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 | |
Operating revenues Operating expenses Operating income Net income Balance sheet data: Total assets Total long-term debt(1) Total stockholder's equity Operational metrics: Total broadband subscribers(2) Total access lines(3) 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 segment. see "Business—Network Architecture" below. 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 area of our wireline operations. 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. We continue to enhance and expand our network by deploying broadband-enabled technologies to provide additional capacity to our customers. Rapid and significant changes in technology are expected to continue in the telecommunications industry. Our future success will depend, in part, on our ability to anticipate and adapt to changes in 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 Telecommunications Act of 1996, which amended the Communications Act of 1934 primarily to promote competition. several FCC proceedings relating to the CAF order remain pending. For these and other reasons, we cannot predict the ultimate impact of these proceedings at this time. 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. video and Internet access. Accordingly, we and our competitors continue to develop and deploy more innovative product bundling, enhanced features and combined billing options in an effort to retain and gain customers. While we rely on reseller or sales agency arrangements to provide some of our bundled services, some of our competitors are able to provide all of their bundled services directly, which may provide them a competitive advantage. Environmental Compliance At December 31, Investors may also read and copy any materials filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. For information on the operation of the Public Reference Room, you are encouraged to call the SEC at 1-800-SEC-0330. For all of our electronic filings, the SEC maintains a website atwww.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility. services, or to provide more comprehensive customer service. reductions. If this occurred, our ability to service debt and pay other obligations would also be adversely affected. Given the current competitive market for personnel with these skills; we cannot assure you that these recruitment efforts will be successful. and liquidity could be adversely affected. 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. 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 resignations. For a discussion of similar retention concerns relating to our recent complaints in various forums requesting reductions in our access rates. In addition, several long-distance providers are disputing or refusing to pay amounts owed to us for carrying 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. For a more thorough discussion of the regulatory issues that may affect our business, see "Regulation" in Item 1 of Part I of this annual report. competitors; our existing debt securities or otherwise impair our business, financial condition and results of operations. CenturyLink and Tax sharing agreements have been executed between QCII and previous affiliates, and QCII believes the liabilities, if any, arising from adjustments to previously filed returns would be borne by the affiliated group member determined to have a deficiency under the terms and conditions of such 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 We own substantially all of our telecommunications equipment required for our business. However, we lease certain facilities, plant, equipment and software under various capital lease arrangements when the leasing arrangements are more favorable to us than purchasing the assets. 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(2) Access lines(3) Certain statements in this annual report constitute forward-looking statements. See "Special Note Regarding Forward-Looking We have incurred certain non-recurring operating expenses related to CenturyLink's indirect acquisition of us, which consist primarily of integration and severance expenses. The table below summarizes our acquisition-related expenses: Acquisition-related expenses As such we have one reportable segment. of other companies. and (ii) electronic mail, texting and social networking services. We expect that these factors will continue to negatively impact our business. As 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; Operating revenues Operating expenses Operating income Other (expense) income Income tax expense Net income The following table summarizes certain of our operational Operational metrics: Broadband subscribers Access lines Employees Strategic services Legacy services Affiliates and other services Total operating revenues effective January 1, 2012 that resulted in both higher affiliate revenues and expenses for us. See Note 1—Basis of Presentation to Cost of services and products (exclusive of depreciation and amortization) Selling, general and administrative Operating expenses—affiliates Depreciation and amortization Total operating expenses Cost of services and products (exclusive of depreciation and amortization) decreased by $78 million or 3%, 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 related to lower pension benefits expense and lower active and retiree healthcare benefits as a result of better than expected returns on plan assets and from favorable change to discount rates, due to a reduction in severance expenses and due to lower access expense. These decreases were QCII Operating Expenses-Affiliates Depreciation Amortization Total depreciation and amortization the addition of new plant. As of April 1, 2011, our property, plant and equipment was recorded at fair value and as a result net property, plant and equipment decreased $2.535 billion due to CenturyLink's 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, acquired. The accounting for CenturyLink's indirect acquisition of us also resulted in an additional $5.699 billion in amortizable intangible customer relationship assets, which resulted in an additional $172 million of amortization expense for the successor year ended December 31, 2012, as compared to the combined year ended December 31, amortization expense decreased for both comparative periods reflected in the table above due to annual updates of our amortization rates for capitalized software, partially offset by net growth in amortizable intangible assets. Interest expense Interest (expense) income—affiliates Net loss on early retirement of debt Other income Total other income (expense) Income tax expense note payable-affiliate. Affiliate interest expense increased by $25 million for the successor year ended December 31, 2012 as compared to the combined year ended December 31, 2011 primarily due to note payable-affiliate in 2012. On April 18, 2012, we completed a premium-priced cash tender offer to purchase a portion of our 2012. The decrease in the 2013 effective tax rate is primarily due to a decrease in the state deferred rate. 39.1%. (i) business combinations; (ii) goodwill, customer relationships and other intangible assets; (iii) property, plant and equipment; (iv) pension and post-retirement benefits; (v) affiliates transactions; and (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. billion our annual reviews. During the fourth quarter of equity. October 31, 2014. wear and tear, replacement history, assets. Changes in strategic services primarily our broadband services. In particular, we expect to continue to focus on expanding our fiber infrastructure, including installations of "fiber to the tower," which is a type of telecommunications network consisting of fiber-optic cables that run from a wireless carrier's mobile telephone switching office to cellular towers 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 and on software development. For more information on capital spending, see Items 1 and 1A of this annual report. 2012. other factors. ratings. Additional downgrades of CenturyLink's senior unsecured debt ratings could under certain circumstances incrementally increase the cost of CenturyLink's borrowing under the Credit Facility, which could indirectly impact us. In addition, the recent actions of the credit agencies, and any additional downgrades in the future, could impact CenturyLink's Long-term debt, including current maturities and capital lease obligations Interest on long-term debt and capital leases(1) Note payable—affiliate Interest on note payable—affiliate Operating leases Purchase commitments(2) Non-qualified pension obligations Other Total future contractual obligations(3) Historical Information Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities early retirement of debt. Net cash used in financing activities decreased by $492 million in the successor year ended December 31, 2012 as compared to the combined year ended December 31, 2011 primarily due to proceeds from an affiliate note payable and a reduction in dividends paid partially offset by an increase in net debt paydowns, payments of accounts payable affiliates and payment of early debt retirement costs. floating rate Notes. date. Amortized Extinguished(1) Total premiums recognized The remaining premium of Other Matters 2013. 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 Interest (expense) income—affiliates Net loss on early retirement of debt Other income 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 $46 and $42 Advances to affiliates 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 CURRENT LIABILITIES Current maturities of long-term debt Accounts payable Accounts payable—affiliates, net Note payable—affiliate 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 revenue Deferred income taxes, net Affiliates obligations, net Other Total deferred credits and other liabilities COMMITMENTS AND CONTINGENCIES (Note 16) STOCKHOLDER'S EQUITY Common stock—one share without par value, owned by Qwest Services Corporation Retained Earnings (Accumulated deficit) Total stockholder's equity TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes (benefits) Provision for uncollectible accounts Long-term debt (premium) discount amortization Net loss on early retirement of debt Changes in current assets and liabilities: Accounts receivable Accounts payable Accounts receivable and Accrued income and other taxes Other current assets and other current liabilities, net Changes in other noncurrent assets and 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 advances to affiliates Proceeds from sale of property Other, net Net cash used in investing activities FINANCING ACTIVITIES Net proceeds from issuance of long-term debt Payments of long-term debt Early retirement of debt costs Dividends paid to Qwest Services Corporation Changes in note payable—affiliate Changes in advances to affiliates Other, net Net cash used in financing activities Net increase (decrease) 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) refunded, net Interest (paid) (net of capitalized interest of $18, $8, $3 and $12) COMMON STOCK Balance at beginning of period Asset transfers Tax benefit of pension deduction 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) 2011. ended December 31, 2014. 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 consolidated 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. commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically flows. Legal Costs We review be recoverable. method. write-down the value of goodwill only in periods in which the recorded amount of goodwill exceeds the implied fair 2013. 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 Acquisition-Related Expenses Acquisition-related expenses Goodwill Customer relationships, less accumulated amortization of $1,320 and $598 Other intangible assets subject to amortization Capitalized software, less accumulated amortization of $704 and $354 Amortization expense for intangible assets Year ending December 31, 2013 2014 2015 2016 2017 2018 and thereafter Senior notes(1) Capital lease and other obligations Unamortized premiums, net Total long-term debt Less current maturities Long-term debt, excluding current maturities In connection with consummating the April 18, 2012 tender offer described below under "Repayments", we borrowed from a CenturyLink affiliate approximately On July 20, 2012, we redeemed all amount of these notes, or Long-Term Debt 2013 2014 2015 2016 2017 2018 and thereafter Total long-term debt Interest Expense Interest expense: Gross interest expense Capitalized interest Total interest expense Interest expense (income)—affiliates Trade and purchased receivables Earned and unbilled receivables Other Total accounts receivable Less: allowance for doubtful accounts Accounts receivable, less allowance these amounts in our accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables. Balance at January 1, 2010 (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) Charged to expense—net Deductions Balance at December 31, 2012 (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 and the predecessor three months ended March 31, 2011, respectively. lease term. 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) Accrued to expense Payments, net Reversals and adjustments Balance at December 31, 2012 (Successor) The unfunded status of QCII's qualified pension plan for accounting purposes was health care costs (also referred to as the "caps") 2009. Deferred Compensation Plans 2011. CenturyLink through affiliate transactions. segment. Strategic services Legacy services Affiliates and other services Total operating revenues Taxes and surcharges included in operating revenues and expenses Below are details of the services we 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. As of the successor 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 Debt premiums Other Total deferred tax assets Valuation allowance on deferred tax assets Net deferred tax assets Net deferred tax liabilities Liabilities—Long-term debt excluding capital lease obligations 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. 2012 Operating revenues Operating income Income tax expense (benefit) Net income (loss) 2011 Operating revenues Operating income Income tax expense (benefit) Net income (loss) Capital Leases Assets acquired through capital leases Depreciation expense Cash payments towards capital leases Assets included in property, plant and equipment Accumulated depreciation Capital lease obligations: 2013 2014 2015 2016 2017 2018 and thereafter Total minimum payments Less: amount representing interest and executory costs Present value of minimum payments Less: current portion Long-term portion Operating Leases Operating leases: 2013 2014 2015 2016 2017 2018 and thereafter Total future minimum payments(1) Purchase Obligations Prepaid expenses Other Total other current assets Audit fees Audit-related fees Total fees 2012. of condensed consolidated financial statements included in our Form 10-Q filings made during that 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. 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 Chief Executive Officer and PresidentTitle 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 o ý(Dox ýx12, 2013,7, 2014, one share of common stock was outstanding. None of Qwest Corporation's common stock is held by non-affiliates.TABLE OF CONTENTS Signaturesand long-distance, 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 ("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.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, theour 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. Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 (Dollars in millions) $ 8,848 6,635 2,268 9,271 6,943 5,436 1,630 6,788 $ 1,905 1,199 638 2,483 $ 849 543 299 1,082 Successor December 31, 2012 December 31, 2011 (Dollars in millions) $ 23,945 24,809 7,625 8,325 9,974 9,865 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. 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,
2012 December 31,
2011(1) December 31,
2010 (in thousands) 3,316 3,183 3,053 8,055 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)In the second quarter of 2012, we updated our methodology for counting our broadband subscribers and reclassified prior year amounts to conform to the current period presentation. For additional information see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview" in Item 7 of this report.(2)Broadband subscribers are customers that purchase high-speed Internet connection service through their existing telephone lines and fiber-optic cables.(3)Access lines are telephone lines reaching from the customers' premises to a connection with the public switched telephone network, or PSTN."Products "Products and Services". The following table provides a summary of our operating revenues by category: Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 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) $ 3,265 2,406 792 3,059 $ 3,342 3,265 2,406 792 3,471 2,796 1,003 4,323 3,208 3,471 2,796 1,003 2,112 1,433 473 1,889 2,203 2,112 1,433 473 $ 8,848 6,635 2,268 9,271 $ 8,753 8,848 6,635 2,268 Since the April 1, 2011 closing of CenturyLink's indirect acquisition of us, ourhave beenare integrated into and 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. As such, we now have one reportable segment and we have reclassified our predecessor period results to conform to our current view.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. We offer our customers the ability to bundle together several products and services, such as broadband, video (including DIRECTV through ourCenturyLink's strategic partnership), voice and Verizon Wireless (through ourCenturyLink's strategic partnership) services. We believe our customers value the convenience of and price discounts associated with receiving multiple services through a single company.8.17.6 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:•access)access, which we market to our business and wholesale customers) is a direct circuit or channel specifically dedicated for the purpose of directly connecting two or more sites. Private line offers a high-speed, secure solution for frequent transmission of large amounts of data between sites. We also provide private line transmission services to wireless service providers that use our fiber-optic cables connected to their towers, commonly referred to as fiber to the tower or wireless backhaul services, to support their next generation wireless networks;Table of Contents•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;•networks;networks. Ethernet services are also used to provide transmission services to wireless service providers that use our fiber-optic cables connected to their towers;•anCenturyLink's arrangement with DIRECTV that allows us to market, sell and bill for its services under its brand name; and•legacy"legacy" services represent our traditional voice, data and network services, which include the following:•regional marketsresidential and business customers within ourthe local service area of our wireline markets, generally for a fixed monthly charge. These services include a number of enhanced calling features and other services, such as call forwarding, caller identification, conference calling, voicemail,voice mail, selective call ringing and call waiting, for which we generally charge an additional monthly fee. We also generate revenues from non-recurring services, such as inside wire installation, maintenance services, service activation and reactivation.•servicesservice offerings include primarily the resale of our voice services and the sale of unbundled network elements ("UNEs"), which allow our wholesale customers to use our network or a combination of our network and their own networks to provide voice and data services to their customers. Local calling services also include network transport, billing services and access to our network by other telecommunications providers and wireless carriers. Local calling services provided to our wholesale customers allow other telecommunications companies the ability to originate or terminate telecommunications services on our network;•Long-distance. We offer our residential and business customers domestic and international long-distancenetwork. Local calling services also include network transport, billing services and toll free services. Our international long-distance services include voice calls that either terminate or originate withaccess to our customers in the United States;network by other telecommunications providers and wireless carriers;•••WeAs part of our wholesale operations, we provide various forms of switched access services to wireline and wireless service providers for the use of our facilities to originate and terminate their interstate and intrastate voice transmissions.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 Universalourthe local service area.ourCenturyLink's agency agreement with Verizon Wireless is marketed under the "Verizon Wireless" brand name.governmentgovernmental customers includes a commitment to deliver communications and 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 communications solution for our small office, mid-sized and select enterprise business and governmentgovernmental customers.2012,2013, we maintained over 431434 thousand miles of copper plant and approximately 7378 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. Most of our long-distance services are provided through reselling arrangements with other long-distance carriers, with the balance being provided directly through CenturyLink's own switches and network equipment. All of our satellite television and wireless voice service is provided by other carriers under agency agreements.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 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.report below.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, state universal service funds 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 whichwe 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 for reselling our service pursuant to the Telecommunications Act of 1996. 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 voice over internet protocol ("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, including intrastate access charges that have historically been subject to exclusive state jurisdiction. Furthermore, the FCC decreed that on a prospective basis, intercarrier compensation rates for VoIP traffic will be 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 pledge their assets (v) regulate transactions between ILECs and their affiliates, and (vi) impose various other service standards. Unlike many of our competitors, 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 withhold service from high-risk unprofitable customers. In addition, strict adherence to carrier of last resort requirements may force us to construct facilities with a low likelihood of positive economic return. 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.itthis could adversely impact our operations or financial results.Universal Service Fund and Other Related Matterstraffic. traffic and (ii) administrated the federal USF.connection therewith,October, 2011, the FCC solicited public commentsadopted 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. The 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 line charges paid by end user customers are gradually increased. We anticipate that these changes will substantially increase the pace of reductions in the amount of switched access revenues in our wholesale business, while creating opportunities for increases in federal USF and retail revenue streams.a varietythe outcome of topics relatedthe FCC proceedings, various state commissions may consider changes to their universal service funds or intrastate access chargesrates. Moreover, rulemaking designed to implement the CAF order is not complete, and intercarrier compensation.Connect Americarate implications contemplated on a prospective basis by this FCC order, we will continue to vigorously defend and Intercarrier Compensation Reform order ("CAF order") intendedseek to reform the existing regulatory regimecollect our intrastate switched access revenue subject to recognize ongoing shiftsoutstanding disputes. The outcomes of these disputes cannot be determined at this time. If we are required to new technologies, including VoIP, and gradually re-direct universal service fundingreduce our intrastate switched access rates as a result of any of these disputes or state initiatives, we will seek to fosternationwide broadband coverage. This initial ruling 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 line charges paid by end user customers are gradually increased. We anticipate that these changes will substantially increase the pace of reductions in the amount ofrecover displaced switched access revenues in our wholesale business, while creating opportunities for increases in federal USF and retail revenue streams. On December 29, 2011, the CAF order went into effect. At the same time, numerous parties filed a petition for reconsideration with the FCC seeking numerous revisions to the order. In January 2012, CenturyLink joined more than two dozen parties in challenging certain aspects of the order by filing a separate appeal that is expected to be heard by the United States Tenth Circuit Court of Appeals in late 2013. Future judicial challenges to the CAF order are possible, which could alter or delay the FCC's proposed changes. In addition, based on the outcome of the FCC proceedings, variousfrom state commissions may consider changes to their universal service funds or intrastate access rates. Moreover, rulemaking designed to implementother services. However, the orderamount of such recovery particularly from residential customers, is not complete, and several FCC proceedings relating to the order remain pending. For these and other reasons, we cannot predict the ultimate impactassured.consumersresidential and business customers increasingly demand high-speed connections for entertainment, communications and productivity, we expect the demands on our network will continue to increase over the next several years. To succeed, we and other network-based providers must ensure that our networks can deliver services that meet these increasing bandwidth and speed requirements. We plan to continue to invest in our network to be able to meet this future demand. In addition, network reliability and security are increasingly important competitive factors in the enterprise business. some advantages in providing local services in our local service area, as noted above 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, price compression and a decrease in our market share. As a result of this product substitution, we face greater competition in providing local and long-distance services from wireless providers, resellers and sales agents (including ourselves), social media hosts and broadband service 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. 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. 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.LEClocal exchange carriers services. For all these reasons, we cannot assure that VoIP providers will not successfully compete for our customers.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.Employees2012,2013, we had approximately 21,40022,800 employees, of which approximately 12,000 are members of either the International Brotherhood of Electrical Workers or the Communications Workers of America and are subject to collective bargaining agreements that expired October 6, 2012. Our parent company, CenturyLink, is currently negotiating the terms of new agreements. In the meantime, the predecessor agreements have been extended, and the unions have agreed to provide at least a twenty-four hour advance notice before terminating those predecessor agreements.America. See the discussion of risks relating to our labor relations in "Risk Factors—Risks Affecting Our Business" in Item 1A of this annual report.severalcouple of years, we have reduced our workforce primarily due to (i) integration efforts from CenturyLink's recent indirect acquisition of us; (ii) increased competitive pressures; and (iii) the loss of access lines over the last several years. 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 2012, 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;••••change;•orof regulatory or judicial proceedings relating to intercarrier compensation, access charges, universal service, broadband deployment, data protection and net neutrality;•our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages;•the composition of our markets, and product mix and network caused by our recent acquisitions;••the ability of QCII to use net operating loss carryovers in projected amounts;••demandsdemand for high-speed broadband services;•••••••rates,laws, in accounting policies or practices, in operating, medical, pension or administrative costs, in general market, labor or economic conditions, or in legislation, regulation or public policy. and our recent acquisitions are described in greater detail in Item 1A of this 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.
or that are not specific to us, such as general economic conditions.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 competition to continue to intensify.these trends will continue. In addition to competition from larger national telecommunications providers, we are facing increasing competition from a variety of other sources, including cable and satellite companies, wireless providers, information technology companies, broadband companies,providers, device providers, resellers, sales agents 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 or more diverse networks with greater transmission capacity or other advantages, (iv)(v) conduct operations or raise capital at a lower cost than us, (v)(vi) are subject to less regulation, (vi)(vii) offer services nationally or internationally to a larger geographic area or larger base of customers, (viii) offer greater online content 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 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 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.manywhich in general are enhancing non-voice communications and enabling a broader array of whichcompanies to offer services competitive with ours. Many of those technological changes are (i) displacing or reducing demand for our traditional voice services, (ii) enabling the development of competitive products or areservices, or (iii) enabling our current customers to reduce or bypass use of our networks. Similarly, demand for our broadband services could be adversely affected by advanced wireless data transmission technologies being developed by wireless providers and by certain technologies permitting cable companies and other competitors to deliver faster broadband speeds than ours. Rapid changes in technology are also increasing the competitiveness of the information technology services industry is experiencing rapid changes in technologies.industry.forgoforego 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 compete could be adversely affected and our market share could decline. Any inability to effectively respond to technological 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. The•Items 1 and 7 of this annual report;••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, 2012, we had approximately 21,400 employees, of which approximately 12,000 or 56%, are members of various bargaining units represented by the International Brotherhood ofElectrical Workers or the Communications Workers of America and are subject to collective bargaining agreements that expired October 6, 2012. We are currently negotiating the terms of new agreements. In the meantime, the predecessor agreements have been extended and the applicable unions have agreed to provide us with at least twenty-four hour advance notice before terminating those predecessor agreements. 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 may also limit our flexibility to change benefits in response to industry or competitive changes. In particular, the post-employment benefits provided under these agreements could cause us to incur costs not faced by many of our competitors, which could ultimately hinder our competitive position.marketing, technological, engineering, marketing and provisioning skills. Our future success depends, in part, on our ability to retrain our staff to acquire or strengthen skills necessary to address these changes, and, where necessary, to attract and retain new personnel that possess these skills.downturn,stagnation, slow growth or economic uncertainty. While it is difficult to predict the ultimate impact of these general economic conditions, they 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. These conditions impact, in particular, our ability to sell discretionary products or services to business customers that are under pressure to reduce costs or to governmental customers that have recently suffered recentsubstantial 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 or may not be able to obtain adequate access to credit, which could negatively impact their ability to make timely payments to us. In addition, as discussed further below, unstable economic and credit markets may preclude us from refinancing maturing debt at terms that are as favorable as those 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, as well as our ability to raise capital.ITinformation technology infrastructure or related systems, or of those we operate for certain of our customers.ITinformation technology infrastructure and related systems (including our billing systems). As a communications and ITinformation technology company, we face an added risk that a security breach or other significant disruption of our public networks or ITinformation 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••••••••••inabilityfailure to expand or upgrade our technology infrastructure could have adverse consequences, which could include the delayed implementation of new service offerings, increasedTabledecreased competitiveness of Contentsutilization rates and availabilityuse of these newer services continuecontinues to grow, our high-speed Internet customers maywill likely use much more bandwidth than in the past. If this occurs, we could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions, reduced capacityservice degradation or slower transmission speeds for our customers. Alternatively, we could choose to implement network management practices to reduce the network capacity available to bandwidth-intensive activities during certain times in market areas experiencing congestion, which could negatively affect our ability to retain and attract customers in affected markets. While we believe demand for these services may drive high-speed Internet customers to pay for faster broadband speeds, we may not be able to recover the costs of the necessary network investments. This could result in an adverse impact to our operating margins, results of operations and financial condition.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.Consolidation amongparticipantscommunications companies who typically compete against us in those markets. Similar to the risks summarized in the telecommunications industry may allowprior paragraph, our competitors to compete more effectively against us, which could adversely affectreliance on these lease or interconnection arrangements limits our operating results and financial condition. The telecommunications industry has experienced substantial consolidationcontrol over the last couple of decades, and somequality of our competitors have combined withservices and exposes us to the risk that the other telecommunications providers, resultingcarrier may be unwilling to continue or renew these arrangements in larger competitors that have greater financial and business resources and broader service offerings. Further consolidation could increase competitive pressures, and could adversely affectthe future on terms favorable to us, or at all.operating results and financial condition, as well as our ability to service debt and pay other obligations.We haveoperations carry a significant amount of goodwill andvoice or data traffic for other intangible assetscommunications providers. Their reliance on our balance sheet. Ifservices exposes us to the risk that they may transfer all or a portion of this traffic from our goodwillnetwork to networks built, owned or leased by them, thereby reducing our revenues.intangible assets become impaired, we may be requiredlabor strife;record a significant chargereceive payments or services under applicable regulations or the terms of our existing contract arrangements; orearnings and reduce our stockholders' equity. Under generally accepted accounting principles, intangible assets are tested for impairmentmake payments or provide services to us.an annual basis or more frequently whenever events or circumstances indicate that its carrying value may not be recoverable. If our intangible assets are 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 ofother key suppliers, vendors landlords and other third parties to operate our business.landlords. suppliers.suppliers and may be adversely affected if third parties assert patent infringement claims against our 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"Risk Factors—Risks Relating to our Recent Acquisition."CenturyLink its recently-acquiredCenturyLink's operations and realize the anticipated benefits of the recent acquisition.••lost sales as a resultcustomers deciding not to do business with the combined company;multiplicity of different legacy systems, network and processes used by each of the companies;•• additional complexities of combining two companies with different histories, regulatory restrictions, cost structures, products, sales forces, markets, marketing strategies, product markets 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 the anticipated benefits of the acquisition, or could otherwise adversely affect our business and financial results.CenturyLink cannot assure you whether, when or in what amounts they will be able to use QCII's net operating losses. At December 31, 2012, QCII had approximately $5.3 billion of federal net operating losses, or 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. CenturyLink currently expects to use substantially all of QCII's NOLs and certain other deferred tax attributes. However, if CenturyLink is unable to realize these benefits, CenturyLink's future income tax payments would behigher 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.
Risks Relating to Legal and Regulatory MattersAnyof 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 dollars in damages. 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 debt covenants. 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. General.General. We are subject to significant regulation by (i) the Federal Communications Commission ("FCC"(“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.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.end userend-user customers are gradually increased. We expect 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 Universal Service Fund ("USF") and retail revenue streams. 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 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.posed by costs of regulatory compliance.higher costs. Regulations continue to create significant 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.Regulatory changes in the communications industry could adversely affect our business by facilitating greater competition against us. For over 15 years, Congress and the FCC have taken several steps that have resulted in increased competition among communications service providers. Many of the FCC's regulations remain subject to judicial review and additional rulemakings, thus making it difficult to determine the ultimate impact of these changes on us and our competitors.The FCC'sIn 2010, the FCC adopted "net neutrality" regulations that curtailed our operational flexibility. Although a federal appeals court vacated these rules in January 2014, the FCC or Congress could adopt similar measures in the future. Any such measures could adversely impact our ability to operate our high-speed data network profitably and to undertakeimplement the upgrades and implement network management practices that may be needed to continue to provide high quality high-speed data services, and could therefore negatively impact our ability to compete effectively. Thefor information carried on, stored or disseminated through their networkssuch as us, is still unsettled.not entirely clear. As such, we could be exposed to legal claims relating to third party content disseminated on our networks. Claims could challenge the accuracy of materials on our network, or could involve matters such as defamation, invasion of privacy or 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.We are subject to significant regulations that limit our flexibility. As a diversified full service incumbent local exchange carrier in most of our key markets, 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 ability to compete.investors' confidence in us.our reputation with investors, lenders or others.2012,2013, our consolidated debt was approximately $7.6 billion (excluding note payable-affiliate), which was included in CenturyLink's consolidated debt of approximately $20.6$21.0 billion as of that date. Approximately $2.1$2.6 billion of CenturyLink's consolidated debt securities, which includes approximately $1.4 billion$927 million of our debt securities, come due over the next thirty-six months.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 the condition of CenturyLink, the credit markets or the economy. We may incur unexpected expenses or liabilities, and we may have limited access to financing.including (i) including:markets, (ii) markets;capital, (iii) capital;conditions, (iv) conditions;uses, (v) uses;increases, and (vi) increases;competitors.or QCII areis required to contribute a material amount of cash to theirits 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—Contingencies to theour consolidated financial statements in Item 8 of this annual report or in Item 8 of CenturyLink's and QCII's Annual ReportsReport 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. and QCII's debt instruments have cross payment default or cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. Any such event could adversely affect our ability to conduct business or access the capital markets and could adversely impact our credit ratings. See "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.immediately above. Incremental borrowings on terms that impose additional financial risks could exacerbate the other risks described in this annual report.planplans could negatively impact CenturyLink's and QCII's liquidity, which may in turn affect our business and liquidity.plan 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 $948of $159 million, as of December 31, 2012.2013. 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. Based on current laws and circumstances, (i) QCII was not required to make a cash contribution to this plan in 20122013 and (ii) QCII does not expect it will be required to make a contribution in 2013.2014. CenturyLink expects to make required contributions of $123 million to its qualified pension plans in 2014. The actual amount of required contributions to our plantheir plans in 20142015 and beyond will 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.QCwe plan to access the public debt markets, and we cannot assure you that these markets will remain free of disruptions.QCus or both. CenturyLink's ability to arrange additional financing will depend on, among other factors, the financial position, performance, and 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 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. Instability 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 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. None. telephone operations. Our gross property, plant and equipment consisted of the following components as of the following dates: 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 % Successor December 31,
2012 December 31,
2011 4% 4% 38% 39% 28% 26% 26% 29% 4% 2% 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. (1)Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.(2)Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.(3)Support assets consist of buildings, computers and other administrative and support equipment.(4)Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still under construction. 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 consolidated 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.20122013 and December 31, 2011,2012, our total net property, plant and equipment was approximately $7.2$7.2 billion and approximately $7.5 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 theour consolidated financial statements in Item 8 of this annual report. During 2012, we reclassified certain amounts reported in prior periods of inventory held for construction to conform to the current period presentation. This reclassification increased construction in progress at December 31, 2011 by $38 million with an offsetting decrease to fiber, conduit and other outside plant and central office and other network electronics by $8 million and $30 million, respectively.theour consolidated financial statements included in Item 8 of this annual report is incorporated herein by reference.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) Year
Ended
December 31,
2012 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 (Dollars in millions) $ 8,848 6,635 2,268 9,271 9,731 10,388 6,943 5,436 1,630 6,788 7,169 7,525 $ 1,905 1,199 638 2,483 2,562 2,863 $ 1,391 892 490 1,873 1,921 2,267 849 543 299 1,082 1,197 1,438 (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 year ended December 31, 2012, 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,
2012 December 31,
2011 December 31,
2010 December 31,
2009 December 31,
2008 (Dollars in millions) $ 9,369 9,369 — — — 23,945 24,809 12,570 13,997 14,252 7,625 8,325 8,012 8,386 7,588 9,974 9,865 (831 ) 312 786 (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 Successor Predecessor Year
Ended
December 31,
2012 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,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 (Dollars in millions) (Dollars in millions) $ 2,774 2,201 869 3,235 3,167 3,479 $ 2,713 2,774 2,201 869 3,235 3,167 (1,528 ) (1,191 ) (335 ) (1,256 ) (1,100 ) (1,402 ) (1,381 ) (1,528 ) (1,191 ) (335 ) (1,256 ) (1,100 ) (1,241 ) (1,208 ) (525 ) (2,801 ) (1,286 ) (2,136 ) (1,326 ) (1,241 ) (1,208 ) (525 ) (2,801 ) (1,286 ) (1,266 ) (1,036 ) (341 ) (1,240 ) (1,106 ) (1,404 ) (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,
2012 December 31,
2011(1) December 31,
2010 (in thousands) 3,316 3,183 3,053 8,055 8,533 9,193 (1)In the second quarter of 2012, we updated our methodology for counting our broadband subscribers and reclassified prior year amounts to conform to the current period presentation. For additional information see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview" in Item 7 of this report.(2)Broadband subscribers are customers that purchase high-speed Internet connection service through their existing telephone lines and fiber-optic cables.(3)Access lines are telephone lines reaching from the customers' premises to a connection with the public switched telephone network, or PSTN.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 "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.and long-distance, 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.theour consolidated financial statements in Item 8 of this annual report, on April 1, 2011, our indirect parent, QCII, became a wholly owned subsidiary of CenturyLink.$9.369$9.354 billion, which we 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. Successor Predecessor Combined 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) $ 39 146 2 148 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 Since the April 1, 2011 closinghave beenare integrated into and 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.••long-distance, 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 telecommunicationstelecommunication services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services as well as network support and technical services. During the first quarter of 2012, we reclassified certain prior period revenues between the aforementioned three categories to conform to the current period presentation.2012,2013, we served approximately 3.4 million broadband subscribers. We also operated approximately 8.17.6 million access lines, which are telephone lines reaching from the customers' premises to a connection with the public switched telephone network. We countOur methodology for counting our broadband subscribers and access lines when we install the service. Our 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 methodology for counting our broadband subscribers and access lines may not be comparable to those As of the successor date of December 31, 2012, we also served approximately 3.3 million broadband subscribers. As described below, we have updated our methodology for counting broadband subscribers to include residential, business and wholesale subscribers instead of only residential and small business subscribers.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 2012. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this annual report.•36% and 33%36% of our total revenues for the successor yearyears 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 will 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, 2012,2013, we reached approximately 3.33.4 million broadband subscribers compared to approximately 3.3 million as of the successor date of December 31, 2012 and 3.2 million as of the successor date of December 31, 2011 and 3.1 million as of the predecessor date of December 31, 2010.2011. We believe that continually increasing connection speeds is important to remaining competitive in our industry. As a result, we continue to invest in our 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 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 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. Another trend impacting our strategic services is the deployment of fiber-based special access services provided to wireless 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;•43% and 47%43% of our total revenues for the successor yearyears 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 will continue to decline. Our legacy services revenues have been, and we expect they will continue to be, adversely affected by access line losses, which declined 5% and 6% in 2013 and 7% in 2012, and 2011, respectively. Intense competition and product substitution continue to drive our access line losses. For example, many consumers are replacing traditional voice telecommunications service with substitute services, including (i) cable and wireless voice services•long-distance and wireless;wireless. While we believe our bundled service offerings can help retain customers, they also tend to lower our profit margins;••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;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; and• Successor Predecessor Combined Predecessor % Change Successor Predecessor Combined % Change Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 Year
Ended
December 31,
2010 Successor
2012 v
Combined
2011 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) $ 8,848 6,635 2,268 8,903 9,271 (1)% (4)% $ 8,753 8,848 6,635 2,268 8,903 (1 )% (1 )% 6,943 5,436 1,630 7,066 6,788 (2)% 4% 6,675 6,943 5,436 1,630 7,066 (4 )% (2 )% 1,905 1,199 638 1,837 2,483 4% (26)% 2,078 1,905 1,199 638 1,837 9 % 4 % (514 ) (307 ) (148 ) (455 ) (610 ) 13% (25)% (512 ) (514 ) (307 ) (148 ) (455 ) — % 13 % 542 349 191 540 791 — (32)% 602 542 349 191 540 11 % — % $ 849 543 299 842 1,082 1% (22)% $ 964 849 543 299 842 14 % 1 % metrics: Successor Predecessor % Change Successor % Change December 31,
2012 December 31,
2011 December 31,
2010 Successor
2012 v
Successor
2011 Successor
2011 v
Successor
2010 December 31, 2013
2011(2) (in thousands) (in thousands) 3,316 3,183 3,053 4% 4% 8,055 8,533 9,193 (6)% (7)% 3,429 3,318 3,185 3 % 4 % 7,641 8,058 8,536 (5 )% (6 )% 21.4 24.7 26.1 (13)% (5)% 22.8 22.7 24.7 — % (8 )% During the second quarter of 2012, we updated our methodology for counting broadband subscribers to better align with the methodology used by our ultimate parent company, CenturyLink. We have restated our previously reported amounts to reflect this change. For additional information on our counting methodologies, see "Overview" 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 % Change Successor Predecessor Combined % Change Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 Year
Ended
December 31,
2010 Successor
2012 v
Combined
2011 Combined
2011 v
Predecessor
2010 Year
Ended
December 31,
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) $ 3,265 2,406 792 3,198 3,059 2% 5% $ 3,342 3,265 2,406 792 3,198 2 % 2 % 3,471 2,796 1,003 3,799 4,323 (9)% (12)% 3,208 3,471 2,796 1,003 3,799 (8 )% (9 )% 2,112 1,433 473 1,906 1,889 11% 1% 2,203 2,112 1,433 473 1,906 4 % 11 % $ 8,848 6,635 2,268 8,903 9,271 (1)% (4)% $ 8,753 8,848 6,635 2,268 8,903 (1 )% (1 )% Growth in ourinincreased 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 of the comparative periods waswere principally due principally to increases in the number of broadband subscribers as well as volume increases in our Ethernet services. These increases were partially offset by declinesa decline in our private line services revenues. of the comparative periods asis a result of lower local and long-distance services revenues due to access line loss and reduced access services usage related to competitive pressures and product substitution. Legacy services revenues also decreased in both of the comparative periods due to lower revenues from our traditional WAN services caused by customer migration, product substitution and increased competition. Part of the decrease in legacy services revenues for the successor year ended December 31, 2012 compared to the combined year ended December 31, 2011 is attributable to lower amortization of deferred revenue due to predecessor deferred installation and activation revenue being assigned no value at the acquisition date.to a change in methodologytheour consolidated financial statements in Item 8 of this annual report. A portion of the increase in affiliates and other services revenues for the successor year ended December 31, 2012 compared to the 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. The remainder of this increase is attributable to increased USF revenues. The increase in affiliates and other services revenues for the combined year ended December 31, 2011 as compared to the predecessor year ended December 31, 2010 was primarily due to telecommunications services we provided to affiliates, which were partially offset by a decrease in USF revenues. Successor Predecessor Combined Predecessor % Change Successor Predecessor Combined % Change Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 Year
Ended
December 31,
2010 Successor
2012 v
Combined
2011 Combined
2011 v
Predecessor
2010 Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 Successor
2013 v
Successor
2012 Successor
2012 v
Combined
2011 (Dollars in millions) (Dollars in millions) $ 2,868 2,171 742 2,913 3,069 (2)% (5)% $ 2,790 2,868 2,171 742 2,913 (3 )% (2 )% 1,166 1,161 385 1,546 1,652 (25)% (6)% 1,062 1,166 1,161 385 1,546 (9 )% (25 )% 619 238 52 290 194 113% 49% Operating expenses-affiliates 695 619 238 52 290 12 % 113 % 2,290 1,866 451 2,317 1,873 (1)% 24% 2,128 2,290 1,866 451 2,317 (7 )% (1 )% $ 6,943 5,436 1,630 7,066 6,788 (2)% 4% $ 6,675 6,943 5,436 1,630 7,066 (4 )% (2 )% loweroffset partially by increases in professional fees, network expenses and real estate and power costs. Costs of services and products (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 decreases in salaries and wages and employee benefits related to employee headcount reductions, which resulted from reevaluations of our workforce 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. Costs of services and products decreased for the combined year ended December 31, 2011 as compared to the predecessor year ended December 31, 2010 due to lower salaries and wages and employee benefits related to employee reductions in our network operations and to amortization of certain deferred expenses being lower as a result of assigning no value to the predecessor assets at the acquisition date. The amortization of certain deferred expenses is lower due to assigning no value to these predecessor assets at the acquisition date.
.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. During the first quarter of 2012, we reclassified certain operating expenses from our selling, general and administrative expenses to our cost of services and products (exclusive of depreciation and amortization) to better reflect our expenses related to providing services to our affiliates. As a result, we reclassified previously reported amounts to conform to the current period presentation. For the predecessor three months ended March 31, 2011 and the successor nine months ended December 31, 2011, this reclassification resulted in a reduction of selling, general and administrative expenses of $116 million and $338 million, respectively. For the predecessor year ended December 31, 2010, this reclassification resulted in a reduction of selling, general and administrative expenses of $484 million. Selling, generaladministrative expenses decreased for the combined year ended December 31, 2011 as compared to the predecessor year ended December 31, 2010 primarily due to decreased pension expense, professional fees and marketing and advertising expense. This decrease was 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 income of $88 million and $11 million in 2013 and 2012, respectively, and combined net periodic benefits expense of $61 million and $125 million in 2011 and 2010, respectively.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 $55$56 million in 2013.2014. 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 theour consolidated financial statements in Item 8 of this annual report.Expenses—Affiliatesyearyears ended December 31, 2013 and 2012. Successor Predecessor Combined Predecessor % Change Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 Year
Ended
December 31,
2010 Successor
2012 v
Combined
2011 Combined
2011 v
Predecessor
2010 (Dollars in millions) $ 1,175 914 393 1,307 1,652 (10)% (21)% 1,115 952 58 1,010 221 10% nm $ 2,290 1,866 451 2,317 1,873 (1)% 24% nm—Percentages greater Successor Predecessor Combined % Change Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 Successor
2013 v
Successor
2012 Successor
2012 v
Combined
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.2011 and a decrease of $272 million for the combined year ended December 31, 2011, as compared to the predecessor year ended December 31, 2010.2011. 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. Excludingeffects of CenturyLink's acquisition of us, depreciationsuccessor year ended December 31, 2013 as compared to the successor year ended December 31, 2012. The decrease in amortization expense increased for both comparative periods reflected in the table aboveis primarily due to net growth in capitalthe use of accelerated amortization for a portion of the customer relationship assets whichand due to our software investments becoming fully amortized faster than new software was partially offset by annual updates of our depreciation rates for capitalized assets.2011, and $598 million for the combined year ended December 31, 2011, as compared to the predecessor year ended December 31, 2010.2011. In addition, at the acquisition date our capitalized software was also recorded at fair value of $1.702 billion, an increase of $815 million, which increased amortization expense by $59 million and $176 million for the successor year ended December 31, 2012 and the combined year ended December 31, 2011, respectively, as compared to the previous periods.period. Excluding the effects of CenturyLink's acquisition of us, Successor Predecessor Combined % Change Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 Successor
2013 v
Successor
2012 Successor
2012 v
Combined
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 % Change Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 Year
Ended
December 31,
2010 Successor
2012 v
Combined
2011 Combined
2011 v
Predecessor
2010 (Dollars in millions) $ (443 ) (300 ) (150 ) (450 ) (615 ) (2)% (27)% (24 ) 1 — 1 — nm nm (47 ) (8 ) — (8 ) — nm nm — — 2 2 5 (100)% (60)% $ (514 ) (307 ) (148 ) (455 ) (610 ) 13% (25)% $ 542 349 191 540 791 — (32)% nm—Percentagesnm-Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
$46 millionthe details of these net redemptions. The decrease inadditional information about our debt.combinedsuccessor year ended December 31, 20112013 as compared to the predecessorsuccessor year ended December 31, 2010, was2012 primarily due to the amortization of the net premium associated withan increase in our long-term debt, which resulted from the accounting for CenturyLink's indirect acquisition of us.Interest (Expense) Income—Affiliatesincreased affiliate loan balances. The increased affiliate loan balances are due to CenturyLink's cash management arrangement between certainthe establishment of its subsidiaries, including us, under which the majority of our cash balance is transferred on a daily basis to CenturyLink. We report the balance of these transfers on our balance sheet as advances to affiliates.$484$484 million of our 7.50% Notes due 2023, which resulted in an immaterial loss.$811$400$400 million of 7.625% Notes due 2015. With respect to our 8.375% Notes due 2016, we received and accepted tenders of approximately $575$575 million aggregate principal amount of these notes, or 71%, for $722$722 million including a premium, fees and accrued interest. With respect to our 7.625% Notes due 2015, we received and accepted tenders of approximately $308$308 million aggregate principal amount of these notes, or 77%, for $369$369 million including a premium, fees and accrued interest. The completion of this tender offer resulted in a loss of $46 million. In October 2011, we redeemed $1.5 billion aggregate principal amount of our 8.875% Notes due 2012, which resulted in a loss of $6 million. In June 2011, we redeemed $825 aggregate principal amount of our 7.875% Notes due 2011, which resulted in an immaterial loss.2012,2013, was $602 million, or an effective tax rate of 38.4%, compared to $542 million, or an effective tax rate of 39.0%, compared to $540 million, or an effective tax rate of 39.1%, for the combinedsuccessor year ended December 31, 2011.as compared to the predecessor year ended December 31, 2010, decreased by $251was $540 million, as a resultor an effective tax rate of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Income tax expense also decreased due to the 2010 tax treatments of the expenses allocated to us when QCII accelerated the vesting of certain stock-based compensation and certain expenses associated with CenturyLink's acquisition of us.theour consolidated financial statements in Item 8 of this annual report.Other Operational Matters At December 31, 2012, we had approximately 21,400 employees,Table of which approximately 12,000 are members of either the International Brotherhood of Electrical Workers or the Communications Workers of America. These employees are subject to collective bargaining agreements that expired October 6, 2012. Our ultimate parent company, CenturyLink, is currently negotiating the terms of new agreements. In the meantime, the predecessor agreements have been extended, and the applicable unions have agreed to provide at least a twenty-four hour advance notice before terminating those predecessor agreements. 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. See the discussion of risks relating to our labor relations in "Risk Factors—Risks Affecting Our Business" in Item 1A of this report. To help mitigate this potential risk, we have established contingency plans in which we would assign trained, non-represented employees to cover jobs for represented employees in the event of a work stoppage to provide continuity for our customers.allocationassignment of the purchase price related to CenturyLink's indirect acquisition of us involved significant estimates and judgments by our management. In arriving at the fair values of assets acquired and liabilities assumed, we considered the following generally accepted valuation approaches: the cost approach, income approach and market approach. Our estimates also included 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. In the first quarter of 2012, we completed our valuation of the assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets.$9.369$9.354 billion, which has been 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 to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes. The aggregate consideration allocationassignment is based on our final analysis of enterprise value of $18.639 billion.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 yearsyears. We annually review the estimated lives and methods used to amortize trade names and patent assets predominantly usingour other intangible assets. The amount of future amortization expense may differ materially from current amounts, depending on the sum-of-the-years digits method over an estimated liferesults of four years.testassess 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 goodwill impairment iswas 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 acquisition of us, we determined that we are one reporting unit. In the third quarter of 2011, we adopted the provisions of ASU 2011-08, Testing Goodwill for Impairment, which permits us to make a qualitative assessment of whether it is more likely than not that a reporting unit's estimated fair value is less than its carrying amount before applying the two stepgoodwill impairment test, which requires us (i) in step one, to identify potential impairments by comparing the estimated fair value of a reporting unit against its carrying value and (ii) in step two, to quantify any impairment identified in step one. At September 30, 2012, as a result of changes in our estimate of future cash flows we did not perform a qualitative assessment. We estimated the fair value of Qwest using an equal weighting based on a market approach and a discounted cash flow method. The market approach 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 terminal value, which represents the expected normalized cash flows of Qwest beyond the cash flows from the discrete nine-year projection period. We discounted the estimated cash flows using a rate that represents a market participant's weighted average cost of capital, which we determined to be approximately 6.0% as of the measurement date (which was comprised of an after-tax cost of debt of 3.2% and a cost of equity of 8.4%).2012,2013, we completed our annual impairment testingassessment and concluded that our goodwill was not impaired and the estimated fair value of our equity exceededis substantially in excess of our carrying value of equity by 10%.testingassessment date of September 30, 2013October 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 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; (vi) a significant adverse change in legal factors or in the overall business 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, 2013.Property, plantPurchased and equipment purchased subsequent to our acquisition is recorded at cost. Substantially all otherconstructed property, plant and equipment is recorded at cost less depreciation.cost. 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 straight-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 the assets. This method requires the periodic revision of depreciation rates. Normal retirements of property, plant and equipment are charged against accumulated depreciation, with no gain or loss recognized. Other types of property, plant and equipment are stated at cost and, when sold or retired, a gain or loss is recognized. We depreciate such property on the straight line method over estimated service lives ranging from 5 to 45 years. and assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining life of our asset base.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 $250$220 million, respectively. We review long-lived assets, other than goodwill and other intangible assets with indefinite lives, for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For measurement purposes, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its fair value. Recoverability of the asset group to be held and used is measured 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. During 2012, we did not incur changes in events or circumstances that would indicate that the carrying amounts of our long-lived assets, other than goodwill and other intangible assets with indefinite lives, may not be recoverable. As a result, no impairment charge was recorded in 2012.QCII'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 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.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, 2012.
Affiliate TransactionsAffiliates Transactions We provide to our affiliates telecommunications services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services. We also purchase services from our affiliates including telecommunications services and marketing and employee-related support services. In the normal course of business, we transfer assets and liabilities to and from QCII and its affiliates based on carrying value. 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 bythe 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, 2012, we established a valuation allowance of $12 million as it is not more likely than not that this amount of deferred tax assets will be realized. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that an additional valuation allowance for certain deferred tax assets is appropriate, which could materially impact our financial condition or results of operations. See Note 12—Income Taxes to theour consolidated financial statements in Item 8 of this annual report for additional information.2012,2013, we had a working capital deficit of $1.3$0.9 billion, reflecting current liabilities of $2.8$2.7 billion and current assets of $1.6$1.8 billion, compared to a working capital deficit of $917 million$1.2 billion as of the successor date of December 31, 2011.2012. The changeincrease in our working capital position is primarily due to an increasea decrease in the current maturities of long-term debt of $740$167 million and an increase in our advances to affiliates, which were partially offset by a decreasean increase in accounts payable and decrease in net affiliate position. Our current maturities of long-term debt balances were higher as of the successor date of December 31, 2012 substantially due to the scheduled maturity of our $750 million floating rate notes on June 15, 2013.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 advances from CenturyLink if and to the extent CenturyLink has available funds that it is willing and able to contribute or advance.Revolving Promissory Note During 2012, we entered into a revolving promissory note with an affiliate of CenturyLink that provides us with a funding commitment with an aggregate principle amount available to $1.0 billion through June 30, 2022, of which $701 million was outstanding as of the successor date of December 31, 2012. 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 31,2012, the weighted average interest rate was 6.706%. This revolving promissory notereflectedinfluenced by, among other things, demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.consolidated balance sheets under "Notes payable—affiliates".2012,2013, CenturyLink had approximately $1.2$1.3 billion and $40$28 million available for future use under the Credit Facility and the separate letter of credit arrangement, respectively.2012,2013, our long-term debt (including current maturities and excluding note payable to affiliate discussed in "Revolving Promissory Note") totaled $7.625$7.558 billion, compared to $8.325$7.625 billion outstanding as of the successor date of December 31, 2011. Substantially all of the $700 million decrease in our debt is attributable to the net impact of our new issuances being more than offset by our redemption and cash tender offers. Qwest Corporation floating rate senior notes of $750 million of will mature on June 15, 2013, which we expect to refinance.others.2012.2013. See Note 4—Long-Term Debt to theour 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- one credit agencytwo rating agencies downgraded CenturyLink's and QC'sour debt credit ratings and another indicated that it has placed CenturyLink's, QCII's and QC's debt credit ratings under review for a downgrade. As of the date of this report, the credit ratings for the senior unsecured debt of QC were as follows:AgencyQCStandard & Poor'sBBB-Moody's Investors Service, Inc. Baa3(under review for downgrade)Fitch RatingsBBB-QCII's and QC'sour access to debt capital or further raise CenturyLink's QCII's and QC'sour borrowing costs. See "Risk Factors—Risks Affecting our Liquidity and Capital Resources" in Item 1A of this annual report.2012:2013: 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 2013 2014 2015 2016 2017 2018 and
thereafter Total (Dollars in millions) $ 804 634 112 236 500 5,212 7,498 490 464 426 409 384 7,823 9,996 701 — — — — — 701 47 — — — — — 47 55 36 30 25 20 39 205 47 34 29 28 28 13 179 2 2 2 2 2 6 16 2 1 2 1 2 29 37 $ 2,148 1,171 601 701 936 13,122 18,679 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)Actual 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, 2012.(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 is limited to contractual obligations only and does not include:••recordedissued 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;•2013,2014, termination fees for these contracts to purchase goods and services would be $20 million.$160 million. In the normal course of business, we do not believe payment of these fees is 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, operating, productivity, expense or 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 flow generated by operating activities, cash required for other purposes and regulatory considerations. Our capital expenditures continue to be focused on our strategic services primarily our broadband services. . In particular, we expect to continue to focus on expanding our fiber infrastructure, including installations of "fiber to the tower," which is a type of telecommunications network consisting of fiber-optic cables that run from a wireless carrier's mobile telephone switching office to cellular towers 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. For more information on capital spending, see Items 1 and 1A of this report. CenturyLink, our ultimate parent, has agreed to accept approximately $35 million of the $90 million available to it from Phase 1 of the FCC's Connect America Fund ("CAF") established by Congress to help telecommunications carriers defray the cost of providing broadband access to remote customers. Of the $35 million, we will receive approximately $30 million and intend to use the funds to deploy broadband service for up to 39,000 homes in unserved rural areas principally in Colorado, Minnesota, New Mexico and Washington. CenturyLink has determined that restrictions on the use of these funds have made acceptance of additional CAF funds uneconomical. CenturyLink has, however, filed with the FCC a waiver application, which, if granted, would allow us to deploy broadband services with CAF funds to approximately 56,000 more homes in high-cost unserved areas in our markets. We received approximately $27.5 million in CAF funds during 2012 and received approximately $2.5 million in January 2013.Pension and Post-retirement Benefit Obligations QCII is subject to material obligations under its existing defined benefit pension and other post-retirement benefit plans. When QCII became a wholly owned subsidiary of CenturyLink on April 1, 2011, QCII re-measured its plans and 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 the 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 was not required and did not make contributions to the trust in 2012 and QCII currently does not expect to make a plan contribution in 2013 and 2014. 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, 2012, the fair value of the trust assets was $572 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 fouryear period could be substantially shorter or longer depending on changes in projected health care costs, returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits. Successor Predecessor Combined Predecessor % Change Year
Ended Nine
Months
Ended Three
Months
Ended Year
Ended Year
Ended Successor
2012 v Combined
2011 v Successor Predecessor Combined % Change December 31,
2012 December 31,
2011 March 31,
2011 December 31,
2011 December 31,
2010 Combined
2011 Predecessor
2010 Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2011 Successor
2013 v
Successor
2012 Successor
2012 v
Combined
2011 (Dollars in millions) (Dollars in millions) $ 2,774 2,201 869 3,070 3,235 (10)% (5)% $ 2,713 2,774 2,201 869 3,070 (2 )% (10 )% (1,528 ) (1,191 ) (335 ) (1,526 ) (1,256 ) — 21% (1,381 ) (1,528 ) (1,191 ) (335 ) (1,526 ) (10 )% — % (1,241 ) (1,208 ) (525 ) (1,733 ) (2,801 ) (28)% (38)% (1,326 ) (1,241 ) (1,208 ) (525 ) (1,733 ) 7 % (28 )% as compared to the combined year ended December 31, 2011 primarily due to changes to deferreda decrease in net income taxes which were somewhat offset by changes in affiliate balances. Net cash provided by operating activities decreased by $165 million in the combined year ended December 31, 2011 compared to the predecessor year December 31, 2010 primarily due to decreased cash payments received from customers as a result of decreased revenues.adjusted for non-cash items. For additional information about our operating results, see "Results of Operations" above.investingfinancing activities increased by $270$85 million in the combinedsuccessor year ended December 31, 20112013 as compared to the predecessorsuccessor year ended December 31, 20102012 primarily due to increasesan increase in short-termdividend payments and a decrease in the amount of funds borrowed from an affiliate loans resulting fromunder the majorityrevolving promissory note, which were partially offset by a decrease of our cash balance being transferredpayments on debt and a daily basis to CenturyLink and paymentsreduction in the amount of costs incurred for property, plant and equipment.Net cash used in financing activities decreased by $1.068 billion in the combined year ended December 31, 2011 as compared to the predecessor year ended December 31, 2010 primarily due to a $830 million decrease in dividends paid to QSC and a decrease in net debt paydowns. For additional information regarding our financing activities, see Note 4—Long-Term Debt to theour consolidated financial statements in Item 8 of this annual report.July 20, 2012,June 17, 2013, we redeemed all $484paid at maturity the $750 million principal amount of our 7.50% Notes due 2023, which resulted in an immaterial loss.June 25, 2012,May 23, 2013, we issued $400$775 million aggregate principal amount of 7.00%6.125% Notes due 20522053, 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 $387$752 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after JulyJune 1, 20172018 at a redemption price equal to 100% of the principal amount redeemed plus accrued interest. In connection with consummatingand unpaid interest to the April 18, 2012 tender offer described below, we borrowed from a CenturyLink affiliate approximately $580 million under a revolving promissory note, payable upon demand. The promissory note is unsecured and is ranked equally to our senior notes. On April 18, 2012, we completed a cash tender offer to purchase a portion of our $811 million of 8.375% Notes due 2016 and our $400 million of 7.625% Notes due 2015. With respect to our 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 7.625% Notes due 2015, we received and accepted tenders of approximately $308 million aggregate principal amount of these notes, or 77%, for $369 million including a premium, fees and accrued interest. The completion of these tender offers resulted in a loss of $46 million. On April 2, 2012, we issued $525 million aggregate principal amount of 7.00% Notes due 2052 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $508 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after April 1, 2017 at a redemption price equal to 100% of the principal amount redeemed plus accrued interest.2012,2013, we have paid certain costs that were associated with CenturyLink's indirect acquisition of us. These costs include compensation costs comprised of retention bonuses 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 Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 (Dollars in millions) Amortized $ 53 66 135 254 — 128 59 187 Total premiums recognized $ 53 194 194 441 Successor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Total Since
Acquisition (Dollars in millions) $ 66 135 201 128 59 187 $ 194 194 388 See "Debt and Other Financing Arrangements" for more information. (1)See "Debt and Other Financing Arrangements" for more information.$142$89 million as of the successor date of December 31, 20122013 will reduce interest expense in future periods, unless otherwise extinguished.and QCII areis 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 as of the successor date of December 31, 2012.2012,2013, 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.2012,2013, we havehad approximately $7.4 billion (excluding capital lease and other obligations) of long-term debt outstanding, 90% 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.2012.theour consolidated financial statements in Item 8 of this annual report, or in the Future Contractual Obligations table included in this Item 7 above or (iii) discussed under the heading "Market Risk" above.20122013 and 20112012 (Successor dates), and the related consolidated statements of operations, comprehensive income, cash flows, and stockholder's equity (deficit) for the yearyears ended December 31, 2013 and 2012, the period from April 1, 2011 to December 31, 2011 (Successor periods), and the period from January 1, 2011 to March 31, 2011 and the year ended December 31, 2010 (Predecessor periods)period). 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.20122013 and 20112012 (Successor dates), and the results of their operations and their cash flows for the yearyears ended December 31, 2013 and 2012, the period from April 1, 2011 to December 31, 2011 (Successor periods), and the period from January 1, 2011 to March 31, 2011 and the year 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.12, 20137, 2014 Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 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) $ 7,031 5,419 1,870 7,700 $ 6,818 7,031 5,419 1,870 1,817 1,216 398 1,571 Operating revenues-affiliates 1,935 1,817 1,216 398 8,848 6,635 2,268 9,271 8,753 8,848 6,635 2,268 2,868 2,171 742 3,069 2,790 2,868 2,171 742 1,166 1,161 385 1,652 1,062 1,166 1,161 385 619 238 52 194 Operating expenses-affiliates 695 619 238 52 2,290 1,866 451 1,873 2,128 2,290 1,866 451 6,943 5,436 1,630 6,788 6,675 6,943 5,436 1,630 1,905 1,199 638 2,483 2,078 1,905 1,199 638 (443 ) (300 ) (150 ) (615 ) (450 ) (443 ) (300 ) (150 ) (24 ) 1 — — Interest (expense) income-affiliates (64 ) (24 ) 1 — (47 ) (8 ) — — — (47 ) (8 ) — — — 2 5 2 — — 2 (514 ) (307 ) (148 ) (610 ) (512 ) (514 ) (307 ) (148 ) 1,391 892 490 1,873 1,566 1,391 892 490 542 349 191 791 602 542 349 191 $ 849 543 299 1,082 $ 964 849 543 299 Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 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) $ 849 543 299 1,082 $ 964 849 543 299 — — 1 (4 ) Unrealized gain on investments and other, net of tax — — — 1 — — 1 (4 ) — — — 1 $ 849 543 300 1,078 $ 964 849 543 300 Successor Successor December 31,
2012 December 31,
2011 December 31, 2013 December 31, 2012 (Dollars in millions,
except per share amounts) (Dollars in millions) $ 8 3 $ 14 8 709 707 Accounts receivable, less allowance of $43 and $46 738 709 593 198 712 593 149 162 161 166 114 98 126 114 1,573 1,168 1,751 1,590 9,242 8,420 10,193 9,242 (2,011 ) (914 ) (2,985 ) (2,011 ) 7,231 7,506 7,208 7,231 9,369 9,369 9,354 9,354 4,379 5,101 3,687 4,379 1,212 1,460 1,008 1,212 181 205 210 181 15,141 16,135 14,259 15,126 $ 23,945 24,809 $ 23,218 23,947 $ 804 64 $ 637 804 456 656 440 456 — 180 701 — — 310 Note payable-affiliate 754 701 253 256 217 253 215 221 Income and other taxes 206 215 102 133 126 102 301 265 320 301 2,832 2,085 2,700 2,832 6,821 8,261 LONG-TERM DEBT 6,921 6,821 130 55 161 130 2,629 2,842 2,473 2,631 1,442 1,572 1,263 1,442 117 129 87 117 4,318 4,598 3,984 4,320 10,050 9,950 (76 ) (85 ) Common stock-one share without par value, owned by Qwest Services Corporation 10,050 10,050 Retained earnings (Accumulated deficit) (437 ) (76 ) 9,974 9,865 9,613 9,974 $ 23,945 24,809 $ 23,218 23,947 Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 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) $ 849 543 299 1,082 $ 964 849 543 299 2,290 1,866 451 1,873 2,128 2,290 1,866 451 (201 ) 150 76 241 (152 ) (201 ) 150 76 74 44 17 70 65 74 44 17 (65 ) (133 ) 3 11 (52 ) (65 ) (133 ) 3 47 8 — — — 47 8 — (76 ) (71 ) 18 (22 ) (94 ) (76 ) (71 ) 18 (58 ) (47 ) (20 ) 51 (1 ) (58 ) (47 ) (20 )
payable—affiliates, net — (108 ) 93 (81 ) Accounts receivable and payable-affiliates, net — — (108 ) 93 (9 ) (36 ) 50 (16 ) (9 ) (9 ) (36 ) 50 (17 ) (6 ) (89 ) 11 34 (17 ) (6 ) (89 )
liabilities 61 11 (36 ) 15 — 61 11 (36 ) (130 ) (53 ) — 7 Changes in other noncurrent assets and liabilities-affiliates (179 ) (130 ) (53 ) — 9 33 7 (7 ) 9 9 33 7 2,774 2,201 869 3,235 2,713 2,774 2,201 869 (1,266 ) (1,036 ) (341 ) (1,240 ) (1,264 ) (1,266 ) (1,036 ) (341 ) — — 4 (17 ) — — — 4 (395 ) (157 ) — — (119 ) (395 ) (157 ) — 133 — — — 2 133 — — — 2 2 1 — — 2 2 (1,528 ) (1,191 ) (335 ) (1,256 ) (1,381 ) (1,528 ) (1,191 ) (335 ) 896 2,126 — — 752 896 2,126 — (1,430 ) (2,368 ) (14 ) (534 ) (806 ) (1,430 ) (2,368 ) (14 ) (178 ) — — — — (178 ) — — (1,150 ) (900 ) (530 ) (2,260 ) (1,325 ) (1,150 ) (900 ) (530 ) 701 — — — Changes in note payable-affiliate 53 701 — — (80 ) — — — — (80 ) — — — (66 ) 19 (7 ) — — (66 ) 19 (1,241 ) (1,208 ) (525 ) (2,801 ) (1,326 ) (1,241 ) (1,208 ) (525 ) 5 (198 ) 9 (822 ) 6 5 (198 ) 9 3 201 192 1,014 8 3 201 192 $ 8 3 201 192 $ 14 8 3 201 $ (607 ) (327 ) 116 (677 ) $ (750 ) (607 ) (327 ) 116 (513 ) (464 ) (149 ) (603 ) Interest (paid) (net of capitalized interest of $17, $18, $8, and $3) $ (513 ) (513 ) (464 ) (149 ) Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 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) $ 9,950 9,951 11,425 11,346 $ 10,050 9,950 9,951 11,425 — (1 ) — 79 — — (1 ) — 100 — — — — 100 — — 10,050 9,950 11,425 11,425 10,050 10,050 9,950 11,425 (85 ) — (12,256 ) (11,034 ) (76 ) (85 ) — (12,256 ) 849 543 299 1,082 964 849 543 299 (840 ) (628 ) (1,000 ) (2,300 ) (1,325 ) (840 ) (628 ) (1,000 ) — — 1 (4 ) — — — 1 (76 ) (85 ) (12,956 ) (12,256 ) (437 ) (76 ) (85 ) (12,956 ) $ 9,974 9,865 (1,531 ) (831 ) $ 9,613 9,974 9,865 (1,531 ) (1) (1) Basis of Presentation and Summary of Significant Accounting Policies and Summary of Significant Accounting PoliciesBasis of Presentationand long-distance, 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 provide to our affiliates telecommunications services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services. We also purchase services from our affiliates including telecommunications services, marketing and employee-related support services. In the normal course of business, we transfer assets and liabilities to and from our ultimate parent, CenturyLink, and its affiliates based on their respective carrying values. Dividends declared are reflected on our consolidated statements of stockholder's equity.2012.Table2013, we recorded a correction of Contents During the first quarter of 2012, we reclassified certain operating expenses from our selling, general and administrative expenses to our cost of services and products (exclusive of depreciation and amortization) to better reflect our expensesan error related to providing servicesan 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 $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 affiliates. As a result, we reclassified previously reported amounts to conform toconsolidated balance sheet as of December 31, 2012. The correction of the current period presentation. Forerror did not have an effect on our consolidated statements of operations or on our consolidated statements of cash flows for the successor nine monthsyears ended December 31, 20112012 and the predecessor three months ended March 31, 2011, this reclassification resulted in a reduction of selling, general and administrative expenses of $338 million and $116 million, respectively.$25$25 million to $34$34 million for the successor year ended December 31, 2012.ofand net salvage value for certain telecommunications equipment. These changes resulted in a decrease to depreciation expense of approximately $52$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$32 million for the successor year ended December 31, 2012. Duringfirst quarterestimates of 2012, we recognizedthe remaining economic lives of certain switch and circuit network equipment. We estimate this will result in a $100net increase in depreciation expense in our consolidated statements of operations of $19 million equity contribution for 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. On April 2, 2012, we sold an office building for net proceeds of $133 million. As part of the transaction, we agreed to lease a portion of the building from the new owner. As a result, the $16 million gain from the sale was deferred and will be recognized as a reduction to rent expense over the 10 year lease term. 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.mademake when accounting for items and matters such as, but not limited to, 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 estimatesprocurement costs related tofor customer activationactivations and installations. The deferral of customer activation and installation costs is limited to the amount of revenue deferred for such items.on advance payments. Costs in excess of deferred revenueadvance 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.each 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 based upon its relative selling price is recognized ratably over the longer of the contractual period or the expected customer relationship period.have periodically transferred the rights to usetransfer optical capacity assets on our network to other telecommunications service carriers. These transactions are structured as indefeasible rights of use,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 during all periods presented in these financial statements. We offer someassets.that 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 or 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.$28$28 million of noncash dividends associated with asset transfers to QSC during the successor nine months ended December 31, 2011.governmentalgovernment authorities, including Universal 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 surcharges on a gross basis and include them in our revenue and costs of services and products.incurred. Our advertising expense was $90 million for the successor year ended December 31, 2012, $174 million for the successor nine months ended December 31, 2011, $65 million for the predecessor three months ended March 31, 2011incurred and $292 million for the predecessor year ended December 31, 2010. This expense is included in selling general and administrative expenses in our consolidated statements of operations. Our advertising expense was $88 million for the successor year ended December 31, 2013, $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.does havehas the right to change their policy regarding settlement of these assets and liabilities at any time.As of the successor date of December 31, 2012, we established a valuation allowance of $12 million as it is not more likely than not that this amount of deferred tax assets will be realized. See Note 12—Income Taxes for additional information.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 as cash equivalents, we required that individual securities have original maturities of ninety days or less and that individual investment funds have dollar-weighted average maturities of ninety days or less. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition and in high quality and relatively risk-free investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to credit worthiness of any particular financial institution.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 consolidated 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. We have asset retirement obligations associated with the legally or contractually required removal of a limited group of property, plant and equipment assets from leased properties and the disposal of certain hazardous materials present in our owned properties. When an asset retirement obligation is identified, usually in association with the acquisition of the asset, we record the fair value of the obligation as a liability. The fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated asset. Where the removal obligation is not legally binding, the net cost to remove assets is expensed in the period inwhich the costs are actually incurred. As a result of CenturyLink's acquisition of us, our asset retirement obligations were adjusted to fair value as of the acquisition date. The asset retirement obligation was $21 million and $22 million as of December 31, 2012 and 2011.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. trademarks and trade names 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 and amortize our trademark and trade name assets using the sum-of-the-years digits method over an estimated life of four years. In the predecessor period, we amortized capitalized software using the straight-line group method. In the predecessor period, trade names and trademarks were not amortized as they had an indefinite life.. Other intangible assets not arising from business combinations are initially recorded at cost. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of an intangible asset, we classify the intangible asset as indefinite lived and suchWe review long-lived intangible assets, areother 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.testassess 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.testassess goodwill 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 tovalue.value of goodwill. Our annual measurementassessment date for testingassessing goodwill impairment iswas 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 QCII'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, 2012.(2) Acquisition of QCII by CenturyLink(2) Acquisition of QCII by CenturyLink $9.369$9.354 billion, which we have 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.iswas our assignment of the aggregate consideration: April 1, 2011 (Dollars in millions) Cash, accounts receivable and other current assets* $ 1,108 Property, plant and equipment 7,460 Identifiable intangible assets: Customer relationships 5,699 Capitalized software 1,702 Other noncurrent assets 209 Current liabilities, excluding current maturities of long-term debt (2,446 ) Current maturities of long-term debt (2,378 ) Long-term debt (6,310 ) Deferred credits and other liabilities (4,447 ) Goodwill 9,354 Aggregate consideration $ 9,951 * April 1, 2011 (Dollars in millions) $ 1,091 7,460 5,699 1,702 209 (2,446 ) (2,378 ) (6,310 ) (4,445 ) 9,369 $ 9,951 *Includes estimated fair value of $674 million for accounts receivable, excluding affiliate accounts receivable, which had gross contractual value of $722 million on April 1, 2011. The $48 million difference between the gross contractual value and the estimated fair value assigned represents our best estimate as of April 1, 2011 of contractual cash flows that would not be collected. During the first quarter of 2012, we retrospectively adjusted our reported assignment of the aggregate 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-K for the year ended December 31, 2011. Due to these revisions of our estimates, (i) property, plant and equipment decreased by $36 million primarily from a revision to our valuation of our buildings and (ii) deferred credits and other liabilities increased by $89 million primarily from a revision to one of our lease valuations and changes in tax liabilities. Among other minor revisions, goodwill decreased by $84 million as an offset to the above-mentioned changes. The depreciation impact of the adjustments to property, plant and equipment valuations did not result in a material change to previously-reported amounts. Successor Predecessor Combined Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Twelve Months
Ended
December 31,
2011 $ 39 146 2 148 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 (3) Goodwill, Customer Relationships and Other Intangible Assets(3) Goodwill, Customer Relationships and Other Intangible Assets Successor Weighted
Average of
Remaining Lives December 31,
2012 December 31,
2011 N/A $ 9,369 9,369 8.3 years $ 4,379 5,101 3.1 years $ 1,212 1,460 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 2012,2013, the gross carrying amounts of goodwill, customer relationships and other intangible assets were $16.984$17.055 billion. These assets were recorded at fair value on April 1, 2011 as a result Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 $ 1,114 952 58 221 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) $ 988 917 $ 894 827 821 737 743 652 667 1,470 2018 581 2019 and thereafter 989 periodicallyannually review the estimated lives and methods used to amortize our other intangible assets. The actual amounts of amortization expense may differ materially from our estimates, depending on the results of our periodicannual reviews.$9.369$9.354 billion, which has been recognized as goodwill. The impairment testingassessment is done at the reporting unit level; in reviewing the criteria for reporting units whenallocating assigning the goodwill resulting from our acquisition by CenturyLink, we have determined that we are one reporting unit. We are required to testassess goodwill recorded in business combinations for impairment at least annually, or more frequently, if events or circumstances indicate there may be impairment. Our annual measurement date for testing goodwill impairment isassessment date was September 30. We are required to write-down the value of goodwill only in periods in which the recorded amount of goodwill exceeds the fair value.adopted the provisions of ASU 2011-08 in the third quarter of 2011, Testing Goodwill for Impairment, which permits us to make a qualitative assessment of whether it is more likely than not that a reporting unit'scompare Qwest’s estimated fair value to the carrying value of equity. If the estimated fair value of Qwest is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of Qwest is less than the carrying value, a second calculation is required in which the implied fair value of goodwill is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than its carrying amount before applying the two step goodwill impairment test, which requires us (i) in step one, to identify potential impairments by comparing the estimated fair value of a reporting unit againstgoodwill, goodwill must be written down to its carrying value and (ii) in step two, to quantify any impairment identified in step one. implied fair value.2012,2013, as a result of changes in our estimate of futureforecasted cash flows since our previous quantitative assessment, we did not have a baseline valuation upon which to perform a qualitative assessment. Therefore, we determinedestimated the estimated fair value of Qwest using an equal weighting based onby considering both a market approach method and a discounted cash flow method.method, which resulted in a Level 3 fair value measurement. 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 terminal value, which represents the expected normalized cash flows of Qwest beyond the cash flows from the discrete nine-year projection period. We discounted the estimated cash flows using a rate that represents a market participant's weighted average cost of capital, which we determined to be approximately 6.0% as of the measurementassessment date (which was comprised of an after-tax cost of debt of 3.2%3.4% and a cost of equity of 8.4%8.3%). Based on our analysisassessment performed with respect to our reporting unit described above, we concluded that our goodwill was not impaired.(4) Long-Term Debt and Revolving Promissory Note(4) Long-Term Debt and Revolving Promissory Note Successor Interest Rates Maturities December 31,
2012 December 31,
2011 (Dollars in millions) 3.558 - 8.375% 2013 - 2052 $ 7,386 7,829 Various Various 112 176 127 320 7,625 8,325 (804 ) (64 ) $ 6,821 8,261 (1)Our $750 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 20132053, 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 approximately $752 million. The Notes are floating rate notes, with rates that reset every three months. Asunsecured obligations and may be redeemed, in whole or in part, on or after June 1, 2018 at a redemption price equal to 100% of the most recent measurement date of December 17, 2012,principal amount redeemed plus accrued and unpaid interest to the rate for these notes was 3.558%.redemption date.New Issuances$400$400 million aggregate principal amount of 7.00% Notes due 2052 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $387 million.$387 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after July 1, 2017 at a redemption price equal to 100% of the principal amount redeemed plus accrued interest.$580$580 million under a revolving promissory note, payable upon demand. The promissory note is unsecured and ranked equally to our senior notes.$525$525 million aggregate principal amount of 7.00% Notes due 2052 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $508 million.$508 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after April 1, 2017 at a redemption price equal to 100% of the principal amount redeemed plus accrued interest.2011October 4, 2011,June 17, 2013, we issued $950paid at maturity the $750 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 interestfloating 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, 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. CenturyLink has a revolving credit facility (the "Credit Facility") maturing April 2017 that allows CenturyLink to borrow up to $2 billion for the general corporate purposes of itself and its subsidiaries. Up to $400 million 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-current senior unsecured long-term debt rating. 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, Notes. CenturyLink had approximately $820 million and $120 million outstanding under the Credit Facility and the separate letter of credit arrangement, respectively. CenturyLink also had approximately $277 million and $129 million outstanding under the Credit Facility and the separate letter of credit arrangement, respectively, for the successor date of December 31, 2011. We are not guarantors of the Credit Facility or any other debt obligations of our affiliates.Repayments2012$484$484 million of our 7.50% Notes due 2023, which resulted in an immaterial loss.$811$811 million of 8.375% Notes due 2016 and our $400$400 million of 7.625% Notes due 2015. With respect to our 8.375% Notes due 2016, we received and accepted tenders of approximately $575$575 million aggregate principal$722$722 million including a premium, fees and accrued interest. With respect to our 7.625% Notes due 2015, we received and accepted tenders of approximately $308$308 million aggregate principal amount of these notes, or 77%, for $369$369 million including a premium, fees and accrued interest. The completion of this tender offer resulted in a loss of $46 million.2011$46 million In October 2011, we used the net proceeds.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% Notes due 2012 and to pay all related fees and expenses, which resulted in a loss of $6 million. In June 2011, we used the net proceeds of $642 million from the June 8, 2011 debt issuance, 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, which resulted in an immaterial loss.other)other and excluding note payable-affiliate): (Dollars in millions) $ 804 (Dollars in millions) 634 $ 637 112 122 236 237 500 500 5,212 2018 — 2019 and thereafter 5,987 $ 7,498 $ 7,483 On April 18, 2012, we entered into$701$754 million was outstanding as of the successor date of December 31, 2012. The revolving promissory note is payable 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.2013. As of the successor date of December 31, 2012,2013, the weighted average interest rate was 6.706%6.765%. The accrued interest and outstanding principle balance are payable on demand, or no later than June 30, 2022. This revolving promissory note and accrued interest thereon is reflected on our consolidated balance sheets as a current liability under "Note payable—affiliate"“Note payable-affiliate”.—affiliates:-affiliates: Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 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) $ 461 305 153 627 $ 467 461 305 153 (18 ) (5 ) (3 ) (12 ) (17 ) (18 ) (5 ) (3 ) $ 443 300 150 615 $ 450 443 300 150 $ 24 (1 ) — — Interest expense (income)-affiliates $ 64 24 (1 ) — 2012,2013, we believe we were in compliance with the provisions and covenants of our debt agreements.(5) Accounts Receivable(5) Accounts Receivable Successor December 31,
2012 December 31,
2011(1) (Dollars in millions) $ 661 660 82 81 12 8 755 749 (46 ) (42 ) $ 709 707 (1)We have reclassified prior period amounts of purchased receivables from other to trade and purchased receivables to conform to the current period presentation. Successor December 31, 2013 December 31, 2012 (Dollars in millions) Trade and purchased receivables $ 697 661 Earned and unbilled receivables 73 82 Other 11 12 Total accounts receivable 781 755 Less: allowance for doubtful accounts (43 ) (46 ) Accounts receivable, less allowance $ 738 709 Allowance for Doubtful
Accounts (Dollars in millions) $ 53 70 (75 ) (Dollars in millions) 48 $ 48 17 Charged to expense-net 17 (18 ) (18 ) $ 47 $ 47 (47 ) (47 ) $ — $ — 44 Charged to expense-net 44 (2 ) (2 ) 42 $ 42 74 Charged to expense-net 74 (70 ) (70 ) $ 46 $ 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 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 Depreciable
Lives December 31,
2012 December 31,
2011 (Dollars in millions) N/A $ 356 368 15-45 years 3,475 3,247 5-10 years 2,611 2,155 5-30 years 2,428 2,449 N/A 372 201 9,242 8,420 (2,011 ) (914 ) $ 7,231 7,506 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 inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still under construction. Effective January 1, 2012, we changed our rates of capitalized labor as we transitioned certain legacy systems to the historical systems of our ultimate parent, CenturyLink. This transition resulted in an estimated $40 million to $55 million increase in the amount of labor capitalized as an asset compared to the amount that would have been capitalized if we had continued to use our legacy systems and a corresponding estimated $40 million to $55 million decrease in operating expenses for the successor year ended December 31, 2012. The reduction in expenses described above, net of tax, increased net income approximately $25 million to $34 million for the successor year ended December 31, 2012. Effective January 1, 2012, we changed our estimates of the remaining useful lives of certain telecommunications equipment. These changes resulted in a decrease to depreciation expense of approximately $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. During the first quarter of 2012, we retrospectively adjusted our previously reported assignment of the aggregate Qwest consideration for changes to our original estimates of the fair value of buildings at the acquisition date. This retrospective adjustment decreased the previously reported December 31, 2011 support assets by $36 million. Also, we reclassified certain prior period amounts of inventory held for construction to conform to the current period presentation. This reclassification increased construction in progress at December 31, 2011 by $38 million with an offsetting decrease to fiber, conduit and other outside plant and central office and other network electronics by $8 million and $30 million, respectively.$1.176$1.099 billion, $914$1.175 billion, $914 million $393, and $393 million and $1.652 billion for the successor yearyears ended December 31, 2013 and 2012, the successor nine months ended December 31, 2011,predecessor10 year ended December 31, 2010, respectively.(7) Severance(7) Severance implemented reductions in our workforce and have accrued liabilities for related severance costs. These workforce reductions resulted primarily from the progression or completion of our integration plans related to CenturyLink's indirect acquisition of us, increased competitive pressures and reduced workload demands due to the loss of access lines."accruedaccrued expenses and other liabilities—salariesliabilities-salaries and benefits"benefits in our consolidated balance sheets and report severance expenses in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations. Severance Severance (Dollars in millions) (Dollars in millions) $ 28 $ 28 3 3 (11 ) (11 ) (1 ) (1 ) $ 19 $ 19 (2 ) (2 ) $ 17 $ 17 118 118 (97 ) (97 ) (9 ) (9 ) 29 $ 29 64 64 (85 ) (85 ) (1 ) (1 ) $ 7 $ 7 Accrued to expense 10 Payments, net (12 ) Reversals and adjustments — Balance at December 31, 2013 (Successor) $ 5 (8) Employee Benefits(8) Employee Benefits 2012.2013. Based on current laws and circumstances, (i) QCII will not be required to make a cash contribution to this plan in 20132014 and (ii) QCII does not expect it will be required to make a contribution in 2014.2015. The amount of required contributions to the plan in 20142015 and beyond will depend on earnings on plan investments, prevailing interest and discount rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. No contributions were made to the post-retirement occupational health care trust in 2013 or 2012 or 2011 and QCIICenturyLink does not expect to make a contribution in 2013.2014.$948$627$948 million as of the successor dates of December 31, 20122013 and December 31, 2011,2012, respectively. The unfunded status of itsCenturyLink's post-retirement benefit plans for accounting purposes was $2.866$3.153 billion and $2.706$3.448 billion as of the successor dates of December 31, 2013 and 2012, respectively. CenturyLink and December 31, 2011, respectively. QCII allocates its pension, non-qualified pensionallocate income and post-retirement benefit obligationsexpenses to us usingbased upon the amountdemographics of its funded or unfunded statusour employee 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 onretirees compared to all the assets or obligations that areremaining participants.to us. We recognized an allocated $117$178 million and yearyears ended December 31, 2013 and 2012 and $51$51 million for the successor nine months ended December 31, 2011, as well as $11$11 million and $53 million in pension expense for the predecessor three months ended March 31, 2011 and the predecessor year ended December 31, 2010, respectively.2011. Our allocated post-retirement benefit expense for the successor yearyears 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 year ended December 31, 2010 was $106$88 million, $84$106 million $16, $84 million and $72, $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 91%, 96%91%, 102%96%, and 101%102% for the successor yearyears 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 year ended December 31, 2010, respectively. QCII allocates theincome and 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 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 October 2012, our current2013, we renewed a four-year collective bargaining agreements expiredagreement which coveredcovers approximately 100%12,000 of our unionized employees. Effective January 1, 2014, the approximately 12,000 active employees as of the successor date of December 31, 2012. In 2008, the plan was amended to 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 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.$221$223 million, $167$221 million $57, $167 million, and $224$57 million for the successor yearyears 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 year ended December 31, 2010, 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. Our group life insurance plan is fully insured and the premiums are paid by us. No contributions were made to the post-retirement occupational health care trust in 2012, 2011 or 2010 and we do not expect to make a contribution in 2013.QCII, on our behalf, matcheswe match a percentage of our employees' contributions in cash. We recognized $46$49 million, $36$46 million $12, $36 million, and $51$12 million in expense related to this plan for the successor yearyears 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 year ended December 31, 2010, respectively.(9) Stock-Based Compensation During the predecessor year ended December 31, 2010, our employees participated 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 yearyears ended December 31, 2013 and 2012, we were allocated a stock based compensation expense of $18.3approximately $17 million from CenturyLink.and $18 million, respectively. For the successor nine months ended December 31, 2011 and the predecessor three months ended March 31, 2011, and the predecessor year ended December 31, 2010, our total stock-based compensation expense allocated was approximately $19 million $3 million and $121$3 million, respectively. We recognized an income tax benefit of $7 million, $7 million, $1 million and $30 million associated withfrom our stock compensation expense of approximately $7 million and $7 million, respectively, during the successor yearyears ended December 31, 2012,2013 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 year ended December 31, 2010, respectively. On December 21, 2010, QCII accelerated the vesting of certain restricted stock and performance share awards issued under our previous Equity Incentive Plan in order to preserve certain economic benefits to employees that otherwise would have been lost in connection with CenturyLink's acquisition of 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.cash settle the stock-based compensation expense allocated to us from CenturyLink.(10) Products and Services Revenues(10) Products and Services Revenues and long-distance, network access,broadband, private line (including special access)access, which we market to our business and wholesale customers), broadband,network access, Ethernet, data,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 resold satellite video services) and Verizon Wireless services; long-distance, integrated services digital network (which uses regular telephone lines to support voice, video and data applications), switched access and traditional wide area network services (which allows a local communications network to link to networks in remote locations); and•and network support and technical services. During the first quarter of 2012, we reclassified certain prior period revenues between the aforementioned three categories to conform to the current period presentation. Since the April 1, 2011 closing of CenturyLink's indirect acquisition of us, ourhave beenare integrated into and 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. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we believe we now have one reportable segment and have reclassified our prior period results to conform to our current view. Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended March 31,
2011 Year
Ended
December 31,
2010 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) $ 3,265 2,406 792 3,059 $ 3,342 3,265 2,406 792 3,471 2,796 1,003 4,323 3,208 3,471 2,796 1,003 2,112 1,433 473 1,889 2,203 2,112 1,433 473 $ 8,848 6,635 2,268 9,271 $ 8,753 8,848 6,635 2,268 Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended March 31,
2011 Year
Ended
December 31,
2010 (Dollars in millions) $ 171 122 43 186 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 providedprovide to our affiliates:•affiliatesaffiliates' service offerings;••(12) Income Taxes(12) Income Taxes 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 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 as included in the consolidated federal return of the ultimate parent company, CenturyLink.settlements.settlements and in 2013, QCII filed an amended return for 2009. Such amended filing isfilings are subject to adjustment by the IRS. QCII19961999 are still open for state specific adjustments. As of the successor dates of December 31, 2012 and December 31, 2011, we had no amounts accrued for unrecognized tax benefits for each aforementioned year.datesdate of December 31, 2013, we had no liability for interest related to uncertain tax positions. As of the successor date of December 31, 2012, and December 31, 2011, we had a recorded liabilitiesliability for interest related to uncertain tax positions in the amounts of $5 millionmillion. We did not record a liability for each aforementioned year.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. Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 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) $ 638 173 104 470 Federal and foreign $ 653 638 173 104 105 26 11 80 101 105 26 11 743 199 115 550 754 743 199 115 (175 ) 128 61 208 Federal and foreign (125 ) (175 ) 128 61 (26 ) 22 15 33 (27 ) (26 ) 22 15 (201 ) 150 76 241 (152 ) (201 ) 150 76 $ 542 349 191 791 $ 602 542 349 191 Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 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 % 3.7 3.5 3.4 3.9 — — — 2.7 — — — 1.0 State income taxes-net of federal effect 3.1 3.7 3.5 3.4 0.3 0.6 0.6 (0.4 ) 0.3 0.3 0.6 0.6 39.0% 39.1% 39.0% 42.2% 38.4 % 39.0 % 39.1 % 39.0 % Successor Successor December 31,
2012 December 31,
2011 December 31, 2013 December 31, 2012 (Dollars in millions) (Dollars in millions) $ (1,046 ) (1,279 ) $ (1,281 ) (1,179 ) (2,226 ) (2,274 ) (1,772 ) (2,118 ) (398 ) (359 ) (462 ) (397 ) (39 ) (148 ) (52 ) (61 ) (3,709 ) (4,060 ) (3,567 ) (3,755 )
participation 932 920 983 982 70 164 55 67 239 304 229 253 1,241 1,388 1,267 1,302 (12 ) (8 ) (12 ) (12 ) 1,229 1,380 1,255 1,290 $ (2,480 ) (2,680 ) $ (2,312 ) (2,465 ) 2012,2013, we have established a valuation allowance of $12$12 million as it is not more likely than not that this amount of deferred tax assets will be realized.$607$750 million, $211$607 million, and $677$211 million to QSC related to income taxes in the successor years ended December 31, 2013, 2012 and 2011, and the predecessor year ended 2010, 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 advances to affiliates on our consolidated balance sheets. Income tax expense for the combined year ended December 31, 2011, as compared to the predecessor year ended December 31, 2010, decreased by $251 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. Income tax expense also decreased due to the 2010 tax treatments of the expenses allocated to us when QCII accelerated the vesting of certain stock-based compensation and certain expenses associated with CenturyLink's acquisition of us. 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. We had unamortized investment tax credits of $1 million, $2 million and $61 million as of the successor dates of December 31, 2012 and December 31, 2011 and the predecessor date of December 31, 2010, 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 2012 and 2011. Amortization of investmenttax credits of $8 million is included in the provision for income taxes for the predecessor year ended December 31, 2010.(13) Fair Value Disclosure(13) Fair Value Disclosure accounts payable—affiliates, note payable—affiliatepayable-affiliate and long-term debt excluding capital lease obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable accounts payable—affiliates and note payable—affiliatepayable-affiliate approximate their fair values.used.used following the fair value hierarchy set forth by the 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.Financial Accounting Standards BoardFASB generally as follows: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. Successor December 31, 2012 December 31, 2011 Input
Level Carrying
Amount Fair
Value Carrying
Amount Fair
Value (Dollars in millions) 2 $ 7,513 8,019 8,149 8,352 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 ofto 9.5% depending upon the asset or liability valued and relative risk associated with the cash flows.(14) Stockholder's Equity(14) Stockholder's Equity During 2010, we recorded a $56 million equity transaction for excess tax deductions, the difference between the acceleration of stock-based compensation expense for both performance and restricted shares and the tax 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 Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31
2010 (Dollars in millions) $ — 28 — — 840 600 1,000 2,300 1,150 900 530 2,260 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)(15) Quarterly Financial Data (Unaudited) Quarterly Financial Data Successor First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Twelve
Months
Total (Dollars in millions) $ 2,260 2,195 2,183 2,210 8,848 466 455 459 525 1,905 136 113 133 160 542 218 178 212 241 849 Quarterly Financial Data Successor Twelve
Months
Total (Dollars in millions) 2013 Operating revenues $ 2,159 2,199 2,188 2,207 8,753 Operating income 553 525 493 507 2,078 Income tax expense 166 155 139 142 602 Net income 264 246 218 236 964 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 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 Second Quarter 2011 We 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 to us by QCII and system integration consulting of $1 million.(16) Commitments and Contingencies(16) Commitments and Contingencies 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.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. Successor Predecessor Successor Predecessor Year
Ended
December 31,
2012 Nine Months
Ended
December 31,
2011 Three Months
Ended
March 31,
2011 Year
Ended
December 31,
2010 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 $ — — 2 16 50 41 11 28 42 50 41 11 41 35 11 25 40 41 35 11 Successor Successor December 31, 2013 December 31, 2012 December 31,
2012 December 31,
2011 (Dollars in millions) $ 188 192 $ 168 188
85
41 109 85 20122013 were as follows: Future
Minimum
Payments (Dollars in
millions) $ 46 35 $ 33 21 23 2 2 1 1 6 2018 1 2019 and thereafter 5 111 65 (14 ) (10 ) 97 55 (40 ) (31 ) $ 57 $ 24 yearyears 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, respectively. Also, gross rental expense was $58 million and $200 million for the predecessor three months ended March 31, 2011 and the predecessor year ended December 31, 2010, respectively.2011. We also received sublease rental income for the same periods of $4 million, $8 million, $10 million, and $4 million, and $15 million, respectively.2012,2013, our future minimum payments under operating leases were 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) $ 55 36 30 25 20 39 $ 205 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 $32 million due in the future under non-cancelable subleases.$179$284 million as of December 31, 2012.2013. Of this amount, we expect to purchase $47 million in 2013, $63$100 million in 2014, through 2015, $56$134 million in 2015 through 2016, through 2017 and $13$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 onin our consolidated balance sheets consisted of the following: Other Current Assets Other Current Assets December 31,
2012 December 31,
2011 December 31, 2013 December 31, 2012 (Dollars in millions) (Dollars in millions) $ 64 57 $ 47 64 50 41 79 50 $ 114 98 $ 126 114 (18) Labor Union ContractsCurrent liabilities reflected in our consolidated balance sheets include accounts payable as follows: December 31, 2013 December 31, 2012 (Dollars in millions) Accounts payable $ 440 456 (18) Labor Union Contracts 56%12,000 or 12,00053% of our employees are members of various bargaining units represented by the Communications Workers of America and("CWA") or the International Brotherhood of Electrical Workers. These employeesWorkers ("IBEW") and are subject to collective bargaining agreements that expired October 6, 2012. Our parent company, CenturyLink, is currentlySince the expirations, we have been negotiating the terms of new agreements. In the meantime, the predecessorRecently, we reached conditional agreements have been extended,with CWA District 7 and the unions have agreed to provide at leastIBEW Local 206 for a twenty-four hour advance notice before terminating those predecessor agreements. Any strikes or other changes in our labor relations could have a significant impact on our business. If we fail to extend or renegotiate ourfour-year collective bargaining agreement covering approximately 12,000 of our employees. After rejecting the initial agreements, with our labor unions asthe CWA and IBEW members approved the second agreements and they became effective on October 25, 2013. The new agreements will 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. To help mitigate this potential risk, we have established contingency plans in which we would assign trained, non-represented employees to cover jobs for represented employees in the event of a work stoppage to provide continuity for our customers.on October 7, 2017.20122013 based on the framework inInternal 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, 2012.2013.20122013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. None.20122013 and 20112012 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,
2012 Year Ended
December 31,
2011 Year
Ended
December 31,
2013 Year
Ended
December 31,
2012 (Dollars in thousands) (Dollars in thousands) $ 2,970 3,281 $ 2,700 2,970 88 137 32 88 $ 3,058 3,418 $ 2,732 3,058 20122013 or 2011.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 reviewfees—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.Description Description 3.1 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 No. 001-03040) filed with the Securities and Exchange Commission on March 25, 1998).
3.23.2
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 period ended June 30, 2000 (File No. 001-03040) filed with the Securities and Exchange Commission on August 11, 2000).
3.33.3
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 No. 001-03040) filed with the Securities and Exchange Commission on January 13, 2004).
4.14.1
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 No. 001-03040) filed with the Securities and Exchange Commission on January 13, 2004).
a.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 No. 001-03040) filed with the Securities and Exchange Commission on January 13, 2004).
4.24.2
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 4.5(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2012 (File No. 001-07784) filed with the Securities and Exchange Commission on May 10, 2012).
a.Indenture,a.Indenture, dated as of October 15, 1999, by and between U S West Communications, Inc. (currently named Qwest Corporation) and Bank One Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4(b) of Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-03040) filed with the Securities and Exchange Commission on March 3, 2000).
a.a.
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 period ended September 30, 2004 (File No. 001-15577) filed with the Securities and Exchange Commission on November 5, 2004).
b.b.
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).
c.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).1Certain 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.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 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).
e.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).
f.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.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.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.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 (File No. 001-03040) filed with the Securities and Exchange Commission on March 30, 2012).
j.j.
Eleventh Supplemental Indenture, dated 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 with the Securities and Exchange Commission on June 22, 2012).
4.44.4
Revolving Promissory Note, dated as of April 18, 2012, pursuant to which Qwest Corporation may borrow from an affiliate of CenturyLink, Inc. up to $1.0 billion on a revolving basis (incorporated by reference to Exhibit 4.7(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2012 (File No 001-07784) filed with the Securities and Exchange Commission on August 9, 2012).
12*12*
Calculation of Ratio of Earnings to Fixed Charges.
18*Preferability Letter of Independent Registered Public Accounting Firm. 23* Independent Registered Public Accounting Firm Consent.
31.1*31.1*
Certification of the Chief Executive Officer of CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*31.2*
Certification of the Chief Financial Officer of CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*32*
Certification of the Chief Executive Officer and Chief Financial Officer of CenturyLink, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*101*
Financial statements from the Annual Report on Form 10-K of Qwest Corporation for the period ended December 31, 2012,2013, formatted in XBRL: (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive 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. *Exhibit filed herewith.12, 2013. QWEST CORPORATION By:/s/ DAVID D. COLE By: /s/ David D. Cole David D. Cole
SeniorPresident—ControllerPresident-Controller and Operations SupportSignature Title /s/ GLEN F. POST, III
Glen F. Post, III (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