (149 ) (603 ) (597 ) Income taxes (paid) refunded, net $ (750 ) (607 ) (327 ) 116 Interest (paid) (net of capitalized interest of $17, $18, $8, and $3) $ (513 ) (513 ) (464 ) (149 ) Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Successor Predecessor Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) (Dollars in millions) $ 9,973 11,425 11,346 11,326 $ 10,050 9,950 9,951 11,425 (1 ) — 79 20 — — (1 ) — Tax benefit of pension deduction — 100 — — 9,972 11,425 11,425 11,346 10,050 10,050 9,950 11,425 — (12,256 ) (11,034 ) (10,540 ) (76 ) (85 ) — (12,256 ) 543 299 1,082 1,197 964 849 543 299 (628 ) (1,000 ) (2,300 ) (1,700 ) (1,325 ) (840 ) (628 ) (1,000 ) — 1 (4 ) 9 — — — 1 (85 ) (12,956 ) (12,256 ) (11,034 ) (437 ) (76 ) (85 ) (12,956 ) $ 9,887 (1,531 ) (831 ) 312 $ 9,613 9,974 9,865 (1,531 ) Inc.Inc,. and its consolidated subsidiaries.(1) (1) Basis of Presentation and Summary of Significant Accounting Policies and Summary of Significant Accounting PoliciesBasis of Presentationnetwork access,broadband, private line (including special access), broadband, data,network access, Ethernet, wireless and video services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers. On April2011,2012, in connection with post-acquisition systems integration activities, we adopted the affiliate expense allocation methodology used by our indirectultimate parent. This methodology results in certain overhead costs incurred by us and by our direct parent QCII becamethat were previously assessed to us on a wholly owned subsidiarynet basis now being assessed on a gross basis both to and from our ultimate parent, resulting in both higher affiliate revenues and expenses for us. This change resulting from systems integration activities did not have a significant impact to our consolidated net income for the successor years ended December 31, 2013 and 2012.CenturyLink, Inc.an error related to an understatement of our current deferred tax asset, an understatement of our deferred tax liabilities and an overstatement of goodwill recorded in connection with the purchase accounting of us in 2011. Therefore, we recognized a tax-free, stock-for-stock transaction. Although we continued$17 million increase to current deferred income tax asset, a $2 million increase to noncurrent deferred income tax liability and a $15 million reduction to goodwill on our consolidated balance sheet as a surviving corporation and legal entity afterof December 31, 2012. The correction of the acquisition, the accompanyingerror did not have an effect on our consolidated statements of operations comprehensive income,or on our consolidated statements of cash flows and 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. On the date of the acquisition, April 1, 2011, our assets and liabilities were recognized at their fair value. This revaluation has been reflected in our financial statements and, therefore, has resulted in a new basis of accounting for the "successor period". 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.the definitionsour rates of capitalized labor as we use to classify expenses as cost of services and products and selling, general and administrative, and as a result, we reclassified previously reported amounts to conformtransitioned certain legacy systems to the current period presentation. We revisedhistorical systems of our definitions so that our expense classifications are more consistent with the expense classifications used by our new ultimate parent, company, CenturyLink. These revisionsThis transition resulted in an estimated $40 million to $55 million increase in the reclassificationamount of $930labor capitalized as an asset compared to the amount that would have been capitalized if we had continued to use our legacy systems and a corresponding estimated $40 million and $1.092 billion from selling, general and administrative to cost of services and products$55 million decrease in operating expenses for the predecessor yearssuccessor year ended December 31, 20102012. The reduction in expenses described above, net of tax, increased net income approximately $25 million to $34 million for the successor year ended December 31, 2012.2009, respectively. Our current definitions are as follows:•Costnet salvage value for certain telecommunications equipment. These changes resulted in a decrease to depreciation expense of servicesapproximately $52 million for the successor year ended December 31, 2012. This decrease in depreciation expense, net of tax, had the effect of increasing net income by approximately $32 million for the successor year ended December 31, 2012.products (exclusivecircuit network equipment. We estimate this will result in a net increase in depreciation expense in our consolidated statements of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which are third-party telecommunications expenses we incuroperations of $19 million for using other carriers' networks to provide services to our customers); rentsQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)and utilities expenses; equipment sales expenses (such as modem expenses); costs for universal service funds ("USF") (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); and other expenses directly related to our network.•Selling, general and administrative expenses are expenses incurred in selling products and services to our customers, corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; taxes (such as property and other taxes) and fees; external commissions; bad debt expense; and other selling, general and administrative expenses. These expense classifications may not be comparable to those of other companies. year ended December 31, 2014. have reclassified certain other prior period amounts to conform to the current period presentation. These changes had no impact on total operating expenses or net income for any period. We have reclassified certain prior year balance sheet amounts presented in our Annual Report on Form 10-K as of the predecessor date of December 31, 2010. We made these changes so that the classifications of our assets and liabilities are more consistent with the asset and liability classifications used by our new ultimate parent company, CenturyLink. These reclassifications primarily included combining $899 million non-current prepaid pension asset—affiliates and $2.501 billion non-current post-retirement, other post-employment benefits and other—affiliates into $1.602 billion non-current affiliates obligations, net. We also combined $193 million accounts receivable—affiliates, $180 million current portion of post-retirement, other post-employment benefits and other—affiliates into accounts payable—affiliates, net. We reclassified $220 million from accrued expenses and other current liabilities to accounts payable. In addition, we reclassified $25 million from capitalized software, net into net property, plant and equipment.mademake when accounting for items and matters such as, but not limited to, investments, long-term contracts, customer retention patterns, allowance for doubtful accounts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets (including deferred tax assets), impairment assessments, pension, post-retirement and other post-employment benefits, taxes, certain liabilities and other provisions and contingencies are reasonable, based on information available at the time they were made. Our accounting for CenturyLink's indirect acquisition of us required extensive use of estimates in determining the acquisition date fair values of our assets and liabilities. These estimates, judgments and assumptions can affect the reported amounts of assets, liabilities and components of stockholder's equity or deficit as of the dates of the consolidated balance sheets, as well as the reported amounts of revenue, expenses and components of cash flows during the periods presented in our consolidated statements of operations, our consolidated statements of comprehensive income and our consolidatedQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)acquisitions.activations and installations. The deferral of customer acquisitionactivation and installation costs is limited to the amount of revenue deferred on advance payments. Costs in excess of advance payments are recorded as expense in the period such costs are incurred. Expected customer relationship periods are estimated using historical experience. Termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term. Revenues from installation activities are deferred and recognized as revenue over the estimated lifeeach elementthe customer arrangement is allocated to each element based on the relative estimated selling price of the separate elements. We have estimated the selling prices of each element by reference to vendor-specific objective evidence of selling prices when the elements are sold separately. The revenue associated with each element is then recognized as earned. For example, if we receive an advance payment when we sell equipment and continuing service together, we immediately recognize as revenue the amount allocated to the equipment as long as all the conditions for revenue recognition have been satisfied. The portion of the advance payment allocated to the service basedQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)have periodically transferredtransfer optical capacity assets on our network to other telecommunications service carriers. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years.years. We account for the cash consideration received on transfers of optical capacity assets and on all of the other elements deliverable under an IRU, as revenue ratably over the term of the agreement. We have not recognized revenue on any contemporaneous exchanges of our optical capacity assets for other optical capacity assets. We offer somethat are provided by third-party vendors. Wevendors, we review the relationship between us, the vendor and the end customer to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction, take title to the products, have risk and rewards of ownership andor act as an agent or broker. Based on ourCenturyLink's agreements with DIRECTV and Verizon Wireless, we offer these services through sales agency relationships which are reported on a net basis.Affiliates Becausesignificancemajority of our cash balance is transferred on a daily basis to CenturyLink and most affiliate transactions are deemed to be settled at the servicestime the transactions are recorded in our accounting records, with the resulting net balance at the end of each period reflected as advances to affiliates on the accompanying consolidated balance sheets. From time to time we providedeclare and pay dividends to our parent, QSC, which are settled through the advances to affiliates, which has the net effect of reducing the amount of these advances. Dividends declared are reflected on our consolidated statements of stockholder's equity (deficit) and our other affiliates transactions, the resultsconsolidated statements of operations, financial position and cash flows presented hereinreflects the changes in advances to affiliates as investing activities and changes in advances from affiliates as financing activities. Interest is assessed on the advances to/from affiliates on either the three-month U.S T-bill rate (for advances to affiliates) or CenturyLink’s weighted average borrowing rate (for advances from affiliates).not necessarily indicativereflected in operating activities on our consolidated statements 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.have recorded $28$28 million of noncash dividends associated with asset transfers to QSC during the successor nine months ended December 31, 2011.governmentalgovernment authorities, including USFUniversal Service Fund ("USF") charges, sales, use, value added and some excise taxes, we assess, among other things, whether we are the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. In jurisdictions where we determine that we are the principal taxpayer, we record the taxessurcharges on a gross basis and include them in our revenue and costs of services and products.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)incurred. For the successor nine months ended December 31, 2011 our advertising expense was $174 millionincurred and $65 million for the predecessor three months ended March 31, 2011 and $292 million and $328 million for the predecessor years ended December 31, 2010 and 2009, respectively. This expense is included in selling general and administrative expenses in our consolidated statements of operations.
$90 million for the successor year ended December 31, 2012, $174 million for the successor nine months ended December 31, 2011, and $65 million for the predecessor three months ended March 31, 2011. Untilwe wereour results are included in the CenturyLink consolidated federal income tax return of QCII. Since CenturyLink's acquisition of QCII on April 1, 2011, we are included in the consolidated federaland certain combined state income tax returns. CenturyLink allocates income tax expense to us based upon a separate return of CenturyLink. Under CenturyLink'sallocation method which results in income tax allocation policy, CenturyLink treats our consolidated results asexpense that approximates the expense that would result if we were a stand-alone entity. 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 taxpayer. The policy requires us to payreturn allocation method and therefore the settlement of these amounts is dependent upon our parent, CenturyLink, rather than tax authorities. Our current expectation is that the vast majority of deferred tax assets and liabilities in cashwill be settled through our general intercompany obligation based upon our separate return taxable income. We are also included in the combined state tax returns filed bycurrent CenturyLink policy. CenturyLink has the right to change their policy regarding settlement of these assets and the same payment and allocation policy applies.use the deferral method of accounting for federal investmentestablish valuation allowances when necessary to reduce deferred income tax credits earned priorassets to the repeal of such credits in 1986. We also defer certain transitional investment tax credits earned afteramounts that we believe are more likely than not to be recovered. Each quarter we evaluate the repeal, as well as investment tax credits earned in certain states. In the predecessor periods, we amortized these credits ratably over the estimated service livesneed to retain all or a portion of the related assets as a credit tovaluation allowance on our incomedeferred tax expense in our consolidated statements of operations.short-term affiliate loansadvances to affiliates in our consolidated balance sheets. As a result, cash and cash equivalents in the successor period are comprised of demand deposits with financial institutions. During the predecessor periods, in evaluating investments for classification asQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)cash equivalents, we required that individual securities have original maturities of three months or less and that individual investment funds have dollar-weighted average maturities of ninety days or less. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition and in high quality and relatively risk-free investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to credit worthiness of any particular financial institution. Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for payment. Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheet. This activity is included in the operating activities section in our consolidated statements of cash flows.
$159 million and days.days. Our collection process varies by the customer segment, amount of the receivable, and our evaluation of the customer's credit risk. Our past due accounts are written off against our allowance for doubtful accounts when collection is considered to be not probable. Any recoveries of accounts previously written off are generally recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable net of the allowance for doubtful accounts approximates fair value. Property, acquired since the acquisition date is stated at original cost plus the estimated value of any associated legally or contractually required retirement obligations.cost. Property, plant and equipment is depreciated primarily using the straight-line group method. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are categorized in the year acquired on the basis of equal life groups for purposes of depreciation and tracking. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is recognized in our consolidatedQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued) The changes in our estimates incorporated as a result of our most recent reviews did not have a material impact on the level of our depreciation expense.property, plant and equipmentlong-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For measurementassessment purposes, property, plant and equipment islong-lived tangible assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its fair value. Recoverability of the asset group to be held and used is measuredassessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. We determine fair values by using a combination of comparable market values and discounted cash flows, as appropriate.and customer relationships and capitalized software are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of 10ten years, using either the sum-of-the-years-digits or 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. 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 suchyears. Other intangible assets not arising from business combinations are initially recorded at cost. We review long-lived intangible assets, other than goodwill, for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not amortized.we have capitalizedinternally used software, whether purchased or developed by us is capitalized. We capitalize 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.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)reviewassess customer relationships for impairment whenever facts and circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount is not recoverable and exceeds its fair value. Recoverability of the our customer relationships is measured by comparing the carrying amount to the estimated undiscounted future net cash flows expected to be generated by them. If the customer relationship's carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount exceeds its fair value. We determine fair values by using a combination of comparable market values andthe discounted cash flows as appropriate.reviewassess goodwill for impairment at least annually, or more frequently, if events or a change in circumstances indicate that an impairment may have occurred. Our annual measurement date for testing goodwill impairment is September 30. We are required to write-down the value of goodwill only in periods in which the recorded amount of goodwill exceeds the implied fair value.value of goodwill. Our annual assessment date for assessing goodwill impairment was September 30. The impairment testingassessment is at the reporting unit level, and in reviewing the criteria for reporting units when allocatingassigning the goodwill resulting from CenturyLink's indirect acquisition of us, we have determined that our operations consist 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. Substantially allQCII'sCenturyLink's post-retirement health care and life insurance benefit plans. CenturyLink and QCII allocates the expenseallocate income and expenses relating to pension, non-qualified pension, and post-retirement health care and life insurance benefits and the associated obligations and assets to us and determines our cash contribution.. The amounts contributed by us through CenturyLink and QCII are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of CenturyLink and QCII's affiliates. Historically, QCII has only required us to pay our portion of its required pension contribution. The allocation of expense to us is based upon the demographics of our employees and retirees compared to all the remaining participants. However, significant year over year changes in QCII's funded status affecting accumulated other comprehensive income may not have a significant initial impact on the affiliate receivable or payable that is allocated to us. QCII pension, non-qualified pension, post-retirement and other post-employment benefit plans, see QCII'sCenturyLink's Annual Report on Form 10-K for the year ended December 31, 2011.Recently Issued Accounting Pronouncements In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update simplifies the goodwill impairment assessment by allowing a company to first review qualitative factors to determine the likelihood of whether the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a company would not be required to perform the two-step goodwill impairment test for that reporting
2013.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)unit. This update is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. This ASU, which we adopted during the third quarter of 2011, did not have any impact on our consolidated financial statements as our qualitative analysis as of September 30, 2011, indicated that more likely than not, the fair value of our single reporting unit exceeded its carrying value as of that date. In October 2009, the FASB issued ASU 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update requires the use of the relative selling price method when allocating revenue in these types of arrangements. This method requires a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update was effective for us on January 1, 2011 and we have adopted it prospectively for revenue arrangements entered into or materially modified after January 1, 2011. This standard update has not had and is not expected to have a material impact on our consolidated financial statements since the allocation of revenue has historically been based upon the relative fair value of the elements as determined by reference to vendor specific objective evidence of fair value when the elements have been sold on a stand-alone basis.(2) Acquisition of QCII by CenturyLink(2) Acquisition of QCII by CenturyLink our preliminary estimates of their acquisition date fair values. The determinationIn the first quarter of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As such,2012, we have not completed our valuation analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of the assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets. fair values of certain tangible assets, certain liabilities and residual goodwill are the most significant areas not yet finalized and therefore are subject change. We expect to complete our final fair value determinations no later than the first quarter of 2012. Our final fair value determinations may be significantly different than those reflected in our consolidated financial statements as of the successor date of December 31, 2011. Based on our preliminary estimate, the aggregate consideration exceedsexceeded the aggregate estimated fair value of the assets acquired and liabilities assumed by $9.453$9.354 billion, which amount has beenwe recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced financial and operational scale, product and 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. Our aggregate consideration allocation is based on our preliminary estimate of enterprise value of $18.661 billion less the fair value of our debt of $8.688 billion.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(2) Acquisition of QCII by CenturyLink (Continued)iswas our preliminary assignment of the aggregate consideration: April 1, 2011 (Dollars in millions) April 1, 2011 $ 1,102 (Dollars in millions) Cash, accounts receivable and other current assets* $ 1,108 7,496 7,460 5,699 5,699 1,702 1,702 201 209 (2,458 ) (2,446 ) (2,378 ) (2,378 ) (6,310 ) (6,310 ) (4,534 ) (4,447 ) 9,453 9,354 $ 9,973 $ 9,951 We retrospectively adjusted our previously reported preliminary assignment of the aggregate Qwest consideration for changes to our original estimates of the fair value of certain items at the acquisition date. These changes are the result of additional information obtained since the filing of our Form 10-Q for the quarter ended September 30, 2011. Identifiable intangible assets decreased due to a $353 million decrease in customer relationships valuation. Property, plant and equipment increased by $69 million primarily from a revision to our buildings asset valuation. Deferred credits and other liabilities decreased by $103 million primarily from a change in deferred income taxes and a revision to our pension and post retirement asset valuation. Goodwill increased by $171 million as an offset to the above mentioned changes. The adjustment to intangible assets and property, plant and equipment valuations and the resulting application of depreciation and amortization expense did not result in a material change to previously reported depreciation and amortization expense.* recognized $146 million of expense associated with activitiesincurred operating expenses related to CenturyLink's indirect acquisition of us, during the successor nine months ended December 31, 2011. These expenses were comprisedwhich consist primarily of integration and severance retention bonuses, share-based compensation allocated to us by QCII and system integration consulting. During the predecessor three months ended March 31, 2011, weexpenses. The table below summarizes our acquisition-related expenses: Successor Predecessor Combined Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) Acquisition-related expenses $ 24 39 146 2 148 $2 million of expenses associated with our activities related to the acquisition. As of April 1, 2011, as part of acquisition accounting, we also included in our goodwill $22 million for certain performance awardscost of services and $14 million related to retention bonuses, all of which were contingent solely on the completion of the acquisitionproducts and had no benefit to CenturyLink after the acquisition.
selling, general and administrative expenses.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(3) Goodwill, Customer Relationships and Other Intangible Assets(3) Goodwill, Customer Relationships and Other Intangible Assets Successor Predecessor Weighted
Average of
Remaining Lives December 31,
2011 December 31,
2010 (Dollars in millions) N/A $ 9,453 — 9.3 years $ 5,101 — 4.1 years $ 1,460 888 Successor December 31, 2013 December 31, 2012 (Dollars in millions) Goodwill N/A $ 9,354 9,354 Customer relationships, less accumulated amortization of $2,012 and $1,320 7.3 years 3,687 4,379 Other intangible assets subject to amortization Capitalized software, less accumulated amortization of $994 and $704 3.0 years 1,008 1,212 2011,2013, the gross carrying amounts of goodwill, customer relationships and other intangible assets were $16.966$17.055 billion. These assets were recorded at fair value on April 1, 2011 as a result Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 (Dollars in millions) $ 952 58 221 208 Successor Predecessor Year Ended December 31, 2013 Year Ended December 31, 2012 Nine Months Ended December 31, 2011 Three Months Ended March 31,
2011 (Dollars in millions) Amortization expense for intangible assets $ 1,029 1,115 952 58 10ten years, using either the sum-of-the-years-digits or 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. The estimated future amortization expense for intangible assets is as follows: (Dollars in millions) (Dollars in millions) $ 1,074 1,010 884 $ 894 776 821 670 743 2,147 2017 667 2018 581 2019 and thereafter 989 regularlyannually review the estimated lives and methods used to amortize our software and customer relationships.other intangible assets. The actual amounts of amortization expense may differ materially from our estimated future amortization,estimates, depending on the results of our periodic reviewsannual reviews.estimated lives, amortization methodsus under the acquisition method of accounting, which resulted in the assignment of the aggregate consideration to the assets acquired and our final determinationsliabilities assumed based on their acquisition date fair values. The fair value of the aggregate consideration transferred exceeded the acquisition date fair value relatedof the recorded tangible and intangible assets, and assumed liabilities by $9.354 billion, which has been recognized as goodwill. The impairment assessment is done at the reporting unit level; in reviewing the criteria for reporting units when assigning the goodwill resulting from our acquisition by CenturyLink, we have determined that we are one reporting unit. We are required to our intangible assets.early adoptedare required to write-down the provisionsvalue of ASU 2011-08, Testing Goodwill for Impairment, duringgoodwill only in periods in which the third quarterrecorded amount of 2011, which permits us to make a qualitative assessment of whether it is more likelyQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(3) Goodwill, Customer Relationships and Other Intangible Assets (Continued)than not that a reporting unit'sWe compare Qwest’s estimated fair value is less than its carrying amount before applying the two step goodwill impairment test. If, after completing our qualitative assessment we determine that it is more likely than not thatto the carrying value exceeds estimated fair value, we compare the fair value to ourcarrying value (including goodwill).of equity. If the estimated fair valueisvalue of Qwest is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unitQwest is less than the carrying value, a second calculation is required in which the implied fair value of goodwill is compared to itsthe carrying value.value of goodwill. If the implied fair value of goodwill is less than its carrying value of goodwill, goodwill must be written down to its implied fair value. We elected early adopt the provisions of ASU 2011-8 and perform a qualitative assessment given the six month proximity of the goodwill impairment date and the acquisition date resulting in the creation of the goodwill. As a result of the acquisition and related acquisition accounting, the carrying value of our assets and liabilities equaled our fair value as of April 1, 2011. A decrease in our fair value in excess of a reduction in the carrying value of our net assets will result in us having a carrying value in excess of our fair value, which may result in an impairment of our goodwill. There is significant judgment in estimatingassessment. Therefore, we estimated the fair value of the company. The factors that most significantly impact our estimate ofQwest by considering both a market approach method and a discounted cash flow method, which resulted in a Level 3 fair value include forecastedmeasurement. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a risk adjusted discount rate. The applicable risk adjusted discountterminal value, which represents the expected normalized cash flows beyond the cash flows from the discrete projection period. We discounted the estimated cash flows using a rate is impacted by thethat represents a market risk free rate of return and a risk premium associated with a group of peer telecommunications companies, which have been deemed to be market participants for purposes of determining the fair value of the company. The qualitative analysis included assessing the impact of changes in certain factors from April 1, 2011 (the acquisition date on which all assets and liabilities were assigned a fair value) to September 30, 2011 (the goodwill impairment testing date), including (i) changes in forecasted operating results and comparing actual results to those utilized in the April 1, 2011 fair value assignment; (ii) changes in ourparticipant's weighted average cost of capital, from April 1, 2011which we determined to September 30, 2011; (iii) changes inbe approximately 6.0% as of the industry or our competitive environment since the acquisition date; (iv) changes in the overall economy, our market shareassessment date (which was comprised of an after-tax cost of debt of 3.4% and market interest rates since the acquisition date; (v) trends in the stock pricea cost of CenturyLink and related market capitalization and enterprise values; (vi) trends in peer companies total enterprise value metrics; (vii) control premiums paid for recent industry transactions; and (viii) additional factors such as management turnover, changes in regulation and changes in litigation matters.qualitative assessment performed with respect to our reporting unit described above, we concluded that it was more likely than not that the estimated fair value of our reporting unit exceeded its carrying value as of September 30, 2011 and thus, determined itgoodwill was not necessary to perform the two step goodwill impairment test. We believe the more impactful assessments include our actual results compared to those forecasted as of April 1, 2011 and the decline in our weighted average cost of capital since April 1, 2011. To date, our actual operating results have been comparable to those forecasted as of April 1, 2011 and, as of September 30, 2011, we believe the forecasted results of future periods are not materially different than those estimated as of April 1, 2011.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(4) Long-Term Debt(4) Long-Term Debt and Revolving Promissory Note Successor Predecessor Year Ended
December 31,
2011 Year Ended
December 31,
2010 Interest Rates Maturities (Dollars in millions) 6.500%-8.375% 2013-2051 $ 4,647 4,786 6.875%-7.750% 2014-2043 3,182 3,182 Various Various 176 198 320 (154 ) 8,325 8,012 (64 ) (871 ) $ 8,261 7,141 (1)Our $750 million Notes due 2013 are floating rate notes which are re-measured every three months. As of the most recent measurement date (December 15, 2011) the rate for these notes was 3.796% which is not included in the rates stated above. Successor Interest Rates Maturities December 31, 2013 December 31, 2012 (Dollars in millions) Senior notes 6.125% - 8.375% 2014 - 2053 $ 7,411 7,386 Capital lease and other obligations Various Various 72 112 Unamortized premiums, net 75 127 Total long-term debt 7,558 7,625 Less current maturities (637 ) (804 ) Long-term debt, excluding current maturities $ 6,921 6,821 Note payable-affiliate 6.765% 2022 $ 754 701 October 4, 2011,May 23, 2013, we issued $950$775 million aggregate principal amount of our 6.75%6.125% Notes due 20212053, including $25 million principal amount that was sold pursuant to an over-allotment option granted to the underwriters for the offering, in exchange for net proceeds, after deducting underwriting discounts and expenses, of $927approximately $752 million. The notesNotes are our senior unsecured obligations and may be redeemed, in whole or in part, at a redemption price equal to the greater of their principal amount or the present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rate specified in the indenture agreement plus 50 basis points. On September 21, 2011, we issued $575 million aggregate principal amount of our 7.50% Notes due 2051 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $557 million. The notes are our senior unsecured obligations and may be redeemed, in whole or in part, on or after September 15, 2016June 1, 2018 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.8, 2011,25, 2012, we issued $661$400 million aggregate principal amount of our 7.375%7.00% Notes due 20512052 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $642 million.$387 million. The notesNotes are our unsecured obligations and may be redeemed, in whole or in part, on or after JuneJuly 1, 20162017 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest tointerest.redemption date. Until April 1, 2011, QCII had18, 2012 tender offer described below under "Repayments", we borrowed from a CenturyLink affiliate approximately credit facility, which made availablepromissory note, payable upon demand. The promissory note is unsecured and ranked equally to us $1.035 billion of additional credit subject to certain restrictions. That credit facility was terminated in conjunction with CenturyLink's acquisition of QCII. In January 2011, CenturyLink entered into a new four-year revolving credit facility with various lenders (the "Credit Facility") that allows CenturyLink to borrow up to $1.700 billion for the general corporate purposes of itself and its subsidiaries. Up to $400 millionQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(4) Long-Term Debt (Continued)of the Credit Facility can be used for letters of credit, which reduce the amount available for other extensions of credit. Interest is assessed on borrowings using the London Interbank Offered Rate ("LIBOR") plus an applicable margin between 0.5% and 2.5% per annum depending on the type of loan and CenturyLink's then-currentour senior unsecured long-term debt rating. As of the successor date of December 31, 2011, CenturyLink had approximately $277 million and $129 million outstanding under the Credit Facility and the separate letter of credit arrangement, respectively. We are not guarantors of the Credit Facility or any other debt obligations of our affiliates. Innotes.2009,2, 2012, we issued approximately $811$525 million aggregate principal amount of 8.375%7.00% Notes due 2016. We used the2052 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $738$508 million for general corporate purposes, including repayment of indebtedness and funding or refinancing investments in our telecommunication assets.. The notesNotes are unsecured obligations and rank equallymay be redeemed, in rightwhole or in part, on or after April 1, 2017 at a redemption price equal to 100% of payment with all other unsecured and unsubordinated indebtedness. The covenant and default terms are substantially the same as those associated with our other long-term borrowings. In October 2011,usedpaid at maturity the net proceeds of $927$750 million from the October 4, 2011 debt issuance, together with the $557 million of net proceeds received from the September 21, 2011 debt issuance described above and available cash, to redeem the $1.5 billion aggregate principal amount of our 8.875%floating rate Notes.2012 and to pay all related fees and expenses,2023, which resulted in an immaterial loss. In June 2011,used the net proceedscompleted a cash tender offer to purchase a portion of $642our $811 million from the June 8, 2011 debt issuance, together with available cash, of 8.375% Notes due 2016 and our $400 million of 7.625% Notes due 2015. With respect to redeem $825our 8.375% Notes due 2016, we received and accepted tenders of approximately $575 million aggregate principal amount of these notes, or 71%, for $722 million including a premium, fees and accrued interest. With respect to our 7.875%7.625% Notes due 20112015, we received and to pay related fees and expenses, which resulted in an immaterial loss. In June 2010, we paid at maturity the $500accepted tenders of approximately our 6.95% Term Loan due 2010.other)other and excluding note payable-affiliate): (Dollars in millions) $ 64 805 634 420 812 5,270 $ 8,005 (Dollars in millions) 2014 $ 637 2015 122 2016 237 2017 500 2018 — 2019 and thereafter 5,987 Total long-term debt $ 7,483
Revolving Promissory NoteTable$754 million was outstanding as of Contentsthe successor date of December 31, 2013. As of the successor date of December 31, 2013, the weighted average interest rate was QWEST CORPORATION6.765%NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued). This revolving promissory note and accrued interest thereon is reflected on our consolidated balance sheets as a current liability under “Note payable(4) Long-Term Debt (Continued)-debt and capital lease obligations.debt. The following table presents the amount of gross interest expense, net of capitalized interest:interest and interest expense (income)-affiliates: Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Successor Predecessor Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) (Dollars in millions) Interest expense: $ 304 153 627 642 $ 467 461 305 153 (5 ) (3 ) (12 ) (10 ) (17 ) (18 ) (5 ) (3 ) $ 299 150 615 632 Total interest expense $ 450 443 300 150 Interest expense (income)-affiliates $ 64 24 (1 ) — Long-Term Debt WeAs of the successor date of December 31, 2013, we believe we were in compliance with all of the provisions and covenants of our debt agreements asagreements.(5) Accounts Receivable Successor Predecessor December 31,
2011 December 31,
2010 Successor December 31, 2013 December 31, 2012 (Dollars in millions) (Dollars in millions) $ 470 469 Trade and purchased receivables $ 697 661 134 140 73 82 150 159 Other 11 12 754 768 781 755 (42 ) (48 ) (43 ) (46 ) $ 712 720 $ 738 709 QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(5) Accounts Receivable (Continued) Allowance for
Doubtful Accounts (Dollars in millions) $ 52 85 (84 ) 53 70 (75 ) (Dollars in millions) 48 $ 48 17 17 (18 ) (18 ) $ 47 Balance at March 31, 2011(Predecessor) $ 47 (47 ) (47 ) $ — $ — 44 44 (2 ) (2 ) $ 42 $ 42 Charged to expense-net 74 Deductions (70 ) Balance at December 31, 2012 (Successor) $ 46 Charged to expense-net 65 Deductions (68 ) Balance at December 31, 2013 (Successor) $ 43 $47$47 million was reduced to zero and our gross accounts receivable were reduced by $47 million to reflect its estimated acquisition date fair value.(6) Property, Plant and Equipment(6) Property, Plant and Equipment the preliminary estimates of their fair values at the acquisition date.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(6) Property, Plant and Equipment (Continued) Successor December 31, 2013 December 31, 2012 (Dollars in millions) Property, plant and equipment: Land N/A $ 356 356 15-45 years 4,033 3,475 4-10 years 3,026 2,611 5-30 years 2,470 2,428 N/A 308 372 Gross property, plant and equipment 10,193 9,242 Accumulated depreciation (2,985 ) (2,011 ) Net property, plant and equipment $ 7,208 7,231 Successor Predecessor Depreciable Lives December 31,
2011 December 31,
2010 (Dollars in millions) N/A $ 368 97 8-45 years 3,255 20,431 7-10 years 2,185 18,932 5-30 years 2,486 4,637 N/A 163 108 8,457 44,205 (915 ) (34,045 ) $ 7,542 10,160 Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures. Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers. Support assets consist of buildings, computers and other administrative and support equipment. 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. (1)Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.(2)Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.(3)Support assets consist of buildings, computers and other administrative and support equipment.(4)Construction in progress includes property of the foregoing categories that has not been placed in service as it is still under construction.$914$1.099 billion, $1.175 billion, $914 million $393, and $393 million $1.652 billion for the successor years ended December 31, 2013 and $1.768 billion for2012, the successor nine months ended December 31, 2011, and the predecessor three months ended March 31, 2011, respectively.predecessor years ended December 31, 2010 and 2009, respectively.(7) Severance(7) Severance QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(7) Severance (Continued)liabilitiesliability for severance expenses were as follows: Severance (Dollars in millions) Severance $ 54 116 (88 ) (7 ) (Dollars in millions) 75 Balance at December 31, 2010 (Predecessor) $ 28 67 3 (109 ) (11 ) (5 ) (1 ) 28 Balance at March 31, 2011 (Predecessor) $ 19 Fair value adjustment (2 ) Balance at April 1, 2011 (Successor) $ 17 3 118 (11 ) (97 ) (1 ) (9 ) 19 (2 ) 17 Balance at December 31, 2011 (Successor) $ 29 118 64 (97 ) (85 ) (9 ) (1 ) $ 29 Balance at December 31, 2012 (Successor) $ 7 Accrued to expense 10 Payments, net (12 ) Reversals and adjustments — Balance at December 31, 2013 (Successor) $ 5 (8) Employee Benefits(8) Employee Benefits optedwas not required and did not make contributions to make athe pension contribution of $307 millionplan trust in December 2011,2013. Based on current laws and therefore,circumstances, (i) QCII will not be required to make a pensioncash contribution to this plan in 2014 and (ii) QCII does not expect it will be required to make a contribution in 2012 based on current funding laws and regulations. Although potentially significant in the aggregate, QCII currently expects that pension contributions in 2013 and beyond will decrease from the 2011 pension contribution amount. However, the actual2015. The amount of required contributions to the plan in 20132015 and beyond will depend on earnings on plan investments, prevailing discount rates, demographic experience, changes in the plan benefits and changes in funding laws and regulations. No contributions were made to the post-retirement occupational health care trust contributions were made during the successor year ended December 31, 2011in 2013 or the predecessor years ended December 31, 20102012 and 2009 and we doCenturyLink does not expect to make a contribution in 2012.2014.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(8) Employee Benefits (Continued)$627$585$948 million as of the successor datedates of December 31, 20112013 and as of the predecessor date of December 31, 2010,2012, respectively. The unfunded status of itsCenturyLink's post-retirement benefit plans for accounting purposes was $2.706$3.153 billion and $2.522$3.448 billion as of the successor datedates of December 31, 20112013 and as2012, respectively. CenturyLink and QCII allocate income and expenses to us based upon the demographics of our employee and retirees compared to all the predecessor dateremaining participants.2010, respectively. QCII allocates its pension, non-qualified pension2013 and post-retirement benefit obligations to us using the amount of its funded or unfunded status2012 and its related accumulated other comprehensive income balance. Therefore, significant year over year changes in QCII's funded status affecting accumulated other comprehensive income may not have a significant initial impact on the assets or obligations that are allocated to us. We recognized an allocated $51 in pension income for the successor nine months ended December 31, 2011, as well as $11$11 million $53 million and $104 million in pension expense for the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009, respectively.2011. Our allocated post-retirement benefit expense for the successor years ended December 31, 2013 and 2012, the successor nine months ended December 31, 2011, and the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009 was $84$88 million, $16$106 million $72, $84 million and $89, $16 million, respectively. These allocated amounts represent our share of the pension and post-retirement benefit expenses based on the actuarially determined amounts. Our allocated portion of QCII's total pension and CenturyLink's post-retirement benefit income and expenses were 96%91%, 102%91%, 101%96%, and 99%102% for the successor years ended December 31, 2013 and 2012, the successor nine months ended December 31, 2011, and the predecessor three months ended March 31, 2011, respectively. CenturyLink and QCII allocate the predecessor years ended December 31, 2010income and 2009, respectively. QCII allocates the expenses of these plans to us and itstheir other affiliates. The allocation of income and expense to us is based upon demographics of our employees compared to all remaining participants. The combined net pension and post-retirement benefits (income) expenses is included in cost of services and products and selling, general and administrative and other operating expenses.retirees.retirees, which were merged into CenturyLink's post-retirement benefit plans on January 1, 2012. The benefit obligation for QCII's occupational health care and life insurance post-retirement plans is estimated based on the terms of QCII's written benefit plans. In calculating this obligation, QCII considers numerous assumptions, estimates and judgments, including but not limited to, discount rates, health care cost trend rates and plan amendments. In 2008,October 2013, we negotiated our currentrenewed a four-year collective bargaining agreementsagreement which coveredcovers approximately 13,00012,000 of our unionized employees. Effective January 1, 2014, the approximately 12,000 active employees as of the successor date of December 31, 2011. The plan was amended toQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(8) Employee Benefits (Continued)reflect changes affectingand eligible post-1990 retirees who are former represented employees, have changes to their health and welfare benefits including: (i) a Letter of Agreement that states suchchanges to align the coverage and benefits for these active employees and non-Medicare eligible post-1990 retirees will begin contributingwith the health and welfare coverage and benefits offered to all other CenturyLink employees and other CenturyLink retirees (with some exceptions) (ii) increased out-of-pocket health care costs through plan design changes effective January 1, 2014 and the elimination of Class II dependent coverage and (iii) elimination of the group medical plan coverage and benefits for Medicare-eligible post-1990 retirees and the establishment of a health reimbursement account and assistance to this population with their transition effective May 1, 2014 to their own purchase of individual policies through the Medicare Exchange market place using the health reimbursement account. In order to maintain their eligibility, post-1990 retirees continue to be obligated to contribute to the cost of health care benefits in excess of specified limits on the company-funded portion of retiree health care costs (also referred to as the "caps") beginning, as they have since January 1, 2009 and (ii) a provision that such post-1990 retirees will pay increased out-of-pocket costs through plan design changes starting January 1, 2009, including the elimination of Medicare Part B premium reimbursements for post-1990 retirees who are former represented employees. These changes have been considered in calculating the benefit obligation under QCII's occupational health care plan. QCIIQCIICenturyLink deems actuarially equivalent to or exceeding Medicare Part D. QCIICenturyLink recognizes the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of its post-retirement benefit obligation and net periodic post-retirement benefit expense.$167$223 million, $57$221 million $224, $167 million, and $233$57 million for the successor years ended December 31, 2013 and 2012, the successor nine months ended December 31, 2011 and the predecessor three months ended March 31, 2011, and the predecessor years ended December 31, 2010 and 2009, respectively. Represented employee benefits are based on negotiated collective bargaining agreements. Employees are required to partially fund the health care benefits provided by us, in addition to paying their own out-of-pocket costs. Participating non-represented employees contributed $25 million, $8 million, $33 million and $32 million for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009, respectively. Participating represented employees contributed $9 million, $2 million, $11 million and $10 million for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009, respectively. Our group life insurance plan is fully insured and the premiums are paid by us.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(8) Employee Benefits (Continued) No contributions were made to the post-retirement occupational health care trust in 2011 or 2010 and we do not expect to make a contribution in 2012. QCIIQCII, on our behalf, matcheswe match a percentage of our employees' contributions in cash. We recognized $36$49 million, $12$46 million $51, $36 million, and $54$12 million in expense related to this plan for the successor years ended December 31, 2013 and 2012, the successor nine months ended December 31, 2011, and the predecessor three months ended March 31, 2011, and the predecessor years ended December 31, 2010 and 2009, respectively.sponsorssponsored a non-qualified unfunded deferred compensation plan for various groups that include certain of our current and former highly compensated employees. Participants in these plans may, at their discretion, invest their deferredThe plan is frozen and participants can no longer defer compensation in various investment choices including CenturyLink's common stock.to the plan. The value of the assets and liabilities related to this plan is not significant.(9) Stock-Based Compensation During the predecessor year ended December 31, 2010, our employees participate in QCII's Equity Incentive Plan ("EIP") and Employee Stock Purchase Plan ("ESPP"). Due to CenturyLink's acquisition of QCII and the purchasing of its outstanding stock, QCII no longer offers these plans.Stock-Based Compensation Expense(9) Stock-Based Compensation wereare included in cost of services and products, and selling, general, and administrative expenses in our consolidated statements of operations. During our predecessor years, we recognized compensation expense relating to awards granted to our employees under the Equity Incentive Program or EIP using the straight-line method over the applicable vesting periods. We also recognized compensation expense when our employees purchased QCII's common stock under the Employee Stock Purchase Plan or ESPP for the difference between the employees' purchase price and the fair value of QCII's stock.we were allocated a stock based compensation expense of $19 million from our ultimate parent company, CenturyLink. Forand the predecessor three months ended March 31, 2011, and the predecessor years ended December 31, 2010, and 2009, our total stock-based compensation expense allocated was approximately $3 million, $121$19 million and $48$3 million, respectively. We recognized an income tax benefit of $7 million, $1 million, $30 million and $19 million associated withfrom our stock compensation expense of approximately $7 million and $7 million, respectively, during the successor years ended December 31, 2013 and 2012. We recognized an income tax benefit from our stock compensation expense of approximately $7 million and $1 million, respectively, for the successor nine months ended December 31, 2011 and the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010, and 2009, respectively. On December 21, 2010, QCII accelerated the vesting of certain restricted stock and performance share awards issued under its Equity Incentive Plan in order to preserve certain economic benefits to its stockholders that otherwise would have been lost in connection with CenturyLink's acquisition ofQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(9) Stock-Based Compensation (Continued)QCII. As the vast majority of affected employees are employed by us, QCII allocated substantially all of the $63 million expense associated with this accelerated vesting to us.the many factors that affect the allocation, the amount of stock-based compensation expense recorded at CenturyLink and ultimately allocated to us may fluctuate. We cash settle the stock-based compensation expense allocated to us from CenturyLink.(10) Products and Services Revenues(10) Products and Services Revenues in 14 states, including local, broadband, private line (including special access, which we market to our business and wholesale customers), network access, broadband, dataEthernet, information technology, wireless and video services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services. We categorize our products and services into the following three categories:•access)access, which we market to our business and wholesale customers), broadband,Ethernet, video (including DIRECTV)resold satellite video services) and Verizon Wireless services;• ("ISDN") (which uses regular telephone lines to support voice, video and data applications), switched access and traditional wide area network ("WAN") services (which allows a local communications network to link to networks in remote locations); and•data, local services and billing and collectionstelecommunications services that we also provide to external customers. In addition, we provide to our affiliates: marketing, sales and advertising services;affiliates computer system development and support services;services, network support and technical services; and other support services, such as legal, regulatory, finance and accounting, tax and human resources.services. Since the April 1, 2011 closing of CenturyLink's indirect acquisition of us, our are reported as part of the segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") has becomeis 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 SEC.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.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(10) Products and Services Revenues (Continued) Our operatingOperating revenues for our products and services consisted of the following categories: Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Successor Predecessor Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) (Dollars in millions) $ 2,406 793 3,059 2,900 $ 3,342 3,265 2,406 792 2,796 1,003 4,323 4,922 3,208 3,471 2,796 1,003 1,433 472 1,889 1,909 2,203 2,112 1,433 473 $ 6,635 2,268 9,271 9,731 $ 8,753 8,848 6,635 2,268 Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 (Dollars in millions) 122 43 186 182 Successor Predecessor Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) Taxes and surcharges included in operating revenues and expenses $ 154 171 122 43 (11) Related Party Transactions(11) Affiliate Transactions services as well as local and billing and collections services that we also provide to external customers. In addition, we provide to our affiliates, marketing, sales and advertising, computer system development and development support services and network support and technical services and other support services.providedprovide to our affiliates:•affiliatesaffiliates' service offerings.offerings;•Billing and collections services. Billing and collections services in support of affiliates long-distance business.•Marketing, sales and advertising. Marketing, sales and advertising support joint marketing of our services, including the development of marketing and advertising plans, sales unit forecasts, market research, product management, sales training and compensation plans.• development support services.Information technology services primarily include the labor cost of developing, testing and implementing the system changes necessary to support order entry, provisioning, billing, network and financial systems, as well as the cost ofQWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(11) Related Party Transactions (Continued)networks.••Other support services. Other support services include legal, regulatory, finance and accounting, tax, human resources and executive support. In addition, we sublease space in our office buildings, warehouses and other properties.We believe theseThese 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.(12) Income Taxes(12) Income Taxes paysettle our tax liabilities through a change in cashour general intercompany obligation based upon our separate return taxable income.income, which is reflected in advances to affiliates on our consolidated balance sheets and the changes in advances to affiliates are reflected as investing activities on our consolidated statements of cash flows. Because we are included in the consolidated federal income tax returns and the combined state income tax returns of QCII,CenturyLink (and previously with QCII), any tax audits involving CenturyLink or QCII will also involve us. The IRS previously examined all of QCII's federal income tax returns prior to 2008 because they were included in its coordinated industry case program and now examines all of QCII's federal income tax returns because QCII isas included in the coordinated industry case program. As of December 31, 2010, the QCIIconsolidated federal income tax returns for tax years 2006-2007 and prior were examined by the IRS. We received $11 million in the third quarter of 2010 as our sharereturn of the settlements and we recorded a $4 million asset transfer with QSCultimate parent company, CenturyLink.recognize the difference between the settlements recorded and the actual cash payment. In 2010,2011, QCII filed amended federal income tax returns for 2006-2007 to make protective claims with respect to items reserved in QCII's audit settlements and to correct items not addressed in prior audits. Those amended federal income tax returns are subject to adjustment in an IRS audit.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(12) Income Taxes (Continued) In 2009, QCII filed amended federal income tax returns for 2002-20052002-2007 to make protective claims with respect to items reserved in our audit settlements and to correct items not addressed in prior audits. ThoseThe examination of those amended federal income tax returns by the IRS was completed in 2012. In 2012, QCII filed an amended 2008 federal income tax return primarily to report the carryforward impact of prior year settlements and in 2013, QCII filed an amended return for 2009. Such amended filings are subject to adjustment in an IRS audit. Additionally, our federal income tax returns filed for tax years after 2008 are still subject to adjustment in an IRS audit. QCIIby the IRS.19961999 are still open for state specific adjustments. A reconciliation of the unrecognized tax benefits:Unrecognized Tax BenefitsSuccessorPredecessor20112010(Dollars in millions)Balance at January 1$—13Additions for current year tax positions——Additions for prior year tax positions——Reductions for prior year tax positions——Settlements—(13)Reductions related to expirations of statute of limitations——Balance at December 31$——For the successor nine months ended December 31, 2011 and the predecessor three months ended March 31, 2011, we recognized immaterial amounts for interest related to uncertain tax positions. For the predecessor years ended December 31, 2010 and 2009, we recognized $1 million and $9 million of interest benefit related to uncertain tax positions, respectively. As of the successor date of December 31, 2011 and2013, we had no liability for interest related to uncertain tax positions. As of the predecessorsuccessor date of December 31, 2010,2012, we had a recorded liabilitiesliability for interest related to uncertain tax positions in the amounts of $5 million and $6 million, respectively.million. We did not record a liability for interest related to uncertain tax positions for the successor year ended December 31, 2013. We made no accrual for penalties related to income tax positions. The interest benefit and accrued interest liability recognized as of the successor date of December 31, 2011 is related to the carryover effects of settled positions.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(12) Income Taxes (Continued) Successor Predecessor Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Year
Ended
December 31,
2013Year
Ended
December 31,
2012Nine Months
Ended
December 31,
2011Three Months
Ended
March 31,
2011 (Dollars in millions) (Dollars in millions) $ 173 104 470 740 Federal and foreign $ 653 638 173 104 26 11 80 121 101 105 26 11 199 115 550 861 754 743 199 115 128 61 208 (109 ) Federal and foreign (125 ) (175 ) 128 61 22 15 33 (28 ) (27 ) (26 ) 22 15 150 76 241 (137 ) (152 ) (201 ) 150 76 $ 349 191 791 724 $ 602 542 349 191 Successor Predecessor Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (in percent) (in percent) 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % 3.5 3.4 3.9 3.1 — — 2.7 — — — 1.0 — State income taxes-net of federal effect 3.1 3.7 3.5 3.4 0.6 0.6 (0.4 ) (0.4 ) 0.3 0.3 0.6 0.6 39.1 % 39.0 % 42.2 % 37.7 % 38.4 % 39.0 % 39.1 % 39.0 % QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(12) Income Taxes (Continued) Successor Predecessor Successor December 31, 2011 December 31, 2010 December 31, 2013 December 31, 2012 (Dollars in millions) (Dollars in millions) $ (1,315 ) (2,031 ) $ (1,281 ) (1,179 ) (2,306 ) (1,772 ) (2,118 ) (364 ) (340 ) (462 ) (397 ) (147 ) (94 ) (52 ) (61 ) (4,132 ) (2,465 ) (3,567 ) (3,755 ) 941 1,031 983 982 166 55 67 333 266 229 253 1,440 1,297 1,267 1,302 Valuation allowance on deferred tax assets (12 ) (12 ) Net deferred tax assets 1,255 1,290 $ (2,692 ) (1,168 ) $ (2,312 ) (2,465 ) Weperformed an evaluationestablished a valuation allowance of the recoverability of our deferred tax assets. It$12 million as it is our opinion that it isnot more likely than not that thethis amount of deferred tax assets will be realized and should not be reduced by a valuation allowance.$211$750 million, $677$607 million, and $968$211 million including $103 million as our share of QCII's 2002-2005 tax years settlement with the IRS, to QSC related to income taxes in the successor year ended 2011 and the predecessor years ended 2010 and 2009, respectively. As of the successor date of December 31, 2011 we had an approximate $19 million receivable from QSC relating to income taxes reflected in accounts receivable-affiliates. As of the predecessor date of December 31, 2010 we had approximately $8 million in amounts relating to taxes payable to QSC reflected in accounts payable-affiliates on our consolidated balance sheets. Income tax expense for the predecessor year ended December 31, 2010 compared to 2009 increased by $55 million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Among other things, these laws will disallow federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program. Although this tax increase does not take effect until 2013, under accounting principles generally accepted in the U.S. we recognize the full accounting impact in the period in which the laws are enacted.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(12) Income Taxes (Continued) In the predecessor year ended December 31, 2010, we increased our state tax rate based on a review of our state apportionment factors and the current tax rate of the states where we conduct business. This change resulted in a $2 million state deferred tax expense, net of federal effect. In the predecessor year ended December 31, 2009, we reduced our state tax rate based on a review of our state apportionment factors and the current tax rate of the states where we conduct business. This change resulted in a $4 million state deferred tax benefit, net of federal effect. We had unamortized investment tax credits of $2 million, $61 million and $68 million as of the successor date of December 31, 2011, and the predecessor dates of December 31, 2010 and 2009, respectively, which are included in other long-term liabilities on our consolidated balance sheets. These investment credits are amortized over the lives of the related assets. Amortization of investment tax credits was immaterial in 2011. Amortization of investment tax credits of $8 million is included in the provision for income taxes for the predecessor years ended December 31, 20102013, 2012 and 2009.(13) Fair Value Disclosure2011, respectively.(13) Fair Value Disclosure accounts receivable—advances to affiliates, short-term affiliate loans, accounts payable, accounts payable—affiliatesnote payable-affiliate and long-term debt excluding capital lease obligations. TheDue to their short-term nature, the carrying amounts of our cash and cash equivalents, accounts receivable, accounts receivable—advances to affiliates, short-term affiliate loans, accounts payable and accounts payable—affiliatesnote payable-affiliate approximate their fair values.FASB.Input Level Description of Input Level 1 Observable inputs such as quoted market prices in active markets. Level 2 Inputs other than quoted prices in active markets that are either directly or indirectly observable. Level 3 Unobservable inputs in which little or no market data exists. QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(13) Fair Value Disclosure (Continued) investment securities, which are reported in noncurrent other assets, and long-term debt, excluding capital lease obligations, as well as the input levels used to determine the fair values: Successor
December 31, 2011 Predecessor
December 31, 2010 Input
Level Carrying Amount Fair Value Carrying Amount Fair Value (Dollars in millions) 3 $ — — 52 52 2 8,149 8,352 7,814 8,482 During the second quarter of 2011, the rights to our auction rate securities were assigned to our ultimate parent CenturyLink. Upon assignment, the fair value of those securities was $42 million. We did not recognize a gain or loss on this assignment. The table below presents a rollforward of our auction rate securities valued using Level 3 inputs: Successor December 31, 2013 December 31, 2012 (Dollars in millions) Liabilities-Long-term debt excluding capital lease obligations 2 $ 7,486 7,226 7,513 8,019 Auction Rate
Securities (Dollars in millions) $ 41 16 (5 ) — 52 (4 ) 1 $ 49
$
(7
) 42 (42 ) $ — ofto 9.5% depending upon the asset or liability valued and relative risk associated with the cash flows.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(14) Stockholder's Equity (Deficit)(14) Stockholder's Equity 2010,2012, we recordedrecognized a $56$100 million equity transactioncontribution for excess tax deductions, the difference between the acceleration of stock-based compensation expense for both performance and restricted shares and the tax benefit associated with a deduction for pension funding. Since we are the employer of a significant percentage of the participants and none of the 2011 QCII pension funding was allocated to us, a tax deduction will be recognized on our separate company tax return and, therefore, we recognized an equity contribution for the tax benefits associated with this deduction. Successor Predecessor Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) $ — — 28 — Cash dividend declared to QSC 1,325 840 600 1,000 Cash dividend paid to QSC 1,325 1,150 900 530 Predecessor Successor Years Ended
December 31, Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 2010 2009 (Dollars in millions) $ 28 — — — 600 1,000 2,300 1,700 900 530 2,260 2,000 This was a non-cash transaction whereby we transferred assets via dividends to our parent company, QSC. (1)This was a non-cash transaction whereby we transferred assets via dividends to our parent company, QSC.(15) Quarterly Financial Data (Unaudited) Quarterly Financial Data Predecessor Successor First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Nine
Months
Total (Dollars in millions) $ 2,268 2,231 2,190 2,214 6,635 638 370 412 417 1,199 191 116 118 115 349 299 165 199 179 543 QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(15) Quarterly Financial Data (Unaudited) (Continued)(15) Quarterly Financial Data (Unaudited) Quarterly Financial Data Predecessor Quarterly Financial Data First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Total Successor (Dollars in millions) Twelve
Months
Total (Dollars in millions) 2013 $ 2,347 2,313 2,311 2,300 9,271 $ 2,159 2,199 2,188 2,207 8,753 661 649 616 557 2,483 553 525 493 507 2,078 253 187 181 170 791 166 155 139 142 602 252 304 286 240 1,082 264 246 218 236 964 Second Quarter 2011 Quarterly Financial Data Successor (Dollars in millions) 2012 Operating revenues $ 2,260 2,195 2,183 2,210 8,848 Operating income 466 455 459 525 1,905 Income tax expense 136 113 133 160 542 Net income 218 178 212 241 849 (16) Commitments and Contingencies recognized $123 million of certain expenses associated with activities related to CenturyLink's indirect acquisition of us during the successor three months ended June 30, 2011. These expenses were comprised primarily of severance of $98 million, retention bonuses of $12 million, share-based compensation of $11 million allocated toare currently defending several patent infringement lawsuits asserted against us by QCIInon-practicing entities. These cases have progressed to various stages and system integration consulting of $1 million.Fourth Quarter 2010 Net income forone or more may go to trial in the fourth quarter of 2010 was affected by an increase in stock-based compensation expense of $63 million due to QCII's decision to accelerate the vesting of certain restricted stockcoming 24 months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and performance share awards issued under its Equity Incentive Plan in order to preserve certain economic benefits to its stockholders that otherwise would have been lost in connectionsuppliers. As with CenturyLink's indirect acquisition of us. Income tax expense for the fourth quarter of 2010 was affected by the tax treatment of the expenses incurred when QCII accelerated the vesting of certain stock-based compensation.First Quarter 2010 Income tax expense for the first quarter of 2010 increased by $55 millionall litigation, we are vigorously defending these actions and, as a resultmatter of course, are prepared both to litigate the March 2010 enactments of the Patient Protectionmatters to judgment, as well as to evaluate and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Among other things, these laws disallow, beginning in 2013, federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program.(16) Commitments and Contingenciesand QCII'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.expense.expense in our consolidated statements of operations. Payments on capital leases are included in repayments of long-term debt, including current maturities in theour consolidated statements of cash flows.QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(16) Commitments and Contingencies (Continued)tabletables below summarizessummarize our capital lease activity: Successor Predecessor Successor Predecessor Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year Ended
December 31,
2010 Year Ended
December 31,
2009 Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) (Dollars in millions) $ 2 16 116 61 $ — — 2 16 41 11 28 20 42 50 41 11 35 11 25 24 40 41 35 11 Successor Predecessor Successor December 31,
2011 December 31,
2010 December 31, 2013 December 31, 2012 (Dollars in millions) (Dollars in millions) $ 192 223 $ 168 188 41 51 109 85 leaseslease arrangements as of December 31, 2011 are included in our consolidated balance sheet2013 were as follows: Future Minimum
Payments (Dollars in millions) $ 49 45 35 $ 33 21 23 2 2 7 2017 1 2018 1 2019 and thereafter 5 159 65 (20 ) (10 ) 139 55 (41 ) (31 ) $ 98 $ 24 QWEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(16) Commitments and Contingencies (Continued)andrespectively. Also, gross rental expense was $58 million, $200 million and $206 million for the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009, respectively.2011. We also received sublease rental income for the same periods of $4 million, $8 million, $10 million, and $4 million, $15 million, and $18 million, respectively. Theas of December 31, 2011 arewere as follows: Operating leases: 2014 $ 59 2015 51 2016 46 2017 41 2018 34 2019 and thereafter 61 $ 292 Future Minimum
Payments (Dollars in millions) $ 50 33 27 22 18 36 $ 186 Minimum payments have not been reduced by minimum sublease rentals of $32 million due in the future under non-cancelable subleases. (1)Minimum payments have not been reduced by minimum sublease rentals of $36 million due in the future under non-cancelable subleases.$245$284 million as of the successor date of December 31, 2011.2013. Of this amount, we expect to purchase $70$100 million in 2012, $80 million in 2013 through 2014, $60$134 million in 2015 through 2016, and $35$46 million in 2017 through 2018 and $4 million in 2019 and thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed.(17) Other Financial Information(17) Other Financial Information Successor Predecessor Other Current Assets December 31,
2011 December 31,
2010 December 31, 2013 December 31, 2012 (Dollars in millions) (Dollars in millions) $ 57 68 $ 47 64 18 91 23 22 79 50 $ 98 181 $ 126 114 December 31, 2013 December 31, 2012 (Dollars in millions) Accounts payable $ 440 456 (18) Labor Union Contracts QWEST CORPORATION12,000NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) or (18) Labor Union Contracts53% We of our employees are a party to collectivemembers of various bargaining agreements with our labor unions,units represented by the Communications Workers of America and("CWA") or the International Brotherhood of Electrical Workers. We believeWorkers ("IBEW") and are subject to collective bargaining agreements that relationsexpired October 6, 2012. Since the expirations, we have been negotiating the terms of new agreements. Recently, we reached conditional agreements with our employees continue to be generally good. Our currentCWA District 7 and IBEW Local 206 for a four-year collective bargaining agreement covering approximately 12,000 of our employees. After rejecting the initial agreements, the CWA and IBEW members approved the second agreements and they became effective on October 25, 2013. The new agreements will expire on October 6, 2012. As of the successor date of December 31, 2011, employees covered under these collective bargaining agreements totaled approximately 13,000, or 53% of all our employees.Conclusion RegardingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the Effectivenesssupervision and with the participation of Disclosure Controlsour management, including our Chief Executive Officer and ProceduresChief Financial Officer, we evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the "Exchange Act") as of December 31, 2013 based on the framework in Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the "Exchange Act") as of December 31, 2011. On the basis of this review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are designed and are effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting that occurred in the fourth quarter of 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011. None.I(2).I.I(2).I.I(2).I.I(2).I.20112013 and 20102012 for professional accounting services, including KPMG's audit of our annual consolidated financial statements, are set forth in the table below. Year Ended
December 31, 2011 Year Ended
December 31, 2010 Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 (Dollars in thousands) (Dollars in thousands) $ 3,281 2,555 $ 2,700 2,970 137 104 32 88 $ 3,418 2,659 $ 2,732 3,058 20112013 or 2010.fees—Thesefees-These are fees billed for the year shown for professional services performed for the audit of the consolidated financial statements included in our Form 10-K filing for that year, the review of condensed consolidated financial statements included in our Form 10-Q filings made during thatfees—Thesefees-These are fees billed for assurance and related services that were performed in the year shown and that are traditionally performed by our independent registered public accounting firm. More specifically, these services include regulatory filings and employee benefit plan audits.filings. Audit-related fees for each year shown include amounts that have been billed through the date of this filing.(a) Documents filed as part of this report: Page 48 49 49 50 51 52 53 54 (a)(3) and (b) Exhibits required by Item 601 of Regulation S-K:Description (3.1)Description3.1 Restated Articles of Incorporation of Qwest Corporation (incorporated by reference to Exhibit 3(a) of Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 File(File No. 001-03040) filed with the Securities and Exchange Commission on March 25, 1998).
3.2(3.2)
Articles of Amendment to the Articles of Incorporation of Qwest Corporation (incorporated by reference to Exhibit 3.1 of Qwest Corporation's Quarterly Report on Form 10-Q for the quarterperiod ended June 30, 2000 File(File No. 001-03040) filed with the Securities and Exchange Commission on August 11, 2000).
3.3(3.3)
Amended and Restated Bylaws of Qwest Corporation (incorporated by reference to Exhibit 3.3 of Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 File(File No. 001-03040) filed with the Securities and Exchange Commission on January 13, 2004).
4.1(4.1)
Indenture, dated as of April 15, 1990, by and between The Mountain States Telephone and Telegraph Company (currently named Qwest Corporation) and The First National Bank of Chicago (incorporated by reference to Exhibit 4.2 of Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 File(File No. 001-03040) filed with the Securities and Exchange Commission on January 13, 2004).
(4.2)
a.
First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. (currently named Qwest Corporation) and The First National Bank of Chicago (incorporated by reference to Exhibit 4.3 of Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 File(File No. 001-03040) filed with the Securities and Exchange Commission on January 13, 2004).4.2 Indenture, dated as of April 15, 1990, by and between Northwestern Bell Telephone Company (predecessor to Qwest Corporation) and The First National Bank of Chicago (incorporated by reference to Exhibit NumberDescription (4.3) File(File No. 001-03040) filed with the Securities and Exchange Commission on March 3, 2000).
(4.4)
a.Officer's Certificate of Qwest Corporation, dated as of March 12, 2002 (including forms of 87/8% notes due March 15, 2012) (incorporated by reference to Qwest Corporation's Form S-4, File No. 333-115119).(4.5)
First Supplemental Indenture, dated as of August 19, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.22 of Qwest Communications International Inc.'s Quarterly Report on Form 10-Q for the quarterperiod ended September 30, 2004 File(File No. 001-15577) filed with the Securities and Exchange Commission on November 5, 2004).
(4.6)
b.Second Supplemental Indenture, dated as of November 23, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation's Current Report on Form 8-K filed November 23, 2004, File No. 001-03040).(4.7)
Third Supplemental Indenture, dated as of June 17, 2005, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.2 of Qwest Corporation's Current Report on Form 8-K (File No. 001-03040) filed with the Securities and Exchange Commission on June 23, 2005, File No. 001-03040)2005).
(4.8)
c.
Fourth Supplemental Indenture, dated as of August 8, 2006, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 of Qwest Corporation's Current Report on Form 8-K (File No. 001-03040) filed with the Securities and Exchange Commission on August 8, 2006, File No. 001-03040)2006).Certain of the items in Sections 4.1 through 4.3 (i) omit supplemental indentures or other instruments governing debt that has been retired, or (ii) refer to trustees who may have been replaced, acquired or affected by similar changes. In accordance with Item 601(b) (4) (iii) (A) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed herewith. Pursuant to this registration, we hereby agree to furnish a copy of any such instrument to the SEC upon request. Description (4.9)
d.
Fifth Supplemental Indenture, dated as of May 16, 2007, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 of Qwest Corporation's Current Report on Form 8-K (File No. 001-03040) filed with the Securities and Exchange Commission on May 18, 2007, File No. 001-03040)2007).
(4.10)
e.
Sixth Supplemental Indenture, dated as of April 13, 2009, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 of Qwest Corporation's Current Report on Form 8-K (File No. 001-03040) filed with the Securities and Exchange Commission on April 13, 2009, File No. 001-03040)2009).
(4.11)
f.
Seventh Supplemental Indenture, dated as of June 8, 2011, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.8 of Qwest Corporation's Form 8-A (File No. 001-03040) filed with the Securities and Exchange Commission on June 7, 2011).g. Eighth Supplemental Indenture, dated as of September 21, 2011, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.9 of Qwest Corporation's Form 8-A (File No. 001-03040) filed with the Securities and Exchange Commission on September 20, 2011). h. Ninth Supplemental Indenture, dated as of October 4, 2011, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 of Qwest Corporation's Current Report on Form 8-K (File No. 001-03040) filed with the Securities and Exchange Commission on October 4, 2011). i. Tenth Supplemental Indenture, dated as of April 2, 2012, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation's Form 8-A filed June 7, 2011, File(File No. 001-03040) filed with the Securities and Exchange Commission on March 30, 2012).
(4.12)
j.EighthEleventh Supplemental Indenture, dated September 21, 2011,as of June 25, 2012, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation's Form 8-A (File No. 001-03040) filed September 20, 2011, File No. 1-03040)with the Securities and Exchange Commission on June 22, 2012).
4.4(4.13)
Ninth Supplemental Indenture,Revolving Promissory Note, dated October 4, 2011, betweenas of April 18, 2012, pursuant to which Qwest Corporation and U.S. Bank National Associationmay borrow from an affiliate of CenturyLink, Inc. up to $1.0 billion on a revolving basis (incorporated by reference to Qwest Corporation's CurrentExhibit 4.7(b) of CenturyLink, Inc.'s Quarterly Report on Form 8-K10-Q for the period ended June 30, 2012 (File No 001-07784) filed with the Securities and Exchange Commission on October 4, 2011, File No. 1-03040)August 9, 2012).
12*12
Calculation of Ratio of Earnings to Fixed Charges.
18*31.1Preferability Letter of Independent Registered Public Accounting Firm. 23* Independent Registered Public Accounting Firm Consent. 31.1* Certification of the Chief Executive Officer Certificationof CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*31.2
Certification of the Chief Financial Officer Certificationof CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*32
Certification pursuant to 18 U.S.C. Section 1350, as adoptedof the Chief Executive Officer and Chief Financial Officer of CenturyLink, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.ExhibitNumberDescription101* 101 yearperiod ended December 31, 2011,2013, formatted in XBRL: (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive (Loss) Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholder's Equity (Deficit) and (vi) the Notes to the Consolidated Financial Statements.* Exhibit filed herewith. ( ) Previously filed. In accordance with Item 601(b) (4) (iii) (A) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.2, 2012. QWEST CORPORATION A COLORADO CORPORATION
By:By:
/s/ DAVID D. COLE
David D. ColeSeniorDavid D. Cole President—ControllerPresident-Controller and
Operations Support
Duly Authorized Officer)Signature Title
Title/s/ GLEN F. POST, III
Glen F. Post, III Chief Executive Officer and President (Principal (Principal Executive Officer)
Glen F. Post, III/s/ R. STEWART EWING, JR.
R. Stewart Ewing, Jr.
Director, Executive Vice President and
Chief Financial Officer(Principal (Principal Financial Officer)/s/ STACEY W. GOFF
R. Stewart Ewing, Jr. /s/ Stacey W. Goff
DirectorStacey W. Goff