Table of Contents

UNITED STATES


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



x

ý


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

For the fiscal year ended December 31, 2010

or

¨
For the fiscal year ended December 31, 2011

or

o


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

For the transition period from                                to                               

For the transition period from              to             

Commission File No. 001-03040

QWEST CORPORATION

(Exact name of registrant as specified in its charter)

Colorado84-0273800


(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer

Identification No.)

1801 California Street, Denver, Colorado 8020284-0273800
(I.R.S. Employer Identification No.)

100 CenturyLink Drive, Monroe, Louisiana
(Address of principal executive offices)

 

71203
(Zip Code)

(318) 388-9000
(Registrant's telephone number, including area code)

(303) 992-1400

(Registrant’s telephone number, including area code)

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

Title of Each Class

Name of Each Exchange on Which Registered

6.5% Notes Due 2017 New York Stock Exchange
7.375% Notes Due 2051New York Stock Exchange
7.5% Notes Due 2051New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None



THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF QWEST COMMUNICATIONS INTERNATIONALCENTURYLINK, INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION I(2).

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨o    No xý

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xý    No ¨o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller reporting company”company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨o Accelerated filer ¨o 

Non-accelerated filer xý

(Do not check if a
smaller reporting company)

 Smaller reporting company ¨o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨o    No xý

On February 15, 2011,March 2, 2012, one share of Qwest Corporation common stock was outstanding. None of Qwest Corporation’sCorporation's common stock is held by non-affiliates.

DOCUMENTS INCORPORATED BY REFERENCE: None.

   


Table of Contents


TABLE OF CONTENTS

 

Glossary of Terms PART I

  
ii


Item 1.



Business




1


Item 1A.


 

PART I
Risk Factors


 


13


Item 1B.



Unresolved Staff Comments




25


Item 2.



Properties




26


Item 3.



Legal Proceedings




26


Item 4.



Mine Safety Disclosures




26

Item 1.


 

Business

1

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

17

Item 2.

Properties

18

Item 3.

Legal Proceedings

18

Item 4.

Reserved

20
PART II


 


Item 5.


 


Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


 
21

27


Item 6.


 


Selected Financial Data


 
21

27


Item 7.


 

Management’s
Management's Discussion and Analysis of Financial Condition and Results of Operations


 
22

29


Item 7A.


 


Quantitative and Qualitative Disclosures About Market Risk


 


47


Item 8.


 


Consolidated Financial Statements and Supplementary Data


 


48



 


Consolidated Statements of Operations


 


49



 


Consolidated Statements of Comprehensive Income




50




Consolidated Balance Sheets


 
50

51



 


Consolidated Statements of Cash Flows


 
51

52



 


Consolidated Statements of Stockholder’sStockholder's Equity (Deficit) Equity and Comprehensive Income


 
52

53



 


Notes to Consolidated Financial Statements


 
53

54


Item 9.


 


Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


 


88


Item 9A.


 


Controls and Procedures


 


88


Item 9B.


 


Other Information


 


88




PART III


 


Item 10.


 


Directors, Executive Officers and Corporate Governance


 


89


Item 11.


 


Executive Compensation


 


89


Item 12.


 


Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


 


89


Item 13.


 


Certain Relationships and Related Transactions and Director Independence


 


89


Item 14.


 


Principal Accountant Fees and Services


 


89




PART IV


 


Item 15.


 


Exhibits and Financial Statement Schedules


 


91


Signatures


 
93

94

i


Table of Contents

        

i


GLOSSARY OF TERMS

Our industry uses many terms and acronyms that may not be familiar to you. To assist you in reading this document and other documents we file with the Securities and Exchange Commission, we have provided below definitions of some of these terms.

Access Lines. Telephone lines reaching from the customer’s premises to a connection with the public switched telephone network. Our access lines reported in this document include only those lines used to provide services to external customers and exclude lines used solely by us and our affiliates. We also exclude residential lines that are used solely to provide broadband services.

Asynchronous Transfer Mode (ATM).A broadband, network transport service utilizing data switches that provides a fast, efficient way to move large quantities of information.

Broadband Services (also known as high-speed Internet services).Services used to connect to the Internet through existing telephone lines and fiber-optic cables at higher speeds than dial-up access.

Competitive Local Exchange Carriers (CLECs).Telecommunications providers that compete with us in providing local voice and other services in our local service area, predominantly using our network.

Customer Premises Equipment (CPE). Telecommunications equipment sold to a customer, usually in connection with our providing telecommunications services to that customer.

Data Integration.Telecommunications equipment that is located on customers’ premises and related professional services. These services include network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for government and business customers.

Dedicated Internet Access (DIA).Internet access ranging from 128 kilobits per second to 10 gigabits per second.

Facilities expenses. Third-party telecommunications expenses we incur for using other carriers’ networks to provide services to our customers.

Fiber to the Cell Site (FTTCS). A type of telecommunications network consisting of fiber-optic cables that run from a telecommunication provider’s broadband interconnection points to cellular sites. Fiber to the cell site services, commonly referred to as wireless backhaul, allow for the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional telecommunications network.

Fiber to the Node (FTTN). A type of telecommunications network that combines fiber-optic cables (which run from a telecommunication provider’s central office to a single location within a particular neighborhood or geographic area) and traditional copper wires (which run from this location to individual residences and businesses within the neighborhood or geographic area). Fiber to the node 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.

Frame Relay.A high-speed data switching technology used primarily to interconnect multiple local networks.

Hosting Services.The providing of space, power, bandwidth and managed services in data centers.

Incumbent Local Exchange Carrier (ILEC).A traditional telecommunications provider that, prior to the Telecommunications Act of 1996, had the exclusive right and responsibility for providing local telecommunications services in its local service area. Qwest Corporation is an ILEC.

Integrated Services Digital Network (ISDN).A telecommunications standard that uses digital transmission technology to support voice, video and data communications applications over regular telephone lines.

ii


Internet Protocol (IP).Those protocols that facilitate transferring information in packets of data and that enable each packet in a transmission to “tell” the data switches it encounters where it is headed and enables the computers on each end to confirm that message has been accurately transmitted and received.

Managed Services.Customized, turnkey solutions for integrated data, Internet and voice services offered to business markets customers. These services include a diverse combination of emerging technology products and services, such as VoIP, Ethernet, MPLS, hosting services and advanced voice services, such as web conferencing and call center solutions. Most of these services can be performed from outside our customers’ internal networks, with an emphasis on integrating and certifying Internet security for applications and content.

Multi-Protocol Label Switching (MPLS).A standards-approved data networking technology that is a substitute for existing frame relay and ATM networks and that can deliver the quality of service required to support real-time voice and video, as well as service level agreements that guarantee bandwidth.

Private Line.Direct circuit or channel specifically dedicated to a customer 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.

Public Switched Telephone Network (PSTN).The worldwide voice telephone network that is accessible to every person with a telephone equipped with a dial tone.

Unbundled Network Elements (UNEs).Discrete elements of our network that are sold or leased to competitive telecommunications providers and that may be combined to provide their retail telecommunications services.

Universal Service Funds (USF).Federal and state funds established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things. As a telecommunications provider, we are often required to contribute to these funds.

Virtual Private Network (VPN).A private network that operates securely within a public network (such as the Internet) by means of encrypting transmissions.

Voice over Internet Protocol (VoIP).An application that provides real-time, two-way voice communication similar to our traditional voice services that originates in the Internet protocol over a broadband connection and often terminates on the PSTN.

Wide Area Network (WAN).A communications network that covers a wide geographic area, such as a state or country. A WAN typically extends a local area network outside the building, over telephone common carrier lines to link to other local area networks in remote locations, such as branch offices or at-home workers and telecommuters.

iii


Unless the context requires otherwise, references in this report to “QC”"QC" refer to Qwest Corporation, references to “Qwest,” “we,” “us,” the “Company”"Qwest," "we," "us," and “our”"our" refer to Qwest Corporation and its consolidated subsidiaries, references to “QSC”"QSC" refer to our direct parent company, Qwest Services Corporation and its consolidated subsidiaries, and references in this report to “QCII”"QCII" refer to QSC's direct parent company and our ultimateindirect parent company, Qwest Communications International Inc., and its consolidated subsidiaries and references to "CenturyLink" refer to QCII's direct parent company and our ultimate parent company, CenturyLink, Inc. and its consolidated subsidiaries.


PART I

ITEM 1.    BUSINESS

Overview

We offerare an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local, network access, private line (including special access), broadband, data, Internet,wireless and video services. In certain local and voiceregional markets, we also provide local access and fiber transport services withinto 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.

        We generate the majority of our revenues from services provided in the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.

We are wholly owned by QSC, which is wholly owned by QCII. Our operations are included in the consolidated operations of QCII and generally account for the majority of QCII’s consolidated revenue. In addition to our operations, QCII maintains a national telecommunications network. Through its fiber-optic network, QCII provides the following products and services that we do not provide:

Data integration;

Dedicated Internet access;

Hosting services;

Long-distance services that allow calls that cross telecommunications geographical areas;

Managed services;

Multi-protocol label switching; and

Voice over Internet Protocol, or VoIP.

For certain products and services we provide, and for a variety of internal communications functions, we use parts of QCII’s telecommunications network to transport data and voice traffic. Through its network, QCII also provides nationally and globally some data and Internet access services that are similar to services we provide within our local service area. These services include private line and our traditional wide area network, or WAN, services, which consist of asynchronous transfer mode, or ATM, and frame relay.

We were incorporated under the laws of the State of Colorado in 1911. Our principal executive offices are located at 1801 California Street, Denver, Colorado 80202,100 CenturyLink Drive, Monroe, Louisiana 71203 and our telephone number is (303) 992-1400.(318) 388-9000.

On April 21, 2010,1, 2011, our indirect parent QCII entered intobecame a merger agreement wherebywholly owned subsidiary of CenturyLink, Inc., or CenturyLink, will acquire QCII in a tax-free, stock-for-stock transaction. UnderAlthough we continued as a surviving corporation and legal entity after the terms ofacquisition, the agreement, QCII’s stockholders will receive 0.1664 shares of CenturyLink common stockaccompanying financial information is presented for each share of QCII’s common stock they own at closing. Based on QCII’stwo periods: predecessor and CenturyLink’s number of outstanding shares as ofsuccessor, which relate to the date ofperiod preceding the merger agreement, at closing CenturyLink shareholders are expected to own approximately 50.5% and QCII’s stockholders are expected to own approximately 49.5% of the combined company. On July 15, 2010, QCII and CenturyLink received notification from the Department of Justiceacquisition and the Federal Trade Commissionperiod succeeding the acquisition, respectively. The recognition of assets and liabilities at fair value has been reflected in our 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 they received early terminationour financial statements for the successor periods are not comparable to our previously reported financial statements, including the predecessor period financial statements in this report.

        For certain products and services we provide and for a variety of the waiting period under the Hart-Scott-Rodino Act,internal communications functions, we use portions of CenturyLink's telecommunications network to transport data and as such have clearance from a federal antitrust perspective to proceed with the merger. On August 24, 2010, stockholders of each company approved all proposals relating to the merger. Completion of this transaction remains subject to a number of regulatory approvals as well as other customary closing conditions. QCII and CenturyLink have received most of the necessary approvals from state public service or public utility commissions, but they still need approvals from the Federal Communications Commission, or FCC, and several other state public service or

voice traffic.

public utility commissions. While the timing of the receipt of these approvals cannot be predicted with certainty, QCII currently expects to receive all required approvals in the first quarter and is planning toward an April 1st closing date. If the merger agreement is terminated under certain circumstances, QCII may be obligated to pay CenturyLink a termination fee of $350 million.

For a discussion of certain risks applicable to our business, financial condition and results of operations, see “Risk Factors”"Risk Factors" in Item 1A of this report. The summary financial information in this section should be read in conjunction with, and is qualified by reference to, our consolidated financial statements and notes thereto in Item 8 and “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" in Item 7 of this report.


Table of Contents

Financial and Operational Highlights

The following table below provides a summary of somesummarizes the results of our financial highlights.consolidated operations.

 
 Successor  
 Predecessor 
 
 Nine Months
Ended
December 31,
2011
  
 Three Months
Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 
 
 (Dollars in millions)
 

Operating revenues

 $6,635    2,268  9,271  9,731 

Operating expenses

  5,436    1,630  6,788  7,169 

Operating income

  1,199    638  2,483  2,562 

Net income

  543    299  1,082  1,197 

 

   Years Ended December 31, 
   2010   2009   2008 
   (Dollars in millions) 

Operating results:

      

Operating revenue

  $9,271    $9,731    $10,388  

Operating expenses

   6,788     7,169     7,525  

Income before income taxes

   1,873     1,921     2,267  

Net income

   1,082     1,197     1,438  

Cash flow data:

      

Cash provided by operating activities

  $3,235    $3,167    $3,479  

Expenditures for property, plant and equipment and capitalized software

   1,240     1,106     1,404  

Dividends paid to QSC

   2,260     2,000     2,000  

 
 Successor  
 Predecessor 
 
 December 31, 2011  
 December 31, 2010 
 
 (Dollars in millions)
 

Balance sheet data:

         

Total assets

 $24,932    12,570 

Total long-term debt(1)

  8,325    8,012 

Total stockholder's equity (deficit)

  9,887    (831)

(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.

        

   December 31, 
   2010  2009 
   (Dollars in millions) 

Balance sheet data:

   

Cash and cash equivalents

  $192   $1,014  

Total borrowings—net(1)

   8,012    8,386  

Working capital deficit(2)

   (1,716  (474

Total stockholder’s (deficit) equity

   (831  312  

(1)Total borrowings—net is the sum of current portion of long-term borrowings and long-term borrowings—net 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.
(2)Working capital deficit is the amount by which our current liabilities exceed our current assets.

The following table below presents some of our operational metrics.metrics:

   December 31, 
   2010   2009   2008 
   (in thousands) 

Operational metrics:(1)

      

Total broadband subscribers

   2,906     2,803     2,574  

Total video subscribers

   1,003     932     772  

Total access lines

   8,855     9,925     11,127  

(1)We have updated our methodology for counting our subscribers and access lines. For additional information see “Business Overview and Presentation” in Item 7 in this report.

 
 Successor  
 Predecessor 
 
 December 31, 2011  
 December 31, 2010 
 
 (in thousands)
 

Operational metrics:(1)

         

Total broadband subscribers

  3,084    2,940 

Total access lines(2)

  8,533    9,193 

(1)
We have updated our methodology for counting our broadband subscribers and access lines and have reclassified prior year amounts to conform to the current period presentation. For additional information see "Results of Operations—Overview" in Item 7 in this report.

(2)
Access lines are telephone lines reaching from the customers' premises to a connection with the public switched telephone network, or PSTN.

Operations

Our operations are integrated into and are part of the segments of QCII. Our business contributes to all three of QCII’s segments: business markets, mass markets and wholesale markets.        We group our products and services among three major categories, including:

categories: strategic services, which include primarily private line, broadband, DIRECTV videolegacy services and Verizon Wireless services;

legacy services, which include primarily local, access, integrated services digital network, or ISDN, and traditional WAN services; and

affiliates and other services, consisting primarilyservices. See descriptions of services we provide tothese categories below in the section


Table of Contents

"Products and Services". The following table provides a summary of our affiliates and universal service fund, or USF, surcharges.operating revenues by category:

 
 Successor  
 Predecessor 
 
 Nine Months
Ended
December 31,
2011
  
 Three Months
Ended
March 31,
2011
 Year Ended
December 31,
2010
 
Year Ended
December 31,
2009
 
 
 (Dollars in millions)
 

Strategic services

 $2,406    793  3,059  2,900 

Legacy services

  2,796    1,003  4,323  4,922 

Affiliates and other services

  1,433    472  1,889  1,909 
            

Total operating revenues

 $6,635    2,268  9,271  9,731 
            

Additional information about our contribution to QCII’s segments is provided in Note 15—Contribution to QCII Segments to our consolidated financial statements in Item 8 of this report. For more information about QCII’s reporting segments, see QCII’s Annual Report on Form 10-K for the year ended December 31, 2010.

Substantially all of our revenue comesrevenues are from customers located in the United States and substantially all of our long-lived assets are located in the United States.

        Since the April 1, 2011 closing of CenturyLink's indirect acquisition of us, our operations are integrated into and are reported as part of the segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") has become our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission ("SEC"). Consequently, we do not provide our discrete financial information to the CODM on a regular basis.

Products Services and CustomersServices

Our products and services include a variety of voice, broadband, data, Internetinformation technology ("IT"), video and voiceother communications services. Through our strategic partnershipspartnership with DIRECTV, and Verizon Wireless, we also offer satellite digital television and wireless services to customers in our local service area. As noted above, our business contributesWe also offer wireless services to all three of QCII’s segments: business markets, mass markets and wholesale markets. We group our products and services among three major categories:customers through CenturyLink's strategic services, legacy services and affiliates and other services. Revenue from our strategic services represented 33% of our total revenue for the year ended December 31, 2010, and these services are a growing source of revenue.partnership with Verizon Wireless.

We offer our customers primarily consumers and small businesses, the ability to bundle together several products and services. In addition, through joint marketing relationships with our affiliates, we are also able to bundle our services with additional services offered by our affiliates. For example, we offer our mass markets customers integrated and unlimited local and long-distance services. These customers can also bundle two or more services, such as broadband, DIRECTV video services,(including DIRECTV), voice and Verizon Wireless services. We believe theseour customers value the convenience of and price discounts associated with receiving multiple services through a single company.

Most of our products and services are provided using our telecommunications network, which consists of voice and data switches, copper cables, fiber-optic broadband cables and other equipment. Our network serves approximately 8.98.5 million access lines in 14 states and forms a portion of the public switched telephone network, or PSTN.

We offer our products and services through three main customer channels, which are made up of our business markets, mass markets and wholesale markets customers. Our business markets customers include enterprise and government customers. Enterprise customers consist of local, national and global businesses. We sell our products and services to business markets customers through direct sales, partnership relationships and arrangements with third-party sales agents. Our mass markets customers include consumers and small businesses. We sell our products and services to mass markets customers using a variety of channels, including our sales and call centers, our website, telemarketing and retail stores and kiosks. Our wholesale markets customers are other carriers and resellers that purchase our products and services in large quantities to sell to their customers or that purchase our access services that allow them to connect their customers and their networks to our network. We sell our products and services to wholesale customers through direct sales, partnership relationships and arrangements with third-party sales agents.

Described below are our key products and services.

Strategic Services

Our business markets customers use our strategic services to access the Internet, and Internet-based services, as well as to connect to private networks and to conduct internaltransmit data. We also provide value-added services and external data transmissions such as transferring files from one location to another. Our mass markets customers generally useintegrated solutions that make communications more secure, reliable and efficient for our strategic services to access the Internet, Internet-based services, digital television and wireless services. Our wholesale customers use our facilities for colocation and use our private line services to connect their customers and their networks to our network.customers. We focus our marketing and sales efforts on these growth services.services:

Private line.Private line 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. Our business markets customers use theseWe also provide private line services to connectwireless service providers that use our fiber to private networks andthe tower services, commonly referred to conduct internal and external data transmissions such as transferring files from one locationwireless backhaul, to another. Our wholesale markets customers use these services to connectsupport their customers and their networks to our network.next generation wireless networks.


Table of Contents

Broadband        Broadband..    Our broadband services allow customers to connect to the Internet through their existing telephone lines and fiber-optic cables at higher speeds than dial-up access. Our business markets and mass markets customers use these services to access the Internet and Internet-based services.high speeds. Substantially all of our broadband subscribers are located within our local service area.

Video.Our video services include primarily satellite digital television offered to our mass markets customers. These services are offered under an arrangement with DIRECTV that allows us to market, sell and bill for its services under its brand name. Our current arrangement with DIRECTV has an initial five-year term ending in 2014 and automatically renews for one-year terms thereafter unless terminated by one of the parties. Although DIRECTV will have the right to terminate the arrangement upon the closing of the CenturyLink merger, we expect to be able to continue to provide DIRECTV services after the merger.

Verizon        Wireless services.Our wireless services are offered under anCenturyLink's agency arrangement with Verizon Wireless that allows us, as a subsidiary of CenturyLink, to market, sell and bill for its services under its brand name, primarily to mass markets customers who buy these services as part of a bundle with one or more of our other products and services. ThisCenturyLink's arrangement allows us to sell the full complement of Verizon Wireless services. We began selling Verizon Wireless services in the third quarter of 2008. OurCenturyLink's current arrangement with Verizon Wireless has a five-year term ending in 20132015 and is terminable by either party thereafter. Although Verizon Wireless will have the right to terminate the arrangement upon the closing of the CenturyLink merger, we expect to be able to continue to provide Verizon Wireless services after the merger.

Legacy Services

Our legacy services include local, integrated services digital network, or ISDN (which uses regular telephone lines to support voice, video and data applications), switched access ISDN and traditional wide area network, or WAN, services.services (which allow a local communications network to link to networks in remote locations). We originate, transport and terminate local services. Forservices within our business and mass markets customers, local service area. Local services consist primarily of primarily basic local exchange unbundled network elements, or UNEs and switching services. We also provide enhanced featuresthe following services with our local exchange services, such asservices: caller ID, call waiting, call return, 3-way calling, call forwarding, and voice mail. For our wholesale customers, local services include primarily unbundled network elements, or UNEs, which allow these customers to use our network or a combination of our network and their own networks to provide voice and data services to their customers. Our local services also include network transport, billing services, and access to our network by other telecommunications providers and wireless carriers. These services allow other telecommunications companies to provide telecommunications services that originate or terminate on our network.

We also provide access services to our wholesale customers. Access services include fees that we charge to other telecommunications providers to connect their customersnetwork and their networks to our network so that they can provide long-distance, transport, data, wireless and Internet services.voicemail.

Affiliates and Other Services

We provide to our affiliates data services, local services and billing and collectionstelecommunications services that we also provide to external customers. In addition, we provide to our affiliates: marketing, sales and advertising; computer system development and support services;services, network support and technical services; and other support services, such as legal, regulatory, finance and accounting, tax, human resources and executive support.

services. We also generate other operating revenuerevenues from USFUniversal 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 our local service area.

Importance, Duration and Effect of Patents, Trademarks and Copyrights

Either directly or through our affiliates, we own or have licenses to variousseveral patents, tradenames, trademarks, trade names, copyrights and other intellectual property necessary to conduct our business. Our services often use the intellectual property of others, including licensed software. We believe italso occasionally license our intellectual property to others.

Sales and Marketing

        We maintain local offices in most of the larger population centers within our local service area. These offices provide sales and customer support services in the community. We also rely on our call center personnel to promote sales of services that meet the needs of our customers. Our strategy is unlikelyto enhance our communications services by offering a comprehensive bundle of services and deploying new technologies to build upon our reputation and to further enhance customer loyalty.

        Our approach to our residential customers emphasizes customer-oriented sales, marketing and service with a local presence. We market our products and services primarily through direct sales representatives, inbound call centers, local retail stores, telemarketing and third parties. We support our distribution with direct mail, bill inserts, newspaper advertising, website promotions, public relations activities and sponsorship of community events.


Table of Contents

        Our approach to our business customers includes a commitment to deliver communications solutions that meet existing and future business needs through bundles of services and integrated service offerings. Our focus is to be a comprehensive customer communications solution for small businesses to large enterprises.

        Our approach to our wholesale customers includes a commitment to deliver communications solutions that meet existing and future national telecommunications providers' needs through bandwidth growth and quality of services.

Network Architecture

        Most of our products and services are provided using our telecommunications network, which consists of voice and data switches, copper cables, fiber-optic cables and other equipment. Our local exchange carrier networks also include central offices and remote sites, all with advanced digital switches and operating with licensed software. Our fiber-optic cable is the primary transport technology between our central offices and interconnection points with other incumbent carriers.

        We continue to enhance and expand our network as broadband enabled technologies are being deployed to provide significant capacity to our customers. Rapid and significant changes in technology are expected to continue in the telecommunications industry. Our future success will depend, in part, on our ability to anticipate and adapt to technological changes.

Regulation

        We are subject to significant regulation by the Federal Communications Commission ("FCC"), which regulates interstate communications, and state utility commissions, which regulate intrastate communications in our local service area. These agencies issue rules to protect consumers and promote competition; they set the rates that telecommunication companies charge each other for exchanging traffic; and they have established funds (called universal service funds or 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 the utility commissions of most of the states in our local service area. 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 mergers and acquisitions require approval by the FCC and some state commissions.

        Historically, incumbent local exchange carriers, or ILECs, operated as regulated monopolies having the exclusive right and responsibility to provide local telephone services in their franchised service territories. As we discuss in greater detail below, passage of the Telecommunications Act of 1996, coupled with state legislative and regulatory initiatives and technological change, fundamentally altered the telephone industry by generally reducing the regulation of ILECs and creating a substantial increase in the number of competitors. We are considered an ILEC. The following description discusses some of the major industry regulations that affect our traditional telephone operations, but numerous other regulations not discussed below could also impact us. Some legislation and regulations are currently the subject of judicial proceedings, legislative hearings and administrative proceedings which could substantially change the manner in which the telecommunications industry operates and the amount of revenues we receive for our services. Neither the outcome of these proceedings, nor their potential impact on us, can be predicted at this time. The impact of regulatory changes in the telecommunications industry could have a substantial impact on our operations. For additional information, see Item 1A of this annual report below.


Table of Contents

State Regulation

        In recent years, most states have substantially reduced their regulation of ILECs. Nonetheless, state regulatory commissions generally continue to regulate local service rates, intrastate access charges, and in some cases service quality, as they continue to grant and revoke certifications authorizing companies to provide communications services. State commissions traditionally regulated pricing through "rate of return" regulation that focused on authorized levels of earnings by ILECs. Several states continue to regulate us in this manner. In most of our states, we are generally regulated under various forms of alternative regulation that typically limit our ability to increase rates for basic local voice service, but relieve us from the requirement to meet certain earnings tests. In a few states, we have recently gained pricing freedom for the majority of retail services except for the most basic of services, such as stand-alone basic residential voice service. In most of the states in which we operate, we have gained pricing flexibility for certain enhanced calling services, such as caller identification and for bundled services that also include local voice service. State commissions periodically conduct proceedings to review the rates that we charge other telecommunications providers for using our network or reselling our service pursuant to the Telecommunications Act of 1996, and those proceedings can result in revenue reductions.

        We are currently responding to carrier complaints, legislation or generic investigations regarding our intrastate switched access charge rates in several of our states. In particular, certain long-distance providers have disputed existing intercarrier compensation rates payable to us and other ILECs with respect to VoIP traffic or refused to pay access charges, based on the contention that tariffed switched access charges should not apply to VoIP traffic. On October 27, 2011, the FCC adopted an order comprehensively reforming federal intercarrier compensation and universal service policies and rules, as discussed further below under the heading "Federal Regulation." Among other things, this order preempted state regulatory commissions' jurisdiction over all terminating access charges, however, intrastate access charges have historically been subject to exclusive state jurisdiction. Furthermore, the FCC decreed that on a prospective basis, intercarrier compensation rates for VoIP traffic are established at interstate access rates in the event intrastate switched access rates exceed interstate rates.

        The FCC order requires all terminating access rates including intrastate, interstate and reciprocal compensation rates to be reduced and unified over time. Excluding the rate implications contemplated on a prospective basis by the recent FCC order, we will continue to vigorously defend and seek to collect our intrastate switched access revenue subject to outstanding disputes. These historical disputes are primarily over access charge compensation for VoIP traffic terminating on the public switched telephone network. The outcomes of these disputes cannot be determined at this time. If we are required to reduce our intrastate switched access rates as a result of any of these disputes or state initiatives, we will seek to recover displaced switched access revenues from state universal service funds or other services. However, the amount of such recovery, particularly from residential customers, is not assured.

        Under state law, our telephone operating subsidiaries are typically governed by laws and regulations that (i) regulate the purchase and sale of ILECs, (ii) prescribe certain reporting requirements, (iii) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (iv) limit ILECs' ability to borrow and establish asset liens (v) regulate transactions between ILECs and their affiliates, and (vi) impose various other service standards.

        As an ILEC, we generally face "carrier of last resort" obligations which include an ongoing requirement to provide service to all prospective and current customers in our service area who request service and are willing to pay rates prescribed in our tariffs. In competitively-bid situations, such as newly-constructed housing developments or multi-tenant dwellings, this may constitute a competitive disadvantage to us if competitors can choose to focus on low-risk profitable customers and withhold


Table of Contents

service from high-risk unprofitable customers. Strict adherence to carrier of last resort requirements may force us to construct facilities with a low likelihood of positive economic return. In certain cases, we seek to mitigate these risks by receiving regulatory approval to use less costly alternative technologies, such as fixed wireless, or by sharing network construction costs with our customers. In addition, a few of our states provide relief from these obligations under certain specific circumstances, and in certain areas our costs to build and maintain network infrastructure are partially offset by payments from universal service programs.

        We operate in states where traditional cost recovery mechanisms, including rate structures, are under evaluation or have been modified. There can be no assurance that these states will continue to provide for cost recovery at current levels.

Federal Regulation

        We are required to comply with the Communications Act of 1934, which requires us to offer services at just and reasonable rates and on non-discriminatory terms, as well as the Telecommunications Act of 1996, which amended the Communications Act of 1934 primarily to promote competition.

        The FCC regulates interstate services provided by us, 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. 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 care 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.

        Our operations and those of all telecommunications carriers also may be impacted by legislation and regulation imposing new or greater obligations on us. The most likely areas of impact include regulations or laws related to providing broadband service, bolstering homeland security, increasing disaster recovery requirements, minimizing environmental impacts, enhancing privacy, or addressing other issues that impact our business, including the Communications Assistance for Law Enforcement Act, and laws governing local telephone number portability and customer proprietary network information requirements. These laws and regulations may cause us to incur additional costs and could lose any intellectual property rightsimpact our ability to compete effectively.

        From time-to-time, the FCC reviews the rates and terms under which ILECs provide special access services. If the FCC were to adopt significant changes in regulations affecting special access services, this could adversely impact our operations or financial results.

        For decades, the FCC has regularly considered various intercarrier compensation reforms, generally with a goal to create a uniform mechanism to be used by the entire telecommunications industry for payments between carriers originating, terminating, or carrying telecommunications traffic. In connection therewith, the FCC has received intercarrier compensation proposals from several


Table of Contents

industry groups, and solicited public comments on a variety of topics related to access charges and intercarrier compensation. In early 2011, the FCC issued a notice of proposed rulemaking focused on modernizing its universal service policies and intercarrier compensation rules.

        On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order ("CAF order") intended to reform the existing regulatory regime to recognize ongoing shifts to new technologies, including VoIP, and gradually re-direct universal service funding to foster nationwide broadband coverage. This initial ruling provides for a multi-year transition over the next decade as intercarrier compensation charges are reduced, universal service funding is explicitly targeted to broadband deployment, and subscriber line charges paid by end user customers are gradually increased. These changes will substantially increase the pace of reductions in the amount of switched access revenues we receive, while creating opportunities for increases in federal USF and retail revenue streams. The ultimate effect of this order on communications companies is largely dependent on future FCC proceedings designed to implement the order, the most significant of which are scheduled to be determined in 2012 and 2013.

        On December 29, 2011, the CAF order went into effect. At the same time, numerous parties filed a Petition For Reconsideration ("PFR") with the FCC seeking numerous revisions to the order. In January 2012, CenturyLink joined more than two dozen parties in appealing certain aspects of the order by filing a PFR that will be heard by the United States Tenth Circuit Court of Appeals. 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, various state commissions may consider changes to their universal service funds or intrastate access rates. For these reasons, we cannot predict the ultimate impact of these proceedings on us at this time.

        The American Recovery and Reinvestment Act of 2009 (the "Recovery Act") includes certain broadband initiatives that are materialintended to accelerate broadband deployment across the United States. The Recovery Act approved $7.2 billion in funding for broadband stimulus projects across the United States to be administered by two governmental agencies. The programs provide grants and loans to applicants for construction of certain broadband infrastructure, provision of certain broadband services, and support of certain broadband adoption initiatives. This program has attracted a wide range of applicants including states, municipalities, start-up companies and consortiums. The participation of other parties in these programs could increase competition in selected areas, which may increase our business.marketing costs and decrease our revenues in those areas. We cannot at this time estimate the impact these programs may have on our operations.

        On January 31, 2012 the FCC adopted an order modernizing the program that provides assistance to qualifying low-income individuals for local voice service. These changes also affect state-specific programs that provide assistance to qualifying individuals. The impact of these changes cannot be quantified at this time, but we may face increased administrative costs and audit requirements as a result of this FCC order and its implementation.

        For several years, Congress has passed bills granting successive short-term exemptions from a federal law that could otherwise delay or block funding of the USF's E-rate program, including a bill extending the exemption through December 31, 2012. Although we expect funding from this program to continue, we cannot assure you that the lack of a definitive resolution of this issue will not delay or impede the disbursement of funds in the future.


Table of Contents

Competition

We compete in a rapidly evolving and highly competitive market and we expect intense competition to continue. Regulatory developmentsTechnological advances, regulatory and technological advanceslegislative changes have increased opportunities for alternative communications service providers, which in turn have increased competitive pressures on our business. These alternate providers often face fewer regulations and have lower cost structures than we do. In addition, the telecommunications industry has experienced some consolidation and several of our competitors have consolidated with other telecommunications providers. The resulting consolidated companies are generally larger, have more financial and business resources and have greater geographical reach than we currently do.

As discussed below, competition for many of our services is based in part on bundled offerings. We believe our customers value the convenience of and price discounts associated with, receiving multiple services through a single company. As such, we continue to focus on expanding and improving our bundled offerings.

Strategic Services

In providing        With respect to our strategic services, competition is based on price, bandwidth, service, promotions and bundled offerings. Wireless carriers' fourth generation, or 4G, services are allowing them to our business markets customers, wemore directly compete with national telecommunications providers, smaller regional providers and wireless providers, as well as large integrators that provide customers with data services thereby taking traffic off of our network. Competition for business markets strategic services is driven by price and bundled offerings.services. Private line services also compete on network reach and reliability, while broadband and VoIP services also compete on bandwidth and quality.quality of service.

In providing strategicbroadband services, to our mass markets customers, we compete primarily with cable companies, wireless providers and other broadband service providers. Competition forwithin our broadband services is based on price, bandwidth service, promotions and bundled offerings.service. In reselling DIRECTV video services, we compete primarily with cable and other satellite companies as well as other sales agents and resellers. Competition here is based on price, content quality, promotions and bundled offerings. Many of our competitors for these strategic services are not subject to the same regulatory requirements as we are, and therefore they are able to avoid significant regulatory costs and obligations.quality.

        The market for wireless services is highly competitive. In reselling Verizon Wireless services, we compete with national and regional carriers as well as other sales agents and resellers. We market and sell wireless services to customers who are buying these services as part of a bundle with one or more of our other services. In reselling Verizon Wireless services, we compete with national and regional carriers as well as other sales agents and resellers. Competition for our wireless services is based on the coverage area, price, services offered, features, handsets, technical quality and customer service.

In providing private line services to our wholesale markets customers, we compete primarily with national telecommunications providers, such as AT&T Inc. and Verizon Communications Inc. Additionally we are experiencing increased competition for private line services from cable companies. Competition for private line services is based primarily on price, as well as network reach, bandwidth, quality, reliability and customer

service.

service. Demand        Although we are experiencing intense competition in these markets, we believe we are favorably positioned due to our strong presence in our local service area. Many of our competitors for these strategic services are not subject to the same regulatory requirements as we are and therefore they are able to avoid significant regulatory costs and obligations. Throughout each of our private linecompetitive services, continues to increase, despite our customers’ optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue to impactfocus on expanding and improving our private line services, we ultimately believe the growth in fiber based private line will offset our decline in copper based private line, although the timing of this technological migration is uncertain.bundled offerings.

Legacy Services

Although our status as an incumbent local exchange carrier, or ILEC, continues to provide us some advantages in providing local        The market for legacy services to our businessis highly competitive and mass markets customers, we continue to face significant competition in this market. An increasing number of consumers are willing to substitute cable and wireless for traditional voice telecommunications services. This has led to an increase in the number and type of competitors within our industry and a decrease in our market share. As a result of this product substitution, we face greater competition in providing local services from wireless providers, resellers and sales agents (including ourselves) and from broadband service providers, including cable companies. We also continue to compete with traditional telecommunications providers, such as national carriers, smaller regional providers, competitive local exchange carriers and independent telephone companies.

Competition for business and mass markets customers is based primarily on pricing, packaging of services and features, quality of service and meeting customer care needs. We believe these customers value the convenience of and price discounts associated with, receiving multiple services through a single company. Within the telecommunications industry, these services may include telephone, wireless, 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.


Table of Contents

Some of our competitors for business and mass markets customers are subject to fewer regulations than we are which affords them competitive advantages against us. Under federal regulations, telecommunication providers are able to interconnect their networks with ours, resell our services or lease separate parts of our network in order to provide competitive services. Generally, we have been required to provide these functions and services at wholesale rates, which allowsallow our competitors to sell their services at lower prices. However, these rules have been and continue to be reviewed by state and federal regulators. For additional discussion of regulations affecting our business, see “Regulation” below. In addition, wireless and broadband service providers generally are subject to less or no regulation,fewer regulations, which may allow them to operate with lower costs than we are able to operate. For additional discussion of regulations affecting our business, see "Regulation" above.

The        In providing long-distance services to our customers, we compete primarily with national telecommunications and VoIP providers. Competition in the long-distance market for wholesale legacy services is highly competitive.based primarily on price; however customer service, quality and reliability can also be influencing factors. Our resale and UNE customers are experiencing the same competition with competitive local exchange carriers, or CLECs, for local services customers as we are, as discussed above. We also compete with some of our own wholesale markets customers that are deploying their own networks to provide customers with local services. By doing so, these competitors take traffic off of our network.

        Although our status as an ILEC continues to provide us some advantages in providing local services in our local service area, we increasingly face significant competition as an increasing number of consumers are willing to substitute cable, wireless, and electronic communications for traditional voice telecommunications services. This has led to an increase in the number and type of competitors within our industry and a decrease in our market share. As a result of this product substitution, we face greater competition in providing local services from wireless providers, resellers and sales agents (including ourselves) and from broadband service providers, including cable companies. We also continue to compete with traditional telecommunications providers, such as national carriers, smaller regional providers, CLECs and independent telephone companies.

        Significant competitive factors in the local telephone industry include pricing, packaging of services and features, quality and convenience of service and meeting customer needs such as simplified billing and timely response to services calls.

        We provide access services to other telecommunications providers to connect their customers and their networks to our network so that they can provide long-distance, transport, data, wireless and Internet services. We face significant competition for access services from CLECs, cable companies, resellers and wireless service providers. Our access service customers face competitive pressures in their businesses that are similar to those we face with respect to strategic and legacy services. To the extent that these competitive pressures result in decreased demand for their services, demand for our access services also declines.

        Wireless telephone services increasingly constitute a significant source of competition with ILEC services, especially since wireless carriers have begun to compete effectively on the basis of price with more traditional telephone services. As a result, some customers have chosen to completely forego use of traditional wireline phone service and instead rely solely on wireless service for voice services. This trend is more pronounced among residential 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.


RegulationTable of Contents

WeMoreover, the growing prevalence of electronic mail, text messaging, social networking and similar digital communications continues to reduce the demand for traditional landline voice services.

        Improvements in the quality of VoIP service have led several cable, Internet, data and other communications companies, as well as start-up companies, to substantially increase their offerings of VoIP service to business and residential customers. VoIP providers frequently offer features that cannot readily be provided by traditional ILECs and may price their services at or below those prices currently charged for traditional local and long-distance telephone services for several reasons, including lower operating costs and regulatory advantages. Although over the past several years the FCC has increasingly subjected portions of VoIP operations to federal regulation, VoIP services currently operate under fewer regulatory constraints than LEC services. For all these reasons, we cannot assure that VoIP providers will not successfully compete for our customers.

        In providing other legacy services, such as traditional WAN services and ISDN, we compete primarily with national telecommunications providers and cable companies. Competition for these other legacy services is based primarily on price and bundled offerings.

Environmental Compliance

        From time to time we may incur environmental compliance and remediation expenses, mainly resulting from the operation 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, we do not believe that future environmental compliance and remediation expenditures will have a material adverse effect on our financial condition or results of operations.

Seasonality

        Overall, our business is not significantly impacted by seasonality. From time to time weather related problems have resulted in increased costs to repair our network and respond to service calls in some of our markets. The amount and timing of these costs are subject to significant regulation by the FCC, which regulates interstate communications, and state utility commissions, which regulate intrastate communications. These agencies issue rules to protect consumers and promote competition; they set the rates that telecommunication companies charge each other for exchanging traffic; and they have established funds (called universal service funds) to support provisionweather patterns 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 utility commissions in most states. 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 mergers and acquisitions require approval by the FCC and some state commissions.

In this section, we describe potentially significant regulatory changes that we face, including: state commission review of the rates we charge for local telephone service and FCC proposals to reform universal service funds, change the rates carriers charge each other for exchanging traffic, and change the rates we can charge for special access services.

Interconnection

In our local service area, we are required by law to interconnect with other telecommunications providers and to allow competing local exchange carriers to resell our services and use our facilities as unbundled network elements. State commissions periodically conduct proceedings to change the rates we are allowed to charge for these services, and those proceedings can result in changes to our revenue from wholesale markets customers.

Intercarrier Compensation and Access Pricing

The FCC has initiated a number of proceedings that could affect the rates and charges for services that we sell to or purchase from other carriers and for traffic that we exchange with other carriers. The FCC has been considering comprehensive reform of these charges, known as “intercarrier compensation,” in a proceeding that could result in fundamental changes in the charges we or our affiliates collect from and pay to other carriers. This proceeding may not be completed for some time. State commissions also periodically open proceedings to change the rates that we or other local carriers charge to terminate and originate intrastate calls. The FCC, state commissions and federal courts are also reviewing intercarrier compensation issues relating to IP services, including whether we should pay intercarrier compensation to carriers for traffic bound for Internet service providers that cross local exchange boundaries (known as “VNXX traffic”) and whether VoIP providers must pay carrier access charges. In 2010, we received approximately $350 million in switched access revenue (which includes a significant amount of related services not subject to these proceedings), and our affiliates’ paid a greater amount to other carriers for switched access.

The FCC also has an open proceeding to examine whether rates should be reduced for high-capacity facilities that local exchange carriers, like Qwest, sell to other companies. Some parties have proposed changes to the FCC’s rules that would significantly reduce our revenues from these facilities. This proceeding remains pending before the FCC. In 2010, we received approximately $1.4 billion for interstate special access services (excluding digital subscriber line), but not all of that revenue is at issue in the FCC’s special access proceeding. Most proposals submitted in the proceeding would impact only lower-capacity services and not higher-capacity fiber-based services, and many proposals would impact services only in geographic areas where the FCC has granted us pricing flexibility. If the FCC does mandate lower prices, our affiliates’ will benefit from lower prices for the special access services they purchase from other carriers, which totaled $550 million in 2010.

Universal Service

The FCC maintains a number of universal service programs that are intended to ensure affordable telephone service for all Americans, including low-income consumers and those living in rural areas that are costly to serve, and ensure access to advanced telecommunications services for schools, libraries and rural health care providers. These programs, which totaled over $7 billion annually in recent years, are funded through contributions by interstate telecommunications carriers, which are generally passed through to their end-users. The FCC is actively considering a new contribution methodology, which, if adopted, could significantly increase our universal service contributions. While we would have the right to pass these charges on to our customers, the additional charges could affect the demand for certain telecommunications services.

In 2010, we received approximately $67 million in federal universal service high-cost subsidies. The FCC is actively considering changes in the structure and distribution methodology of its universal service programs. The FCC is also considering whether to reconfigure its universal service funds to support broadband services. The resolution of these proceedings ultimately could affect the amount of universal service support we receive.

In 2010, we received approximately $82 million in state universal service high-cost subsidies. State commissions and legislatures may review and alter their respective state universal service programs, and, as a result, our distributions may be affected.

Network Neutrality

In December 2010, the FCC issued network neutrality rules applicable to providers of broadband Internet access services. In general, network neutrality refers to government policies designed to safeguard and promote an open Internet. As written, the FCC’s rules do not materially impact our business operations, but the FCC indicated that it would decide in later cases the extent to which broadband providers like Qwest can charge content providers for enhancing or prioritizing their traffic when it is being delivered to Qwest’s broadband customers.any given year.

Employees

        

   December 31,   Increase/(Decrease)  % Change 
   2010   2009   2008   2010 v
2009
  2009 v
2008
  2010 v
2009
  2009 v
2008
 

Management employees

   11,871     12,248     13,404     (377  (1,156  (3)%   (9)% 

Occupational employees

   14,179     15,557     17,145     (1,378  (1,588  (9)%   (9)% 
                          

Total employees

   26,050     27,805     30,549     (1,755  (2,744  (6)%   (9)% 
                          

Our occupationalAt December 31, 2011, we had approximately 25,000 employees, are covered by collective bargaining agreements with the Communications Workers of America, or CWA, andwhich approximately 13,000 were members of either the International Brotherhood of Electrical Workers ("IBEW") or IBEW. Ourthe Communications Workers of America ("CWA"). We believe that relations with our employees continue to be generally good. However, our current four-year agreements with the IBEW and CWA and IBEWwill expire on October 6, 2012. See the discussion of risks relating to our labor relations in “Risk"Risk Factors—Other Risks Relating to Qwest”Risks" in Item 1A of this report.

        We have reduced our workforce primarily due to (i) integration efforts from CenturyLink's indirect acquisition of us; (ii) increased competitive pressures; and (iii) the loss of access lines over the last several years.

Website Access and Important Investor Information

Our website address iswww.qwest.com, and we routinely post important investor information in the “Investor Relations” sectionsame as that of our website atultimate parent company, CenturyLink, which isinvestor.qwest.comwww.centurylink.com. The information contained on, or that may be accessed through, our website is not part of this annual report. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports in the “Investor Relations”"Investor Relations" section of our website (ir.centurylink.com) under the heading “SEC"SEC Filings." These reports are available on our website as soon as reasonably practicable after we electronically file them with the Securities and Exchange Commission, or SEC.


QCII hasTable of Contents

        We have adopted CenturyLink's written codes of conduct that serve as the code of ethics applicable to our directors, officers and employees, including our principal executive officer and senior financial officers, in accordance with Section 406 ofapplicable laws and rules promulgated by the Sarbanes-Oxley Act of 2002, the rules of the SEC promulgated thereunder and the New York Stock Exchange rules.Exchange. In the event that QCIICenturyLink makes any changes (other than by a technical, administrative or non-substantive amendment) to, or providesprovide any waivers from, the provisions of its code of conduct applicable to its and our principaldirectors or executive officer and senior financial officers, QCIICenturyLink intends to disclose these events on QCII’s and our website or in a report on Form 8-K within four business days of such event.

filed with the SEC. These codes of conduct, as well as copies of QCII’sCenturyLink's guidelines on significant governance issues and the charters of QCII’stheir audit committee, compensation committee, nominating and human resourcescorporate governance committee and nominating and governancerisk evaluation committee, are also available in the “Corporate Governance”"Corporate Governance" section of QCII’s and our website at

investor.qwest.com/corporate-governancewww.centurylink.com/Pages/AboutUs/Governance/or in print to any stockholdershareholder who requests them by sending a written request to QCII’sour Corporate Secretary at Qwest Communications InternationalCenturyLink, Inc., 1801 California100 CenturyLink Drive, Monroe, Louisiana, 71203.

        Investors may also read and copy any materials filed with the SEC at the SEC's Public Reference Room at 100 F Street, Denver, Colorado 80202.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.

        In connection with filing this annual report, our chief executive officer and chief financial officer made the certifications regarding our financial disclosures required under the Sarbanes-Oxley Act of 2002, and the Act's related regulations. In addition, during 2011, our chief executive officer certified to the New York Stock Exchange that he was unaware of any violations by us of the New York Stock Exchange's corporate governance listing standards.

Special Note Regarding Forward-Looking Statements

This Form 10-K containsreport and other documents filed by us under the federal securities law include, and future oral or incorporateswritten statements or press releases by referenceus and our management may include, forward-looking statements about our financial condition, operating results and business. These statements include, among others:

    statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as increased revenue decreased expenses and avoided expenses anddecreased capital or operating expenditures;

    statements about our anticipated future operating and financial performance, financial position and liquidity, tax position, contingent liabilities, growth opportunities and growth rates, acquisition and divestiture opportunities, business prospects, regulatory and competitive outlook, investment and expenditure plans, investment results, financing alternatives and sources and pricing plans; and

    other expenditures; and

similar statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.

These statements may be made expressly in this document or may be incorporated by reference to other documents we have filed or will file with the SEC. You can findfacts, many of these statementswhich are highlighted by looking for words such as “may,” “would,” “could,” “should,” “plan,” “believes,” “expects,” “anticipates,” “estimates,”"may," "would," "could," "should," "plan," "believes," "expects," "anticipates," "estimates," "projects," "intends," "likely," "seeks," "hopes," or variations or similar expressions used in this document or in documents incorporated by reference in this document.expressions.

These forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future developments and events, many of which are outside of our control. These forward-looking statements, and the assumptions upon which they are based, are inherently speculative and are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. Some of these uncertainties and risks are described in “Risk Factors”"Risk Factors" in Item 1A of this report.


Table of Contents

These risk factors should be considered in connection with any written or oral forward-looking statements that we or persons acting on our behalf may issue. Anticipated events may not occur and our actual results or performance may differ materially from those anticipated, estimated or projected if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Additional risks that we currently deem immaterial or that are not presently known to us could also cause our actual results to differ materially from our expected results. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake anyno obligation to reviewupdate or confirm analysts’ expectations or estimates or to release publicly any revisions torevise any forward-looking statements to reflectfor any reason, whether as a result of new information, future events or developments, changed circumstances, after the date of this document or to reflect the occurrence of unanticipated events.otherwise. Further, the information about our intentions contained in this document is a statement of our intentions as of the date of this document and is based upon, among other things, the existing regulatory environment, industry conditions, 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.

        Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

        Unless otherwise indicated, information contained in this report and other documents filed by us under the federal securities laws concerning our views and expectations regarding the communications industry are based on estimates made by us using data from industry sources, and on assumptions made by us based on our management's knowledge and experience in the markets in which we operate and the communications industry generally. You should be aware that we have not independently verified data from industry or other third-party sources and cannot guarantee its accuracy or completeness. Our estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in Item 1A of this report.

ITEM 1A.    RISK FACTORS

Risks Relating to QCII’s Pending Merger with CenturyLink

QCII’s merger with CenturyLink is subject to closing conditions, including government approvals, which could result in additional conditions that adversely affect QCII or which could cause the merger to be delayed or abandoned.

The completion        Any of the CenturyLink merger is subject to certain closing conditions, including the absence of injunctions or other legal restrictionsfollowing risks could materially and the absence of a material adverse effect on either company. In addition, the merger remains subject to a number of regulatory approvals. QCII and CenturyLink have received most of the necessary approvals from state public service or public utility commissions, but they still need approvals from the FCC and several other state public service or public utility commissions. These regulatory entities could impose requirements or obligations as conditions for their approvals. Despite QCII’s best efforts, QCII may not be able to satisfy the various closing conditions and obtain the necessary approvals. In addition, any required conditions to these approvals could adversely affect the combined company or could result in the delay or abandonment of the merger.

Failure to complete the CenturyLink merger could negatively impact QCII and us.

If the CenturyLink merger is not completed, QCII would still remain liable for significant transaction costs and the focus of QCII’s management would have been diverted from seeking other potential strategic opportunities, in each case without realizing any benefits of a completed merger. Depending on the reasons for not completing the merger, QCII could also be required to pay CenturyLink a termination fee of $350 million. For these and other reasons, a failed merger could adversely affect QCII’s business, operating results or financial condition, which in turn could adversely affect our business, financial condition, results of operations, liquidity or financial condition. In addition,prospects. The risks described below are not the trading price of QCII’sonly risks facing us. Please be aware that additional risks and our securitiesuncertainties not currently known to us or that we currently deem to be immaterial could be adversely affected to the extent that the current price reflects an assumption that the merger will be completed.

While the CenturyLink merger is pending, QCIIalso materially and we are subject to business uncertainties and contractual restrictions that could adversely affect our business.

Our employees, customers and suppliers may have uncertainties about the effects of the merger. Although QCII and we have taken actions designed to reduce any adverse effects of these uncertainties, these uncertainties may impair our ability to attract, retain and motivate key employees and could cause customers, suppliers and others that deal with us to try to change our existing business relationships.

The pursuit of the merger and preparations for integration have placed and will continue to place a significant burden on many employees and internal resources. If, despite QCII’s and our efforts, key employees depart because of these uncertainties and burdens, or because they do not wish to remain with a combined company, our business and operating results could be adversely affected.

While the merger is pending, some of our customers could delay or forgo purchasing decisions and suppliers could seek additional rights or benefits from us. In addition, the merger agreement restricts QCII and us from taking certain actions with respect to our business and financial affairs without CenturyLink’s consent, and these restrictions could be in place for an extended period of time if the merger is delayed. For these and other reasons, the pendency of the merger could adversely affect our business operating results or financial condition.

If completed, QCII’s merger with CenturyLink may not achieve the intended results.

The merger will involve the combination of two companies that currently operate as independent public companies. The combined company will need to devote management attention and resources to integrate QCII’s and CenturyLink’s businesses. In addition, the combined company may face difficulties with the integration process. For example:

the combined company may not realize the anticipated cost savings and operating synergies at expected levels or in the expected timeframe;

existing customers and suppliers may decide not to do business with the combined company;

the costs of integrating QCII’s policies, procedures, operations, technologies and systems with those of CenturyLink could be higher than expected;

the integration process could consume significant time and attention on the part of the combined company’s management, thereby diverting attention from day-to-day operations; or

the combined company may not be able to integrate employees from the two companies while maintaining existing levels of sales, customer service and operational support.

For these and other reasons, the merger may not achieve the intended results.operations.

Risks Affecting Our Business

Increasing competition, including product substitution, continues to cause access line losses, which has adversely affected and could continue to adversely affect our operating results and financial condition.

We compete in a rapidly evolving and highly competitive market, and we expect competition to continue to intensify. We are facing greater competition from cable companies, wireless providers, broadband companies, resellers and sales agents (including ourselves) and facilities-based providers using their own networks as well as those leasing parts of our network. In addition, regulatory developments over the past several years have generally increased competitive pressures on our business. Due to some of these and other factors, we continue to lose access lines.

        Some of our current and potential competitors (i) offer a more comprehensive range of communications products and services, (ii) have market presence, engineering and technical capabilities, and financial and other resources greater than ours, (iii) own larger and more diverse networks, (iv) conduct operations or raise capital at a lower cost than us, (v) are subject to less regulation,


Table of Contents

(vi) offer greater online content services or (vii) have substantially stronger brand names. Consequently, these competitors may be better equipped to charge lower prices for their products and services, to provide more attractive offerings, to develop and expand their communications and network infrastructures more quickly, to adapt more swiftly to new or emerging technologies and changes in customer requirements, and to devote greater resources to the marketing and sale of their products and services.

        Competition could adversely impact us in several ways, including (i) the loss of customers and market share, (ii) the possibility of customers reducing their usage of our services or shifting to less profitable services, (iii) reduced traffic on our networks, (iv) our need to expend substantial time or money on new capital improvement projects, (v) our need to lower prices or increase marketing expenses to remain competitive and (vi) our inability to diversify by successfully offering new products or services.

We are continually evaluating our responsestaking steps to respond to these competitive pressures. Some of our more recent responses are expanded broadband capabilities and strategic partnerships. We also remain focused on customer service and providing customers with simple and integrated solutions, including, among other things, product bundles and packages. However, wepressures, but these efforts may not be successful in these efforts. We may not be able to distinguish our offerings and service levels from those of our competitors, and we may not be successful in integrating our product offerings, especially products for which we act as a reseller or sales agent such as wireless and video services.successful. Our operating results and financial condition would be adversely affected if these initiatives are unsuccessful or insufficient and if we otherwise are unable to sufficiently stem or offset our continuing access line losses and our revenue declines significantly without corresponding cost reductions. If this occurred, our ability to service debt and pay other obligations would also be adversely affected.

Our legacy services continue to generate declining revenues, and our efforts to offset these declines may not be successful.

        The telephone industry has experienced a decline in access lines and network access revenues, which, coupled with the other changes resulting from competitive, technological and regulatory developments, continue to place downward pressure on the revenues we generate from our legacy services.

        We have taken a variety of steps to counter these declines, including:

    an increased focus on selling a broader range of strategic services, including broadband, satellite television provided by DIRECTV and wireless voice services provided by Verizon Wireless; and

    greater use of service bundles.

        However, some of these strategic services generate lower profit margins than our traditional services, and some can be expected to experience slowing growth as increasing numbers of our existing or potential customers subscribe to these newer products. Moreover, we cannot assure you that the revenues generated from our new offerings will offset revenue losses associated from reduced sales of our legacy products. In addition, our reliance on services provided by others could constrain our flexibility, as described further below.

Unfavorable general economic conditions in the United States could negatively impact our operating results and financial condition.

Unfavorable general economic conditions, including the unstable economy and the current credit market environment, could negatively affect our business. Worldwide economic growth has been sluggish since 2008, and many experts believe that a confluence of factors in the United States, Europe and developing countries may result in a prolonged period of economic downturn, slow growth or economic uncertainty. While it is often difficult for us to predict the ultimate impact of these general economic conditions, on our business, these conditions 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 forgo purchases of our products and services. One or more of these circumstances could cause our revenuerevenues to decline.continue declining. Also, our customers may encounter financial hardships or


Table of Contents

may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to us. If that were to occur, we could be required to increase our allowance for doubtful accounts, and the number of days

outstanding for our accounts receivable could increase. In addition, as discussed below, under the heading “Risks Affecting our Liquidity,” due to the unstable economyeconomic and the current credit market environment, wemarkets may not be able to refinancepreclude 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 service debt and pay other obligations.raise capital.

Consolidation among other participantsWe may need to defend ourselves against claims that we infringe upon others' intellectual property rights, or may need to seek third-party licenses to expand our product offerings.

        From time to time, we receive notices from third parties or are named in lawsuits filed by third parties claiming we have infringed or are infringing upon their intellectual property rights. We may receive similar notices or be involved in similar lawsuits in the telecommunications industryfuture. Responding to these claims may allowrequire us to expend significant time and money defending our competitorsuse of affected technology, may require us to competeenter into licensing agreements requiring royalty payments that we would not otherwise have to pay or may require us to pay damages. If we are required to take one or more effectively against us,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 adversely affect our operating results and financial condition.

The telecommunications industry has experienced some consolidation, and several of our competitors have consolidated with other telecommunications providers. This consolidation results in competitors that are larger and better financed and affords our competitors increased resources and greater geographical reach, thereby enabling those competitors to compete more effectively against us. We have experienced and expect further increased pressures as a result of this consolidation and in turn have been and may continue to be forced to respond with lower profit margin product offerings and pricing plans in an effort to retain and attract customers. These pressures could adversely affect our operating results and financial condition, as well as our ability to service debt and pay other obligations.

Rapid changes in technology and markets could require substantial expenditure of financial and other resources in excess of contemplated levels, and any inability to respond to those changes could reduce our market sharesignificantly and adversely affect our operating results and financial condition.the way we conduct business.

The telecommunications industry is experiencing significant technological changes, and our ability        Similarly, from time to execute our business plans and compete depends upon our and our affiliates’ abilitytime, we may need to develop and deployobtain the right to use certain patents or other intellectual property from third parties to be able to offer new products and services. The development and deployment ofIf we cannot license or otherwise obtain rights to use any required technology from a third party on reasonable terms, our ability to offer new products and services could also require substantial expenditure of financial and other resources in excess of contemplated levels. If we are not able to develop new products and services to keep pace with technological advances,may be restricted, made more costly 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 keep up with changes in technology and markets could also adversely affect our operating results and financial condition, as well as our ability to service debt and pay other obligations.delayed.

Our reseller and sales agency arrangements expose us to a number of risks, one or more of which may adversely affect our business and operating results.

We rely on reseller and sales agency arrangements with other 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.

Third partiesWe could be harmed by network disruptions, security breaches, or other significant disruptions or failures of our IT infrastructure and related systems or of those we operate for certain of our customers.

        To be successful, we will need to continue providing our customers with a high capacity, reliable and secure network. We face the risk, as does any company, of a security breach, whether through cyber attack, malware, computer viruses, sabotage, or other significant disruption of our IT infrastructure and related systems. We face an added risk of a security breach or other significant disruption of the IT infrastructure and related systems that we develop, install, operate and maintain for certain of our business and governmental customers. As a communications and IT company, we face a heightened risk of a security breach or disruption from unauthorized access to our and our customers' proprietary or classified information on our systems or the systems that we operate and maintain for certain of our customers.


Table of Contents

        Although we make significant efforts to maintain the security and integrity of these types of information and systems, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging, especially in light of the growing sophistication of cyber attacks and intrusions. We may claimbe unable to anticipate all potential types of attacks or intrusions or to implement adequate security barriers or other preventative measures.

        Additional risks to our network and infrastructure include:

        Network disruptions, security breaches and other significant failures of the above-described systems could:

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

Any failure or inadequacy of our information technology infrastructure could harm our business.

        The capacity, reliability and security of our internal information technology hardware and software infrastructure (including our billing systems) are important to the operation of our current business, which would suffer in the event of system failures. Likewise, our ability to expand and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new service offering initiatives. Our inability to expand or upgrade our technology infrastructure could have adverse consequences, which could include the delayed implementation of new service offerings, service or billing interruptions, and the diversion of development resources.


Table of Contents

Rapid changes in technology and markets could require substantial expenditure of financial and other resources in excess of contemplated levels, and any inability to respond to those changes could reduce our market share and adversely affect our operating results and financial condition.

        The communications industry is experiencing significant technological changes, many of which are reducing demand for our traditional voice services or are enabling our current customers to reduce or bypass use of our networks. Technological change could also require us to expend capital or other resources in excess of currently contemplated levels, or to forego the development or provision of products or services that others can provide more efficiently. If we infringe upon their intellectual property rights,are not able to develop new products and defendingservices 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 keep up with changes in technology and markets could also adversely affect our operating results and financial condition, as well as our ability to service debt and pay other obligations.

Consolidation among other participants in the telecommunications industry may allow our competitors to compete more effectively against these claimsus, which could adversely affect our profit marginsoperating results and financial condition.

        The telecommunications industry has experienced substantial consolidation over the last decade, and some of our competitors have combined with other telecommunications providers, resulting in competitors that are larger, have more financial and business resources, and have broader service offerings. Further consolidation could increase competitive pressures, and could adversely affect our operating results and financial condition, as well as our ability to conduct business.service debt and pay other obligations.

From time to time, we receive notices from third parties or are named in lawsuits filed by third parties claiming weWe have infringed or are infringing upon their intellectual property rights. We may receive similar notices or be involved in similar lawsuits in the future. Responding to these claims may require us to expend

a significant time and money defendingamount of goodwill on our use of affected technology, may require us to enter into licensing agreements requiring royalty payments that we would not otherwise have to pay or may require us to pay damages.balance sheet. If we are required to take one or more of these actions, our profit margins may decline. In addition, in responding to these claims,goodwill becomes impaired, we may be required to stop sellingrecord a significant charge to earnings and reduce our stockholder's equity.

        Under generally accepted accounting principles, goodwill is reviewed for impairment on an annual basis or redesignmore frequently whenever events or circumstances indicate that its carrying value may not be recoverable. If our goodwill is determined to be impaired in the future, we may be required to record a significant, non-cash charge to earnings during the period in which the impairment is determined.

We rely on a limited number of key suppliers, vendors, landlords and other third parties to operate our business.

        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 suppliers. Similarly, our data center operations are materially reliant on leasing space from landlords and power services from utility companies, and being able to renew these arrangements from time to time on favorable terms. 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.

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

        Over the past few years, certain utilities, cooperatives and municipalities in certain of the states in which we operate have requested significant rate increases for attaching our plant to their facilities. To


Table of Contents

the extent that these entities are successful in increasing the amount we pay for these attachments, our future operating costs will increase.

        In addition, we rely on rights-of-way, colocation agreements and other authorizations granted by governmental bodies and other third parties to locate our cable, conduit and other network equipment on their respective properties. If any of these authorizations terminate or lapse, our operations could be adversely affected.

We depend on key members of our senior management team.

        Our success depends largely on the skills, experience and performance of a limited number of senior officers. Competition for senior management in our industry is intense and we may have difficulty retaining our current senior officers or attracting new ones in the event of terminations or resignations. For a discussion of similar retention concerns relating to our recent mergers, please see the risks described below under the heading "Risks Relating to Our Recent Acquisitions."

Risks Relating to our Recent Acquisitions

We may be unable to integrate successfully the Legacy CenturyLink and Qwest businesses and realize the anticipated benefits of the acquisition.

        CenturyLink's indirect acquisition of us involved the combination of two companies which previously operated as independent public companies. We have devoted, and will continue to devote, significant management attention and resources to integrating the business practices and operations of Legacy CenturyLink and Qwest. We may encounter difficulties in the integration process, including the following:

        For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our products, or services, standards, controls, procedures and policies, any of which could significantly and adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the


Table of Contents

anticipated benefits of the wayacquisition, or could otherwise adversely affect our business and financial results.

Our final determinations of the acquisition date fair value of our assets and liabilities may be significantly different from our current estimates, which could have a material adverse effect on our operating results.

        CenturyLink has accounted for its indirect acquisition of us under the acquisition method of accounting, which resulted in the assignment of the purchase price to the assets acquired and liabilities assumed based on our preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As such, we conduct business.have not completed our valuation analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of the assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets. As such, all information presented in this report is preliminary and subject to revision pending the final valuation analysis. We expect to complete our final fair value determinations no later than the first quarter of 2012. Our final fair value determinations may be significantly different than those reflected in this report, which could have a material adverse effect on our operating results.

QCII cannot assure you whether, when or in what amounts they will be able to use their net operating losses.

        At December 31, 2011, QCII had federal NOLs of approximately $6.3 billion of federal NOLs. These NOLs can be used to offset their future federal taxable income.

        CenturyLink's acquisition of QCII caused an "ownership change" under federal tax laws relating to the use of NOLs. As a result, these laws could limit CenturyLink's ability to use QCII's NOLs and certain other deferred tax attributes to reduce future federal taxable income. QCII currently expects to realize substantially all of their NOLs and certain other deferred tax attributes. However, if QCII is unable to realize these benefits, its and CenturyLink's future income tax payments would be higher than expected, which would adversely affect its financial results and liquidity. As a wholly owned subsidiary of these companies, our financial results and liquidity could be similarly affected.

Risks Relating to Legal and Regulatory Matters

Any adverse outcome of the KPNQwest litigation, or other material litigation of CenturyLink 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.

As described in “Legal Proceedings”Item 8 of CenturyLink's and QCII's Annual Reports on Form 10-K, CenturyLink and QCII are involved in Item 3several legal proceedings that, if resolved against them, could have a material adverse effect on their business and financial condition. As a wholly owned subsidiary of this report, theCenturyLink 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 have soughtseek billions of euros (equating to billions of dollars) in damages. In addition, the outcome of one or more of thesethe two pending matters could have a negative impact on the outcomes of the other matters.other. QCII continues to defend against these matters vigorously and is currently unable to provide any estimate as to the timing of their resolution.

We can give no assurance as to the impacts on QCII’sQCII'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’sQCII'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


Table of Contents

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.

Further, there        There are other material proceedings pending against CenturyLink and QCII, as described in “Legal Proceedings” in Item 38 of this report that, dependingCenturyLink's and QCII's Annual Reports on Form 10-K. Depending on their outcome, mayany of these matters could have a material adverse effect on QCII’s and our financial position. Thus, weposition or operating results. We can give you no assurances as to the impactsimpact of these matters on QCII’s and our operating results or financial condition as a result of these matters.condition.

We operate in a highly regulated industry and are therefore exposed to restrictions on our manner of doing business and a variety of claims relating to such regulation.

We are subject to significant regulation by the FCC, which regulates interstate communications, and state utility commissions, which regulate intrastate communications. Generally, we must obtain and maintain certificates of authority from the FCC and regulatory bodies in most states where we offer regulated services, and we are subject to numerous, and often quite detailed, requirements and interpretations under federal, state and local laws, rules and regulations. 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. See additional information about regulations affecting our business in “Business—Regulation” in Item 1 of this report.

Regulation of the telecommunications industry is changing rapidly, and the regulatory environment varies substantially from statejurisdiction to state. The state legislatures and state utility commissions in our local service area have adopted reduced or modified forms ofjurisdiction. Notwithstanding a recent movement towards alternative regulation, for retail services. These changes also generally allow more flexibility for rate changes and for new product introduction, and they enhance our ability to respond to competition. Despite these regulatory changes, a substantial portion of our local voice services revenue remains subject to FCC and state utility commission pricing regulation, which periodically exposes us to pricing or earnings disputes and could expose us to unanticipated price declines. For instance,Interexchange carriers have filed complaints in 2011 the state utility commissionvarious forums requesting reductions in Arizona may consider a price cap plan that will

govern the rates that we charge in that state. The FCC is also considering changing the rates that carriers can charge each otherour access rates. In addition, several long distance providers are disputing amounts owed to us for originating, carrying and terminatingVoIP traffic or traffic they claim to be VoIP traffic, and for local access facilities. Also under review by the FCC and state commissions are the intercarrier compensation issues arising from the delivery of traffic destined for entities that offer conference and chat line services for free (known in the industry as “access stimulation,” or “traffic pumping”), and of traffic bound for Internet service providers that cross local exchange boundaries (known as “VNXX traffic”). The FCC and state commissions are also considering changesrefusing to funds they have established to subsidize service to high-cost areas. Changes to how those funds are distributed could result in us receiving less in universal service funding, and changes to how the funds are collected could make some of our services less competitive.pay such amounts. 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.

        On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order ("CAF order") intended to reform the existing regulatory regime to recognize ongoing shifts to new technologies, including VoIP, and gradually re-direct universal service funding to foster nationwide broadband coverage. This initial ruling provides for a multi-year transition over the next decade as intercarrier compensation charges are reduced, universal service funding is explicitly targeted to broadband deployment, and subscriber line charges paid by end user customers are gradually increased. These changes will substantially increase the pace of reductions in the amount of switched access revenues we receive with respect to some of our various services, while creating opportunities for increases in federal USF and retail revenue streams. The ultimate effect of this order on communications companies is largely dependent on future FCC proceedings designed to implement the order, the most significant of which are scheduled to be determined in 2012 and 2013. Several judicial challenges to the CAF order are pending and additional future challenges are possible, any of which could alter or delay the FCC's proposed changes. In addition, based on the outcome of the FCC


Table of Contents

proceedings, various state commissions may consider changes to their universal service funds or intrastate access rates. For these reasons, we cannot predict the ultimate impact of these proceedings at this time.

        Under other pending proceedings, the FCC may implement changes in the regulation or pricing of special access services, any of which could adversely affect our operations or financial results.

        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, increasing disaster recovery requirements, minimizing environmental impacts, enhancing privacy, 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.

All of our operations are also subject to a variety of environmental, safety, health and other governmental regulations. We monitor our compliance with federal, state and local regulations governing the management, discharge and disposal of hazardous and environmentally sensitive materials. Although we believe that we are in compliance with these regulations, our management, discharge or disposal of hazardous and environmentally sensitive materials might expose us to claims or actions that could have a material adverse effect on our business, financial condition and operating results.

Regulatory changes in the communications industry could adversely affect our business by facilitating greater competition against us.

        Beginning in 1996, Congress and the FCC have taken several steps that have resulted in increased competition among service providers. Many of the FCC's regulations remain subject to judicial review and additional rulemakings, thus making it difficult to predict what effect any changes in interpretation of the 1996 Act may ultimately have on us and our competitors. We could be adversely affected by programs or initiatives recently undertaken by Congress or the FCC, including (i) the federal broadband stimulus projects authorized by Congress in 2009; (ii) the FCC's 2010 National Broadband Plan; (iii) new "network neutrality" rules; (iv) the proposed broadband "Connect America" replacement support fund, and (v) the FCC's above-described October 27, 2011 order.

We are subject to significant regulations that limit our flexibility.

        As a diversified full service ILEC, we have traditionally been subject to significant regulation that does not apply to many of our competitors. This regulation imposes substantial compliance costs on us and restricts our ability to change rates, to compete and to respond rapidly to changing industry conditions. As our business becomes increasingly competitive, regulatory disparities between us and our competitors could impede our ability to compete.


Table of Contents

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

        Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, and related regulations implemented by the SEC, the New York Stock Exchange and the Public Company Accounting Oversight Board, are increasing legal and financial compliance costs and making some activities more time consuming. Any future failure to successfully or timely complete annual assessments of our internal controls required by Section 404 of the Sarbanes-Oxley Act could subject us to sanctions or investigation by regulatory authorities. Any such action could adversely affect our financial results or investors' confidence in us.

        For a more thorough discussion of the regulatory issues that may affect our business, see Item 1 of this report.

Risks Affecting Ourour Liquidity

QCII’sCenturyLink's and our high debt levels pose risks to our viability and may make us more vulnerable to adverse economic and competitive conditions, as well as other adverse developments.

Our ultimate parent, QCII, continuesCenturyLink, and we continue to carry significant debt. As of December 31, 2010,2011, our consolidated debt was approximately $8.0$8.3 billion, which was included in QCII’sCenturyLink's consolidated debt of approximately $11.9$21.8 billion as of that date. Approximately $3.5$4.3 billion of QCII’sCenturyLink's debt, which includes approximately $3.2$1.4 billion of our debt obligations, comes due over the next three years. While we currently believe QCIICenturyLink and we will have the financial resources to meet or refinance our obligations when they come due, we cannot fully anticipate our future condition or that of QCII,CenturyLink, the credit markets or the economy generally. We may have unexpected costsexpenses and liabilities, and we may have limited access to financing. In addition, it is the current expectation of QCII’s Board of Directors that QCII will continue

        We expect to pay a quarterly cash dividend. Cash used by QCII to pay dividends will not be available for other purposes, including the repayment of debt.

We may periodically need to obtainrequire financing in order to meet our debt obligations as they come due. Due to the unstable economy and the current credit market environment, we may not be able to refinance maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at all. We may also need to obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets) if revenuerevenues and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase, if QCIICenturyLink or weQCII are required to contribute a material amount of cash to QCII’stheir collective pension plan,plans, if QCIICenturyLink or weQCII are required to begin to pay other post-retirement benefits significantly earlier than is anticipated, if CenturyLink or if QCII becomesbecome subject to significant judgments or settlements in one or more of the matters discussed in “Legal Proceedings”Note 16—Commitments and Contingencies to our consolidated financial statements in Item 38 of this report, but we would need to do so in a manner consistent with the terms of QCII’s merger agreement with CenturyLink.report. We can give no assurance that this additional financing will be available on terms that are acceptable to us or at all. Also,If we may be impacted by factors relatingare able to or affecting our liquidity and capital resources due to perception in the market, impacts onobtain additional financing, our credit ratings could be adversely affected, which could further raise our borrowing costs and further limit our future access to capital and our ability to satisfy our debt obligations.

        Our significant levels of debt can adversely affect us in several other respects, including (i) exposing us to the risk of credit rating downgrades, which would raise our borrowing costs, (ii) hindering our ability to adjust to changing market, industry or provisions ineconomic conditions, (iii) limiting our financing agreements that may restrict our flexibility under certain conditions.ability to access the capital markets, (iv) limiting the amount of free cash flow available for future operations, acquisitions, dividends, or other uses, (v) making us more vulnerable to economic or industry downturns, including interest rate increases, and (vi) placing us at a competitive disadvantage compared to less leveraged competitors.

QCII’s $1.035 billion revolving credit facility (referred to as the Credit Facility), which is currently undrawn, has a        Certain of CenturyLink's and QCII's debt issues have cross payment default provision, and the Credit Facility and certain other debt issues of QCII and its other subsidiaries haveor cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise


Table of Contents

arise from a default or acceleration of a single debt instrument. As a

subsidiary of QCII, anyAny such event could adversely affect our ability to conduct business or access the capital markets and could adversely impact our credit ratings. In addition, the Credit Facility contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the legal matters discussed in “Legal Proceedings”See "Liquidity and Capital Resources" in Item 37 of this report.report for additional information about CenturyLink's credit facility.

The degree to which we, together with QCII,CenturyLink, are leveraged may have other important limiting consequences, including the following:



making us more vulnerable to downturns in general economic conditions or in any of our businesses;



limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and



impairing our credit ratings or our ability to obtain additional financing in the future for working capital, capital expenditures or general corporate purposes.

We may be unable to significantly reduce the substantial capital requirements or operating expenses necessary to continue to operate our business, which may in turn affect our operating results.

The industry in which we operate is capital intensive, and we anticipate that our capital requirements will continue to be significant in the coming years. Although we have reduced our operating expenses over the past few years, we may be unable to further significantly reduce these costs, even if revenuerevenues in some areas of our business isare decreasing. While we believe that our planned level of capital expenditures will meet both our maintenance and our core growth requirements going forward, this may not be the case if circumstances underlying our expectations change.

Adverse changes in the value of assets or obligations associated with QCII’sQCII's qualified pension plan could negatively impact QCII’sQCII's liquidity, which may in turn affect our business and liquidity.

Our        Substantially all of our employees participate in a qualified pension plan sponsored by QCII.

The funded status of thisQCII's qualified pension plan is the difference between the value of plan assets and the benefit obligation. The accounting unfunded status of QCII’sQCII's qualified pension plan was $585$627 million atas of December 31, 2010.2011. Adverse changes in interest rates or market conditions, among other assumptions and factors, could cause a significant increase in QCII’sQCII's benefit obligation or a significant decrease in the value of plan assets. These adverse changes could require QCII to contribute a material amount of cash to its pension plan 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’sQCII'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 currentCurrent funding laws and regulations require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. QCII opted to make a contribution of $307 million in December 2011, and therefore, will not be required to make a cash contribution in 2011. QCII expects to begin making required contributions to the plan during 2012 and estimates that these 2012 contributions could be between $300 million and $350 million.2012. Although potentially significant in the aggregate, QCII currently expects that plan contributions in 2013 and beyond will decrease annually from the 2012 expected2011 contribution amount. However, the actual amount of required contributions to the plan in 2013 and beyond will dependare subject to several variables, many of which are beyond our control, including earnings on earnings onplan investments, discount rates, demographic experience, changes in the plan benefits and changes in funding laws and regulations. Any future material cash contributions in 2011 and beyond could have a negative impact on QCII’sQCII's liquidity by reducing its cash flows, which in turn could affect our liquidity.


The cash needsTable of our affiliated companies consume a significant amount of the cash we generate.Contents

We regularly declare and pay dividends to our direct parent, QSC. We may declare and pay dividends in excess of our earnings to the extent permitted by applicable law, which may consume a significant amount of the cash we generate. Our debt covenants do not limit the amount of dividends we can pay to our parent.

Our debt agreements and the debt agreements of QCIICenturyLink and its other subsidiaries allow us and QCII to incur significantly more debt, which could exacerbate the other risks described in this report.

The terms of QCII’s and our debt instruments permit both QCII and us to incurthe debt instruments of CenturyLink and its other subsidiaries permit additional indebtedness. Additional debt may be necessary for many reasons, including to adequately respond to competition, to comply with regulatory requirements related to our service obligations or for financial reasons alone. Incremental borrowings or borrowings at maturity on terms that impose additional financial risks to our various efforts to improve our operating results and financial condition could exacerbate the other risks described in this report.

CenturyLink plans to access the public debt markets, and we cannot assure you that these markets will remain free of disruptions.

        CenturyLink has a significant amount of indebtedness that it intends to refinance over the next several years, principally it expects through the issuance of debt securities of CenturyLink, Qwest Corporation ("QC") or both. CenturyLink's ability to arrange additional financing will depend on, among other factors, its financial position and performance, as well as prevailing market conditions and other factors beyond its control. Prevailing market conditions could be adversely affected by the ongoing sovereign debt crises in Europe, the failure of the United States to reduce its deficit in amounts deemed to be sufficient, possible further downgrades in the credit ratings of the U.S. debt, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad. As a result, CenturyLink cannot assure you that it will be able to obtain additional financing on terms 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.

Other Risks Relating to Qwest

If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies, the accuracy of our financial statements and related disclosures could be affected.

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are described in Item 7 of this report, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that are considered “critical”"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.

Taxing authorities may determine we owe additional taxes relating to various matters, whichTax audits or changes in tax laws could adversely affect our financial results.us.

We were included in the consolidated federal income tax return of QCII for the periods before the April 1, 2011 closing of CenturyLink's acquisition of QCII, and we are included in the consolidated federal income tax return of QCII.CenturyLink for periods on or after that date. As such, we could be severally liable for tax examinations and adjustments attributedattributable to other members of the QCII or CenturyLink affiliated group.groups, as applicable. As a significant taxpayer, QCII is (and CenturyLink will be) subject to frequent and regular audits by the Internal Revenue Service as well as state and local tax authorities. These audits could subject us to tax liabilities if adverse positions are taken by these tax authorities.

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


Table of Contents

agreements and applicable tax law. We have not generally provided for liabilities attributable to current or former affiliated companies or for claims they have asserted or may assert against us.

We believe that we have adequately provided for tax contingencies. However, QCII’sQCII's tax audits and examinations may result in tax liabilities that differ materially from those that we have recorded in our consolidated financial statements. Because the ultimate outcomes of all of these matters are uncertain, we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our financial results.

Our agreements and organizational documents and applicable law could limit another party's ability to acquire us.

        A number of provisions in our agreements and organizational documents and various provisions of applicable law may delay, defer or prevent a future takeover of CenturyLink unless the takeover is approved by its Board of Directors. This could deprive our shareholders of any related takeover premium.

If we fail to extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, or if our unionized employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.

We are a party        As of December 31, 2011, we had approximately 25,000 employees, of which approximately 13,000 were members of either the International Brotherhood of Electrical Workers ("IBEW") or the Communications Workers of America ("CWA"). From time to collective bargainingtime, our labor agreements with our laborthese unions which represent a significant numberlapse, and we typically negotiate the terms of our employees.new agreements. Our current four-year agreements with the Communications Workers of America, orIBEW and CWA and the International Brotherhood of Electrical Workers, or IBEW,will expire on October 6, 2012. Although we believe that

        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 relations with our employeesability to provide services and unions are satisfactory, no assurance can be given that we will be ableresult in increased cost to successfully extend or renegotiate our collective bargainingus. In addition, new labor agreements as they expire from time

to time. The impact of future negotiations, including changes in wages and benefit levels,may impose significant new costs on us, which could have a material impact onimpair our financial results. Also, if we fail to extendcondition or renegotiate our collective bargaining agreements, if significant disputes with our unions arise, or if our unionized workers engage in a strike or other work stoppage, we could incur higher ongoing labor costs or experience a significant disruptionresults of operations in the future. To the extent they contain benefit provisions; these agreements also limit our flexibility to change benefits in response to industry or competitive changes. In particular, the post-employment benefits provided under these agreements cause us to incur costs not faced by many of our competitors, which could have a material adverse effect onultimately hinder our business.competitive position.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.        Not applicable.


Table of Contents


ITEM 2.    PROPERTIES

Our principal properties do not lend themselvesproperty, plant and equipment consists principally of telephone lines, central office equipment, and land and buildings related to simple description by character and location.our telephone operations. The components of our gross investment in property, plant and equipment consisted of the following asfollowing:

 
 Successor  
 Predecessor 
 
 December 31,
2011
 

 December 31,
2010
 

Land

  4%   nm 

Fiber, conduit and other outside plant(1)

  39%   47%

Central office and other network electronics(2)

  26%   43%

Support assets(3)

  29%   10%

Construction in progress(4)

  2%   nm 
        

Gross property, plant and equipment

  100%   100%
        

nm–Represents less than 1% of December 31, 2010gross property, plant and 2009:equipment.

   December 31, 
   2010  2009 

Components of gross investment in property, plant and equipment:

   

Land and buildings

   7  7

Communications equipment

   42  42

Other network equipment

   47  47

General-purpose computers and other

   4  4
         

Total

   100  100
         

Land

(1)
Fiber, conduit and buildingsother outside plant consists of land, land improvements, centralfiber and metallic cable, conduit, poles and other supporting structures.

(2)
Central office and certain administrative office buildings. Communications equipmentother network electronics consists primarily of circuit and packet switches, routers, transmission electronics and transmission electronics. Other network equipment includes primarily conduit and cable. General-purposeelectronics providing service to customers.

(3)
Support assets consist of buildings, computers and other consists principallyadministrative and support equipment.

(4)
Construction in progress includes property of computers, office equipment, vehicles and other general support equipment.the foregoing categories that has not been placed in service as it is still under construction.

        We own substantially all of our telecommunications equipment required for our business. However, we lease certain facilities and equipment under various capital lease arrangements when the leasing arrangements are more favorable to us than purchasing the assets. Due to favorable economics, we have increasingly turned to financing our assets through capital leases. Total gross investment in property, plant and equipment was approximately $44.2 billion and $43.7 billion as of December 31, 2010 and 2009, respectively, before deducting accumulated depreciation.

We also own and lease administrative offices in major metropolitan locations primarily within our local service area. Substantially all of our communications equipment and other network electronics equipment is located in buildings or on land that we own or on landlease within our local service area.

        On April 1, 2011, our indirect parent, QCII, became a wholly owned subsidiary of CenturyLink. On the date of the acquisition, our assets and liabilities were recognized at fair value. This revaluation has been reflected in our financial statements and, therefore, has resulted in a new basis of accounting for the successor period beginning on April 1, 2011. As of the successor date of December 31, 2011 and the predecessor date of December 31, 2010, our total net property, plant and equipment was approximately $7.5 billion and approximately $10.2 billion, respectively. For additional information, see Note 2—Acquisition of QCII by CenturyLink and Note 6—Property, Plant and Equipment to our consolidated financial statements in Item 8 of this report.

ITEM 3.    LEGAL PROCEEDINGS

QCII is involved in several legal proceedings to which we are not a party that, if resolved against QCII, could have a material adverse effect on our business and financial condition. We have included below a discussion of these matters. Only those matters to which we are a party represent contingencies for which we have accrued, or could reasonably anticipate accruing, liabilities if appropriate to do so. We are not a party to any of the matters discussed below and therefore have not accrued any liabilities for these matters.

In this section, when we refer to a class action as “putative” it is because a class has been alleged, but not certified in that matter. Until and unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to represent.

The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate QCII to indemnify its former directors, officers or employees with respect to certain of the matters described below, and QCII has been advancing legal fees and costs to certain former directors, officers or employees in connection with certain matters described below.

KPNQwest Litigation/Investigation

On September 29, 2010, the trustees in the Dutch bankruptcy proceeding for KPNQwest, N.V. (of which QCII was a major shareholder) filed a lawsuit in district court in Haarlem, the Netherlands, alleging tort and mismanagement claims under Dutch law. QCII and Koninklijke KPN N.V. (“KPN”) are defendants in this

lawsuit along with a number of former KPNQwest supervisory board members and a former officer of KPNQwest, some of whom were formerly affiliated with QCII. Plaintiffs allege, among other things, that defendants’ actions were a cause of the bankruptcy of KPNQwest, and they seek damages for the bankruptcy deficit of KPNQwest, which is claimed to be approximately €4.2 billion (or approximately $5.6 billion based on the exchange rate on December 31, 2010), plus statutory interest.

On September 13, 2006, Cargill Financial Markets, Plc and Citibank, N.A. filed a lawsuit in the District Court of Amsterdam, the Netherlands, against QCII, KPN, KPN Telecom B.V., and other former officers, employees or supervisory board members of KPNQwest, some of whom were formerly affiliated with QCII. The lawsuit alleges that defendants misrepresented KPNQwest’s financial and business condition in connection with the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of approximately €219 million (or approximately $290 million based on the exchange rate on December 31, 2010).

On August 23, 2005, the Dutch Shareholders Association (Vereniging van Effectenbezitters, or VEB) filed a petition for inquiry with the Enterprise Chamber of the Amsterdam Court of Appeals, the Netherlands, with regard to KPNQwest. VEB sought an inquiry into the policies and course of business at KPNQwest that are alleged to have caused the bankruptcy of KPNQwest in May 2002, and an investigation into alleged mismanagement of KPNQwest by its executive management, supervisory board members, joint venture entities (QCII and KPN), and KPNQwest’s outside auditors and accountants. On December 28, 2006, the Enterprise Chamber ordered an inquiry into the management and conduct of affairs of KPNQwest for the period January 1 through May 23, 2002. On December 5, 2008, the Enterprise Chamber appointed investigators to conduct the inquiry. VEB claims that certain individuals have assigned to it their claims for losses totaling approximately €40 million (or approximately $55 million based on the exchange rate on December 31, 2010), which those individuals allegedly incurred on investments in KPNQwest securities. VEB has not yet filed any adjudicative action to assert those claims.

On June 7, 2010, a number of parties, including QCII and KPN, reached a settlement with VEB for €19 million (or approximately $25 million based on the exchange rate on December 31, 2010), conditioned in part on the termination of the investigation by the Enterprise Chamber. Pursuant to the terms of the settlement, VEB formally requested that the Enterprise Chamber terminate the investigation. The Enterprise Chamber denied that request and directed the investigation to proceed. On an appeal of that decision, the Dutch Supreme Court reversed the Enterprise Chamber’s decision and, among other things, referred the case back to the Enterprise Chamber to terminate the investigation.

QCII will continue to defend against the pending KPNQwest litigation matters vigorously.

QCII Stockholder Litigation

In the weeks following the April 22, 2010 announcement of QCII’s pending merger with CenturyLink, purported QCII stockholders filed 17 lawsuits against QCII, its directors, certain of its officers, CenturyLink and SB44 Acquisition Company. The purported stockholder plaintiffs commenced these actions in three jurisdictions: the District Court for the City and County of Denver, the United States District Court for the District of Colorado, and the Delaware Court of Chancery. The plaintiffs generally allege that QCII’s directors breached their fiduciary duties in approving the merger and seek to enjoin the merger and, in some cases, damages if the merger is completed. Many of the lawsuits also challenge the sufficiency of the disclosures in the preliminary joint proxy statement-prospectus relating to the merger, which was filed with the SEC on June 4, 2010.

QCII, and its directors, believe that all of these actions are without merit. The defendants nevertheless negotiated with the purported stockholder plaintiffs regarding a settlement of the claims asserted in all of these actions, including the claims that challenge the sufficiency of the disclosures in the preliminary joint proxy statement-prospectus. On July 16, 2010, the parties entered into a memorandum of understanding reflecting the terms of their agreement-in-principle for a settlement of all of the claims asserted in these actions. Pursuant to

this agreement, defendants included additional disclosures in the final joint proxy statement-prospectus filed with the SEC on July 19, 2010. On December 17, 2010, the United States District Court for the District of Colorado preliminarily approved the settlement, and notice was subsequently provided to stockholders of the proposed final resolution. A final fairness hearing is scheduled for February 25, 2011. If the settlement is approved at the final hearing, all of these actions will be dismissed, with prejudice. The defendants intend to defend their positions in these matters vigorously to the extent they are not fully resolved by the settlement.

Other Matters

Several putative class actions relating to the installation of fiber-optic cable in certain rights-of-way were filed against several other subsidiaries of QCII on behalf of landowners on various dates and in various courts in Arizona, California, Colorado, Georgia, Illinois, Indiana, Kansas, Massachusetts, Mississippi, Missouri, Nevada, New Mexico, Oregon, South Carolina, Tennessee, Texas and Utah. For the most part, the complaints challenge the right to install fiber-optic cable in railroad rights-of-way. The complaints allege that the railroads own the right-of-way as an easement that did not include the right to permit the defendants to install fiber-optic cable in the right-of-way without the plaintiffs’ consent. Most of the actions purport to be brought on behalf of state-wide classes in the named plaintiffs’ respective states, although two of the currently pending actions purport to be brought on behalf of multi-state classes. Specifically, the Illinois state court action purports to be on behalf of landowners in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin, and the Indiana state court action purports to be on behalf of a national class of landowners. In general, the complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages. On July 18, 2008, a federal district court in Massachusetts entered an order preliminarily approving a settlement of all of the actions described above, except the action pending in Tennessee. On September 10, 2009, the court denied final approval of the settlement on grounds that it lacked subject matter jurisdiction. On December 9, 2009, the court issued a revised ruling that, among other things, denied a motion for approval as moot and dismissed the matter for lack of subject matter jurisdiction.

One of QCII’s other subsidiaries, Qwest Communications Company, LLC, or QCC, is a defendant in litigation filed by several billing agents for the owners of payphones seeking compensation for coinless calls made from payphones. The matter is pending in the United States District Court for the District of Columbia. Generally, the payphone owners claim that QCC underpaid the amount of compensation due to them under FCC regulations for coinless calls placed from their phones onto QCC’s network. The claim seeks compensation for calls, as well as interest and attorneys’ fees. QCC will vigorously defend against this action.

A putative class action filed on behalf of certain of QCII’s retirees was brought against QCII, the Qwest Group Life Insurance Plan and other related entities in federal district court in Colorado in connection with QCII’s decision to reduce the life insurance benefit for these retirees to a $10,000 benefit. The action was filed on March 30, 2007. The plaintiffs allege, among other things, that QCII and other defendants were obligated to continue their life insurance benefit at the levels in place before QCII decided to reduce them. Plaintiffs seek restoration of the life insurance benefit to previous levels and certain equitable relief. The district court ruled in QCII’s favor on the central issue of whether QCII properly reserved our right to reduce the life insurance benefit under applicable law and plan documents. The plaintiffs subsequently amended their complaint to assert additional claims. In 2009, the court dismissed or granted summary judgment to QCII on all of the plaintiffs’ claims. The plaintiffs have appealed the court’s decision to the Tenth Circuit Court of Appeals.

QCII continues to evaluate the method it uses to assess the amount of USF payments that must be made on certain products, and during the year ended December 31, 2010 QCII recorded an adjustment to its liability of $15 million related to previous years’ USF payments. This ongoing evaluation may result in further adjustments to QCII’s previous years’ USF payments and charges to customers.

ITEM 4. RESERVED

        

The information contained in Note 16—Commitments and Contingencies to our consolidated financial statements included in Item 8 of this report is incorporated herein by reference.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.


Table of Contents


PART II

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

Not Applicable.

ITEM 6.    SELECTED FINANCIAL DATA

The following table of selected consolidated financial data should be read in conjunction with and are qualified by reference to the consolidated financial statements and notes thereto in Item 8 of this report and “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" in Item 7 of this report.

        The comparability of the following selected financial data below is significantly impacted by various changes in accounting principles includingCenturyLink's April 1, 2011 indirect acquisition of us and the adoptionresulting revaluation of our assets and liabilities. As a result of the acquisition, the following table 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. These historical results are not necessarily indicative of results that you can expect for any future period.

        Selected financial information from the consolidated statements of operations data is as follows:

 
 Successor(1)  
 Predecessor(1) 
 
 Nine Months Ended
December 31,
2011
 


 Three Months Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 Year Ended
December 31,
2008
 Year Ended
December 31,
2007
 
 
  
  
  
  
  
  
  
 
 
 (Dollars in millions)
 

Operating revenues

 $6,635    2,268  9,271  9,731  10,388  10,691 

Operating expenses

  5,436    1,630  6,788  7,169  7,525  7,631 

Operating income

  1,199    638  2,483  2,562  2,863  3,060 

Income before income tax expense

  892    490  1,873  1,921  2,267  2,440 

Net income

  543    299  1,082  1,197  1,438  1,527 

(1)
See "Management's Discussion and Analysis of Financial Accounting Standards Board, or FASB, Interpretation No., or FIN, 48, “AccountingCondition and Results of Operations—Results of Operations" in Item 7 of this report for Uncertaintya discussion of unusual items affecting the results for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011, as well as the predecessor year ended December 31, 2010.

        Selected financial information from the consolidated balance sheets is as follows:

 
 Successor  
 Predecessor 
 
 December 31,
2011
  
 December 31,
2010
 December 31,
2009
 December 31,
2008
 December 31,
2007
 
 
  
  
  
  
  
  
 
 
 (Dollars in millions)
 

Goodwill

 $9,453           

Total assets

  24,932    12,570  13,997  14,252  15,416 

Total long-term debt(1)

  8,325    8,012  8,386  7,588  7,911 

Total stockholder's equity (deficit)

  9,887    (831) 312  786  1,370 

(1)
Total long-term debt is the sum of current maturities of long-term debt and long-term debt on our consolidated balance sheets. For total obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Future Contractual Obligations" in Income Taxes” (Accounting Standards Codification, or ASC, 740), which was effectiveItem 7 of this report.

Table of Contents

        Selected financial information from the consolidated statements of cash flows is as follows:

 
 Successor  
 Predecessor 
 
 Nine Months Ended
December 31,
2011
 

 Three Months Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 Year Ended
December 31,
2008
 Year Ended
December 31,
2007
 
 
  
  
  
  
  
  
  
 
 
 (Dollars in millions)
 

Other data:

                     

Net cash provided by operating activities

 $2,201    869  3,235  3,167  3,479  3,670 

Net cash used in investing activities

  (1,191)   (335) (1,256) (1,100) (1,402) (1,254)

Net cash used in financing activities

  (1,208)   (525) (2,801) (1,286) (2,136) (2,400)

Payments for property, plant and equipment and capitalized software

  (1,036)   (341) (1,240) (1,106) (1,404) (1,270)

        The following table presents certain selected consolidated operating data as of the following dates:

 
 Successor  
 Predecessor 
 
 December 31, 2011  
 December 31, 2010 
 
  
  
  
 
 
 (in thousands)
 

Broadband subscribers(1)

  3,084    2,940 

Access lines

  8,533    9,193 

(1)
We have updated our methodology for us on January 1, 2007.counting our broadband subscribers and access lines and have reclassified prior year amounts to conform to the current period presentation. For additional information see "Results of Operations—Overview" in Item 7 in this report.

Table of Contents

   Years Ended December 31, 
   2010  2009  2008  2007  2006 
   (Dollars in millions) 

Operating revenue

  $9,271   $9,731   $10,388   $10,691   $10,721  

Operating expenses

   6,788    7,169    7,525    7,631    8,288  

Income before income taxes

   1,873    1,921    2,267    2,440    1,882  

Net income(1)

   1,082    1,197    1,438    1,527    1,203  

Other data:

      

Cash provided by operating activities

  $3,235   $3,167   $3,479   $3,670   $3,374  

Cash used for investing activities

   1,256    1,100    1,402    1,254    1,279  

Cash used for financing activities

   2,801    1,286    2,136    2,400    1,980  

Expenditures for property, plant and equipment and capitalized software

   1,240    1,106    1,404    1,270    1,410  
   December 31, 
   2010  2009  2008  2007  2006 
   (Dollars in millions) 

Balance sheet data:

      

Total assets

  $13,686   $15,038   $15,443   $16,522   $17,404  

Total borrowings—net(2)

   8,012    8,386    7,588    7,911    7,735  

Total borrowings—net to total capital ratio(3)

   112  96  91  85  77

(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 2010, 2009 and 2008. Results for 2007 and 2006 were affected by the changes in accounting principles described above the table.
(2)Total borrowings—net is the sum of current portion of long-term borrowings and long-term borrowings—net 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.
(3)The total borrowings—net to total capital ratio is a measure of the percentage of total borrowings—net in our capital structure. The ratio is calculated by dividing total borrowings—net by total capital. Total borrowings—net is the sum of current portion of long-term borrowings and long-term borrowings—net on our consolidated balance sheets. Total capital is the sum of total borrowings—net and total stockholder’s equity or deficit.

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

All references to "Notes" in this Item 7 refer to the Notes to Consolidated Financial Statements included in Item 8 of this annual report.

Certain statements in this report constitute forward-looking statements. See “Business—Special"Special Note Regarding Forward-Looking Statements”Statements" in Item 1 of this report for additional factors relating to these statements and see “Risk Factors”"Risk Factors" in Item 1A of this report for a discussion of certain risk factors applicable to our business, financial condition and results of operations.

Business Overview

        We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and Presentationwholesale customers. Our communications services include local, network access, private line (including special access), broadband, data, 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.

We offer data, Internet, video and voicegenerate the majority of our revenues from services withinprovided in the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.

On        As discussed in Note 2—Acquisition of QCII by CenturyLink, on April 21, 2010,1, 2011, our indirect parent, QCII, entered intobecame a merger agreement wherebywholly owned subsidiary of CenturyLink.

        Since April 1, 2011, our results of operations have been included in the consolidated results of operations of CenturyLink. CenturyLink will acquirehas accounted for its acquisition of QCII and us under the acquisition method of accounting, which resulted in a tax-free, stock-for-stock transaction. Under the termsassignment of the agreement, QCII’s stockholders will receive 0.1664 sharespurchase price to the assets acquired and liabilities assumed based on preliminary estimates of CenturyLink common stock for each share of QCII’s common stock they own at closing. Based on QCII’s and CenturyLink’s number of outstanding shares astheir acquisition date fair values. The determination of the datefair values of the merger agreement, at closing CenturyLink shareholders are expectedacquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. We expect to own approximately 50.5% and QCII’s stockholders are expected to own approximately 49.5% of the combined company. On July 15, 2010, QCII and CenturyLink received notification from the Department of Justice and the Federal Trade Commission that they received early termination of the waiting period under the Hart-Scott-Rodino Act, and as such have clearance from a federal antitrust perspective to proceed with the merger. On August 24, 2010, stockholders of each company approved all proposals relating to the merger. Completion of this transaction remains subject to a number of regulatory approvals as well as other customary closing conditions. QCII and CenturyLink have received most of the necessary approvals from state public service or public utility commissions, but they still need approvals from the FCC and several other state public service or public utility commissions. While the timing of the receipt of these approvals cannot be predicted with certainty, QCII currently expects to receive all required approvals incomplete our final fair value determinations no later than the first quarter and is planning toward an April 1st closing date. If the merger agreement is terminated under certain circumstances, QCIIof 2012. Our final fair value determinations may be obligated to pay CenturyLink a termination fee of $350 million.

We have not recognized certain expenses that are contingent on completion of QCII’s merger. These expenses include compensation expense comprised of retention bonuses, severance and stock-based compensation for stock-based awards that will vest in connection with QCII’s merger. These contingent expenses will be recognizedsignificantly different than those reflected in our consolidated financial statements commencingas of the successor date of December 31, 2011. Based on our preliminary estimate, the aggregate consideration exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities of us by $9.453 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 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 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 financial statements for the successor periods will not be comparable to our previously reported financial statements, including the predecessor period financial statements in whichthis report.

        We have recognized $146 million of certain expenses associated with activities related to CenturyLink's indirect acquisition of us during the merger occurs. The final amountsuccessor nine months ended December 31, 2011. These expenses were comprised of primarily severance, retention bonuses, share-based compensation expenseallocated to beus by QCII and system integration consulting. During the predecessor three months ended March 31, 2011, we recognized is partially dependent upon personnel decisions that will be made as$2 million of expenses associated with our activities related to the acquisition. As part of the integration planning. These amounts may be material.acquisition accounting on April 1, 2011, we also included in our goodwill


Table of Contents

Upon$22 million for certain performance awards and $14 million related to retention bonuses, all of which were contingent on the completion of the merger, our assetsacquisition and liabilities will be revalued and recorded at fair value. The assignmenthad no benefit to CenturyLink after the acquisition.

        CenturyLink has cash management arrangements between certain of fair value will require a significant amount of judgment. The use of fair value measures will affect the comparability of our post-merger financial information and may make it more difficult to predict earnings in future periods. For example, we have certain deferred costs and deferred revenues on our balance sheet associated with installation activities and capacity leases whereby we incurred costs and received payments up front but are recognizing the related expenses and revenues over the estimated life of the customer or life of the contract. Based on the accounting guidance for business combinations, these existing deferred costs and deferred revenues are expected to be assigned little or no value in the purchase price allocation process and will thus be eliminated.

We could experience significant changes in our cost structure as the services provided to and purchased from our affiliates may change substantially in connection with QCII’s pending merger.

Our operations are included in the consolidated operations of our ultimate parent, QCII, and generally account forits subsidiaries, including us, under which the majority of QCII’s consolidated revenue. In additionour cash balance is transferred on a daily basis to our operations, QCII maintainsCenturyLink as a national

short-term affiliate loan.

telecommunications network. Through its fiber-optic network, QCII provides some long-distance, data and Internet services that we do not provide. You can find additional information about these services that we do not provide in “Business” in Item        Since the April 1, 2011 closing of this report.

For certain products and services we provide, and for a varietyCenturyLink's indirect acquisition of internal communications functions, we use parts of QCII’s telecommunications network to transport voice and data traffic. Through its network, QCII also provides nationally and globally some data and Internet access services that are similar to services we provide withinus, our local service area. These services include private line, and our traditional wide area network, or WAN, services, which consist of asynchronous transfer mode, or ATM, and frame relay.

Our operations are integrated into and are reported as part of the segments of QCII and contribute to all three of QCII’s segments: business markets, mass markets and wholesale markets. We have the same Chief Operating Decision Maker, orCenturyLink. CenturyLink's chief operating decision maker ("CODM") has become our CODM, as QCII. QCII’s CODMbut reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the SEC.Securities and Exchange Commission ("SEC"). Consequently, we do not provide our discrete financial information to the CODM on a regular basis. Additional information on our contributions to QCII’s segments is provided in Note 15—Contribution to QCII Segments to our consolidated financial statements in Item 8 of this report.

During the firstsecond quarter of 2010, we changed the definitions we use2011, certain USF surcharges were reclassified from our legacy services to classify expenses as cost of sales, selling expenses or general, administrativeaffiliates and other operating expenses and, asservices revenues to better align with the classifications that our new ultimate parent, CenturyLink, uses. As a result, certain expenses in our consolidated statements of operations for the prior year have beenwe reclassified previously reported amounts to conform to the current yearperiod presentation. Our new definitionsFor the predecessor three months ended March 31, 2011, this reclassification resulted in a reduction of these expenses are as follows:

Cost of sales (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers and affiliates. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages and certain benefits); equipment sales expenses (such as modem expenses); rents and utilities expenses incurred by our network operations; fleet expenses; and other expenses directly related to our network operations (such as professional fees and outsourced services).

Selling expenses are expenses incurred in selling products and services to our customers and affiliates. These expenses include: employee-related expenses directly attributable to selling products or services (such as salaries, wages, internal commissions and certain benefits); marketing and advertising; external commissions; bad debt expense; and other selling expenses (such as professional fees and outsourced services).

General, administrative and other operating expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses for administrative functions (such as salaries, wages and certain benefits); taxes and fees (such as property and other taxes and USF charges); rents and utilities expenses incurred by our administrative offices; and other general, administrative and other operating expenses (such as professional fees). These expenses also include our combined net periodic pension and post-retirement benefits expenses for all eligible employees and retirees allocated to us from QCII.

These definitions reflect changes primarilylegacy service revenues and an increase to reclassify expenses for: rent and utilities incurred by our network operations; fleet; network and supply chain management; and insurance and risk management from general, administrativeaffiliates and other operating expenses to costservices revenues of sales, where these expenses are more aligned with how we now manage our business. We believe these changes allow users of our financial statements to better understand our expense structure. These expense classifications may not be comparable to those of other companies. These changes had no impact on total operating expenses or net income for any period. These changes resulted in$34 million. For the reclassification of $199 million and $212 million from the general, administrative and other operating expenses and selling expenses categories to cost of sales for thepredecessor years ended December 31, 2010 and 2009, the reclassification resulted in a reduction of legacy service revenues and 2008,an increase of affiliates and other services revenues of $133 million and $74 million, respectively.

We anticipatecurrently categorize our products, services and revenues among the following three categories:

    Strategic services, which include primarily private line (including special access), broadband, video (including DIRECTV) and Verizon Wireless services;

    Legacy services, which include primarily local, 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

    Affiliates and other services, which consist primarily of USF surcharges and services we provide to our affiliates. We provide to our affiliates data, local services and billing and collections services that we will changealso provide to external customers. In addition, we provide to our definitions again once QCII’s merger with CenturyLink is complete in order to conform our definitions to those used by CenturyLink.

    affiliates: marketing, sales and advertising services; computer system development and support services; network support and technical services; and other support services, such as legal, regulatory, finance and accounting, tax and human resources.

We have reclassified certain prior year amounts in our Annual Report on Form 10-K for        As of the year endedsuccessor date of December 31, 20092011, we served approximately 3.1 million broadband subscribers. We also operated approximately 8.5 million access lines, which are telephone lines reaching from the customers' premises to conform toa connection with the current year presentation.

PSTN. During the firstsecond quarter of 20102011, we updated our methodology for counting our subscribers and access lines where we provideto conform to the services.methodology used by CenturyLink, our ultimate parent. We now count broadband subscribers and access lines when we earn revenue associated with them.install the service. Our access linenew 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 and residential lines that are used solely to provide broadband services. Our new broadband methodologyaffiliates. It also excludes businessunbundled loops and wholesale markets customers from ourincludes stand-alone broadband subscribers.

During the first quarter of 2010 we also updated our Our new methodology for counting our partnership based video subscribers. We now count these subscribers when we earn revenue associated with them, regardless of whether we actually bill the subscribers for the services. Beginning in mid-2009 we began to earn an ongoing commission associated with video customers that we no longer bill so long as they remain active customers of DIRECTV. Because of the change in this commission we have begun to include them in our subscriber counts. This methodology change has increased our video subscribers by approximately 68,000 for the year ended December 31, 2010. We believe the methodology updates described above align our subscribers and access lines with our revenue and better reflect our ongoing operations.

We have restated our subscribers and access lines reported asmay not be comparable to those of December 31, 2009 to conform to the current year presentation. The table below quantifies these changes by segment:other companies.

        

   December 31, 2009 
   Business
Markets
  Mass
Markets
  Wholesale
Markets
   Total 
   (in thousands) 

Previously reported access lines

   2,396    6,840    1,030     10,266  

Affiliates and us

   (403  —      —       (403

Alignment to billed units

   10    25    27     62  
                  

Currently reported access lines

   2,003    6,865    1,057     9,925  
                  

Previously reported broadband subscribers

   —      2,970    —       2,970  

Excluding business and wholesale customers

   —      (143  —       (143

Alignment to billed units

   —      (24  —       (24
                  

Currently reported broadband subscribers

   —      2,803    —       2,803  
                  

Previously reported video subscribers

   —      872    —       872  

Alignment to billed units

   —      60    —       60  
                  

Currently reported video subscribers

   —      932    —       932  
                  

We have restated our subscribers and access lines reported as of December 31, 2008 to conform to the current year presentation. The table below quantifies these changes by segment:

   December 31, 2008 
   Business
Markets
  Mass
Markets
  Wholesale
Markets
   Total 
   (in thousands) 

Previously reported access lines

   2,636    7,796    1,133     11,565  

Affiliates and us

   (484  —      —       (484

Alignment to billed units

   (6  11    41     46  
                  

Currently reported access lines

   2,146    7,807    1,174     11,127  
                  

Previously reported broadband subscribers

   —      2,774    —       2,774  

Excluding business and wholesale customers

   —      (151  —       (151

Alignment to billed units

   —      (49  —       (49
                  

Currently reported broadband subscribers

   —      2,574    —       2,574  
                  

Previously reported video subscribers

   —      757    —       757  

Alignment to billed units

   —      15    —       15  
                  

Currently reported video subscribers

   —      772    —       772  
                  

Our analysis presented below is organized to provide the information we believe will be useful for understanding the relevant trends affecting our business. The discussion in MD&A is presented on a combined basis for the successor periods in 2011. We believe that the discussion on a combined basis is more meaningful as it allows the results of operations to be analyzed to the annual period in 2010. This


Table of Contents

discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this report.

Business Trends

Our financial results were impacted by several significant trends, which are described below. We expect that these trends will continue to affect our results of operations, cash flows or financial position.

    Strategic services.  We continue to see shifts in the makeup of our total revenues as customers move to strategic services, such as private line, broadband and video services, from legacy services, such as local and access services. Revenues from our strategic services represented 36% and 33% of our total revenues for the combined year ended December 31, 2011 and the predecessor year ended December 31, 2010, respectively, and this percentage continues to grow. We continue to focus on increasing subscribers of our broadband services particularly among consumer and small business customers. As of the successor date of December 31, 2011, we reached approximately 3.1 million broadband subscribers compared to approximately 2.9 million as of the predecessor date of December 31, 2010. We believe that continually increasing connection speeds is important to remaining competitive in our industry. As a result, we continue to invest in our fiber to the node, or FTTN, deployment, which allows for the delivery of higher speed broadband services than would otherwise generally be available through a more traditional telecommunications network made up of only copper wires. In addition to our FTTN deployment, we continue to expand our product offerings and enhance our marketing efforts as we compete in a maturing market in which most consumers already have broadband services. While traditional ATM based broadband services are declining, they have been more than offset by growth in fiber based broadband services. We expect these efforts will improve our ability to compete and increase our broadband revenues. Demand for our private line services continues to increase, despite our customers' optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue to impact our business, we ultimately believe the growth in fiber-based special access provided to wireless carriers for backhaul will, over time, offset the decline in copper-based special access provided to wireless carriers as they migrate to Ethernet, although the timing and magnitude of this technological migration is uncertain.

    Legacy services.  Revenues from our legacy services represented 43% and 47% of our total revenues for the combined year ended December 31, 2011 and for the predecessor year ended December 31, 2010, respectively, and continue to decline. Our legacy services revenues have been, and we expect they will continue to be, adversely affected by access line losses. Intense competition and product substitution continue to drive our access line losses. For example, many consumers are substituting cable and wireless voice and electronic mail and social networking services for traditional voice telecommunications services. We expect that these factors will continue to impact our business. Service bundling and other product promotions, as described below, continue to be some of our responses to offset the loss of revenues as a result of access line losses.

    Service bundling and product promotions.  We offer our customers the ability to bundle multiple products and services. These customers can bundle local services with other services such as broadband, video and wireless. While our video and wireless services are an important piece of our customer retention strategy, they do not make a large contribution to strategic services revenues. However, we believe customers value the convenience of, and price discounts associated with, receiving multiple services through a single company. While bundle price discounts have resulted in lower average revenues for our individual products, we believe service bundles continue to positively impact our customer retention. In addition to our bundle

Table of Contents

Strategic services.We continue to see shifts in the makeup of our total revenue as customers move to strategic services, such as private line, broadband and DIRECTV video services, from legacy services, such as local and access services. Revenue from our strategic services represented 33% and 30% of our total revenue for the years ended December 31, 2010 and 2009, respectively, and this percentage continues to grow. With respect to broadband services, we continue to focus on increasing subscribers, particularly among consumer and small business customers. We reached approximately 2.9 million broadband subscribers at December 31, 2010 compared to approximately 2.8 million at December 31, 2009. Due to price compression, we believe the ability to continually increase connection speeds is competitively important. As a result, we continue to invest in our fiber to the node, or FTTN, deployment, which we launched to meet customer demand for higher broadband speeds. In addition to the FTTN deployment, we continue to expand our product offerings and enhance our marketing efforts as we compete in a competitive and maturing market in which a significant portion of consumers already have broadband services. We expect these efforts will improve our ability to compete and grow our broadband subscribers. Demand for the private line services we offer to business and wholesale customers continues to increase, despite our customers’ optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue to impact our business, we ultimately believe the growth in fiber based private line will offset our decline in copper based private line, although the timing of this technological migration is uncertain.

      discounts, we also offer limited time promotions on our broadband service for prospective customers who want our broadband product in their bundle which further aids our ability to attract and retain customers and increase usage of our services.

      Legacy services.Revenue from our legacy services represented 48% and 51% of our total revenue for the years ended December 31, 2010 and 2009, respectively and continues to decline. Our legacy services revenue has been, and we expect it will continue to be, adversely affected by access line losses. Intense competition and product substitution continue to drive our access line losses. For

      example, many consumers are substituting cable and wireless for traditional voice telecommunications services. This has increased the number and type of competitors within our industry and has decreased our market share. We expect that these factors will continue to impact our business. Product bundling and other product promotions, as described below, continue to be some of our responses to offset the loss of revenue as a result of access line losses.

      Product bundling and product promotions.We offer our customers, primarily consumers and small businesses, the ability to bundle multiple products and services. For example, through joint marketing and advertising efforts with our affiliates, these customers can bundle local services with other services such as broadband, video, long-distance and wireless. While video and wireless subscribers are an important piece of our customer retention strategy, they do not make a large contribution to strategic services revenue. We believe customers value the convenience of, and price discounts associated with, receiving multiple services through a single company. In addition to our bundle discounts, we also offer limited time promotions on our broadband service for qualifying customers who have our broadband product in their bundle, which we believe will positively affect our acquisition volume and drive customers to purchase more expanded offerings. While bundle price discounts have resulted in lower average revenue for our individual products, we believe product bundles continue to positively impact our customer retention.

      Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our workforce in response to our workload, productivity improvements, changes in the telecommunications industry and governmental regulations. Through planned reductions and normal employee attrition, we have reduced our workforce and employee-related expenses (net of severance) while achieving operational efficiencies and improving processes through automation and other innovative ways of operating our business.

      Operating efficiencies.  We continue to evaluate our operating structure and focus. This involves balancing our workforce in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and regulatory conditions.

      Pension and post-retirement benefits expenses.  Our indirect parent QCII is required to recognize in its consolidated financial statements certain expenses relating to its pension and post-retirement health care and life insurance benefits plans. These expenses are calculated based on several assumptions, including among other things discount rates and expected rates of return on plan assets that are generally set at December 31 of each year. Changes in these assumptions can cause significant changes in the combined net periodic benefits expenses QCII recognizes. QCII allocates the expenses of these plans to us and certain of its other affiliates. The allocation of expenses to us is based upon the demographics of our employees and retirees compared to all the remaining participants. Changes in QCII’s assumptions can cause significant changes in the net periodic pension and post-retirement benefits expenses we recognize.

      Based on current funding laws and regulations, QCII will not be required to make a cash contribution in 2011. QCII expects to begin making required contributions to the plan during 2012 and estimates that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, QCII currently expects that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plancombined net periodic benefits expenses QCII recognizes. QCII allocates the expenses of these plans to us and funding laws and regulations. The amounts contributed by us through QCII are not segregated or restricted and may be used to provide benefits to other employees of QCII’s subsidiaries. Historically, QCII has only required us to pay our portioncertain of its other affiliates. The allocation of expenses to us is based upon the demographics of our employees and retirees. Changes in QCII's assumptions can cause significant changes in the net periodic pension contribution.

      and post-retirement benefits expenses we recognize.

      Disciplined capital expenditures.  Our capital expenditures continue to be focused on our strategic services such as broadband and fiber to the tower, or FTTT. FTTT is a type of telecommunications network consisting of fiber-optic cables that run from a telecommunication provider's broadband interconnection points to cellular towers. FTTT allows for the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional telecommunications network.

            

    Disciplined capital expenditures. Our capital expenditures continue to be focused on our strategic services such as broadband. In 2011, we anticipate that our fiber investment, which includes fiber to the cell site, or FTTCS, will increase. Our projected capital expenditures for 2011 will be up to $1.3 billion. In addition, we may use lease financing in 2011 for some portion of our capital spending.

    While these trends are important to understanding and evaluating our financial results, the other transactions, additional events, uncertainties and trends discussed in “Risk Factors”"Risk Factors" in Item 1A of Part I of this report may also materially impact our business operations and financial results.

    Results of Operations

    Overview

    The following table summarizes our results of operations for the years ended December 31, 2010, 2009 and 2008 and the numberoperations:

     
     Successor  
     Predecessor Combined Predecessor Increase/
    (Decrease)
     % Change 
     
     Nine Months
    Ended
    December 31,
    2011
      
     Three
    Months
    Ended
    March 31,
    2011
     Year Ended
    December 31,
    2011
     Year Ended
    December 31,
    2010
     Combined
    2011 v
    Predecessor
    2010
     Combined
    2011 v
    Predecessor
    2010
     
     
     (Dollars in millions)
     

    Operating revenues

     $6,635    2,268  8,903  9,271  (368) (4)%

    Operating expenses

      5,436    1,630  7,066  6,788  278  4%
                     

    Operating income

      1,199    638  1,837  2,483  (646) (26)%

    Other income (expense)

      (307)   (148) (455) (610) (155) (25)%

    Income tax expense

      349    191  540  791  (251) (32)%
                     

    Net income

     $543    299  842  1,082  (240) (22)%
                     

    Employees

              24,697  26,050  (1,353) (5)%

    Table of employees as of December 31, 2010, 2009 and 2008:Contents

            

       Years Ended December 31,   Increase/(Decrease)  % Change 
       2010   2009   2008   2010 v
    2009
      2009 v
    2008
      2010 v
    2009
      2009 v
    2008
     
       (Dollars in millions, except employees)       

    Operating revenue

      $9,271    $9,731    $10,388    $(460 $(657  (5)%   (6)% 

    Operating expenses

       6,788     7,169     7,525     (381  (356  (5)%   (5)% 
                              

    Operating income

       2,483     2,562     2,863     (79  (301  (3)%   (11)% 

    Other expense (income)—net

       610     641     596     (31  45    (5)%   8
                              

    Income before income taxes

       1,873     1,921     2,267     (48  (346  (2)%   (15)% 

    Income tax expense

       791     724     829     67    (105  9  (13)% 
                              

    Net income

      $1,082    $1,197    $1,438    $(115 $(241  (10)%   (17)% 
                              

    Employees (as of December 31)

       26,050     27,805     30,549     (1,755  (2,744  (6)%   (9)% 

    2010 COMPARED TO 2009

    Operating Revenue

    Operating revenue decreased primarily due to lower legacy services revenue as a result of continued access line losses and declining revenue from our traditional WAN services. In addition, operating revenue from affiliates also decreased due to reduced services provided to affiliates. These decreases in overall operating revenue were partially offset by increased revenue in our strategic services as a result of increased volume of broadband subscribers and rates on broadband services and increased volume in private line services.

    The following table compares our operating revenue for the years ended December 31, 2010 and 2009:

       Years Ended
    December 31,
       Increase/
    (Decrease)
      %
    Change
     
       2010   2009   2010 v
    2009
      2010 v
    2009
     
       (Dollars in millions)    

    Operating revenue:

           

    Strategic services

      $3,059    $2,900    $159    5

    Legacy services

       4,456     4,996     (540  (11)% 

    Affiliates and other services

       1,756     1,835     (79  (4)% 
                    

    Total operating revenue

      $9,271    $9,731    $(460  (5)% 
                    

    The following table summarizes our broadband subscribers and videoaccess lines:

     
     Successor  
     Predecessor % Change 
     
     December 31, 2011  
     December 31, 2010 Successor 2011 v
    Predecessor 2010
     
     
     (in thousands)
      
     

    Operational metrics:

                

    Broadband subscribers

      3,084    2,940  5%

    Access lines

      8,533    9,193  (7)%

            During the second quarter of 2011, we updated our methodology for counting our subscribers and access lines where we provide the services. We historically counted access lines at the point we billed them. However, now we count access lines when we install the service. This change in our methodology has resulted in an approximately 69,000 decrease in our successor June 30, 2011 access lines. We have not retrospectively adjusted our predecessor period access lines for this methodology adjustment as it was not reasonably practicable for us to do so. Our access line methodology includes only those access lines that we use to provide services to external customers and excludes lines used solely by customer channel as of December 31, 2010us and 2009:our affiliates. Our new methodology also excludes unbundled loops and includes stand-alone broadband subscribers. We have conformed prior periods to our current presentation, unless noted above.

    Operating Revenues

       December 31,   Increase/
    Decrease
      %
    Change
     
       2010   2009   2010 v
    2009
      2010 v
    2009
     
       (in thousands)    

    Broadband subscribers

       2,906     2,803     103    4

    Video subscribers

       1,003     932     71    8

    Access lines:

           

    Mass markets

       6,038     6,865     (827  (12)% 

    Business markets

       1,872     2,003     (131  (7)% 

    Wholesale markets

       945     1,057     (112  (11)% 
                    

    Total access lines

       8,855     9,925     (1,070  (11)% 
                    

     
     Successor  
     Predecessor Combined Predecessor Increase/
    (Decrease)
     % Change 
     
     Nine Months
    Ended
    December 31,
    2011
      
     Three Months
    Ended
    March 31,
    2011
     Year Ended
    December 31,
    2011
     Year Ended
    December 31,
    2010
     Combined
    2011 v
    Predecessor
    2010
     Combined
    2011 v
    Predecessor
    2010
     
     
     (Dollars in millions)
     

    Strategic services

     $2,406    793  3,199  3,059  140  5%

    Legacy services

      2,796    1,003  3,799  4,323  (524) (12)%

    Affiliates and other services

      1,433    472  1,905  1,889  16  1%
                     

    Total operating revenues

     $6,635    2,268  8,903  9,271  (368) (4)%
                     

      Strategic Services

    Strategic services revenuerevenues increased primarily due to higher broadband revenuerevenues resulting from an increase innew subscribers andas well as an improving mix of higher priced, higher speed services. Strategicbroadband services revenue also increased due toand increased volumes in our private line services and revenue from our increased volume of Verizon Wireless subscribers, partially offset by decreased commissions on Verizon Wireless services.

      Legacy Services

    Legacy services revenuerevenues decreased primarily due toas a decline inresult of lower local and access services revenuerevenues due to access line loss declining demand for UNEs and reduced access services usage related to competitive pressures and product substitution, price compression and increased competition for the year ended December 31, 2010 compared to the same period in 2009.substitution. Legacy services revenues also decreased due to lower amortization of deferred revenue due to certain predecessor deferred revenue being assigned no value at the acquisition date, as well as lower revenues from our traditional WAN services, driven by industry consolidation anddue to customer migration, to more advanced technology services.product substitution and increased competition.

      Affiliates and Other Services Revenue

    Affiliates and other services revenue decreasedrevenues increased primarily due to reduced telecommunication services and associatedwe provided to support an affiliate's growth in its strategic service offerings. This was partially offset by reduced support provided as a result of a decline in customer demand for our affiliate’saffiliate's legacy telecommunication


    Table of Contents

    service offerings driven by technological migration and competition. In addition, we provided reduced support associated with an affiliate’s winding down of its video and data products and related services. These decreases in services were partially offset by an increase in services we provided to support an affiliate’s growth in its strategic service offerings. We estimate that the profit from services provided to our affiliates was approximately $280$200 million and $300$280 million, before income taxes for the yearscombined year ended December 31, 2011 and the predecessor year ended December 31, 2010, and 2009, respectively.

    Operating Expenses

            As discussed in Note 1—Basis of Presentation and Summary of Significant Accounting Policies in Item 8 of this report, during the first quarter of 2011, we changed the definitions we use to classify expenses as cost of services and products and selling, general and administrative and as a result, we reclassified previously reported amounts to conform to the current period presentation.

    The following table provides further detail regardingsummarizes our operating expenses for the years ended December 31, 2010 and 2009:expenses:

       Years Ended
    December 31,
       Increase/
    (Decrease)
      %
    Change
     
       2010   2009   2010 v
    2009
      2010 v
    2009
     
       (Dollars in millions)    

    Cost of sales (exclusive of depreciation and amortization):

           

    Employee-related costs

      $1,027    $1,084    $(57  (5)% 

    Other

       628     620     8    1
                    

    Total cost of sales

       1,655     1,704     (49  (3)% 

    Selling:

           

    Employee-related costs

       860     979     (119  (12)% 

    Marketing, advertising and external commissions

       364     401     (37  (9)% 

    Other

       233     265     (32  (12)% 
                    

    Total selling

       1,457     1,645     (188  (11)% 

    General, administrative and other operating:

           

    Employee-related costs

       625     627     (2  —  

    Taxes and fees

       382     393     (11  (3)% 

    Real estate and occupancy costs

       126     134     (8  (6)% 

    Other

       476     515     (39  (8)% 
                    

    Total general, administrative and other operating

       1,609     1,669     (60  (4)% 

    Affiliates

       194     175     19    11

    Depreciation and amortization

       1,873     1,976     (103  (5)% 
                    

    Total operating expenses

      $6,788    $7,169    $(381  (5)% 
                    
     
     Successor  
     Predecessor Combined Predecessor Increase/
    (Decrease)
     % Change 
     
     Nine Months
    Ended
    December 31,
    2011
      
     Three Months
    Ended
    March 31,
    2011
     Year Ended
    December 31,
    2011
     Year Ended
    December 31,
    2010
     Combined
    2011 v
    Predecessor
    2010
     Combined
    2011 v
    Predecessor
    2010
     
     
     (Dollars in millions)
     

    Cost of services and products (exclusive of depreciation and amortization)

     $1,833    626  2,459  2,585  (126) (5)%

    Selling, general and administrative

      1,499    501  2,000  2,136  (136) (6)%

    Operating expenses—affiliates

      238    52  290  194  96  49%

    Depreciation and amortization

      1,866    451  2,317  1,873  444  24%
                     

    Total operating expenses

     $5,436    1,630  7,066  6,788  278  4%
                     

      Cost of SalesServices and Products (exclusive of depreciation and amortization)

    Cost of salesservices and products (exclusive of depreciation and amortization) are costsexpenses incurred in providing products and services to our customers. These expenses include: employee-related costsexpenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and certain benefits)professional fees); facilities expenses (which are third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses (such as modem expenses); costs for universal service funds ("USF") (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things and to which we are often required to contribute); and other cost of salesexpenses directly related to our network operations (suchnetwork.

            Cost of services and products decreased due to the amortization of certain deferred expenses being lower as professional fees, materialsa result of assigning no value to these predecessor assets at the acquisition date. Cost of services and supplies and outsourced services).

    Employee-related expensesproducts also decreased primarily due to lower salaries wages and severance expenseswages related to prior year employee reductions in our network operations as we continue to adjustmanage our workforce to reflect our workload.

      Selling, ExpensesGeneral and Administrative

    Selling, general and administrative expenses are expenses incurred in selling products and services to our customers.customers, corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; taxes (such as salaries, wages, internal commissionsproperty and certain benefits); marketing, advertisingother taxes) and fees; external commissions; bad debt expense; and other selling, expenses (such as bad debt expense, professional feesgeneral and outsourced services).administrative expenses.


    Table of Contents

    Employee-related        These expenses decreased primarily due to lower salaries, wages, severancedecreased pension expense, professional fees and internal commissions driven by lower sales headcount. Themarketing and advertising expense. This decrease in employee-related expenses was partially offset by increased expenses associated with QCII’s accelerationan increase in severance related to employee reductions, a majority of stock-based compensation.

    Marketing, advertising and external commissions decreased primarilywhich was due to reduced spending associated with direct mail and media. Marketing, advertising and external commissions also decreased due to improved consumer call center expenses resulting from a migration to using internal sales call centers from using third-party sales call centers.

    Other expenses decreased primarily due to lower bad debt expense and professional fees.

    General, Administrative and Other Operating Expenses

    General, administrative and other operating expenses are corporate overhead and other operating costs. These include: employee-related costs for administrative functions (such as salaries, wages and certain benefits); taxes and fees (such as property and other taxes and USF charges); real estate and occupancy costs (such as rents, utility and fleet costs); and other general, administrative and other operating costs (such as professional fees, outsourced services, litigation related charges and general computer systems support services). General, administrative and other operating expenses also include our allocated shareCenturyLink's indirect acquisition of QCII’s combined net periodic pension and post-retirement expense for all eligible employees and retirees.

    Employee-related expenses were flat primarily due to decreased pension and post-retirement benefits expenses offset by increased salaries and wages expenses associated with QCII’s acceleration of stock-based compensation. On December 21, 2010, QCII accelerated the vesting of certain restricted stock and performance share awards issued under its Equity Incentive Plan in order to preserve certain economic benefits to its stockholders that otherwise would have been lost in connection with QCII’s pending merger with CenturyLink. As the vast majority of affected employees are employed by us, QCII allocated substantially all of the expense associated with this accelerated vesting to us.

    QCII allocates the expense or income of its benefit plans to us based upon demographics of our employees compared to all the remaining participants. The expense is 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 expensebenefits expenses of $61 million in 2011 as compared to $125 million in 2010 as compared to $193 million in 2009. The 2009 expense is net of a $12 million gain allocated to us as a result of QCII’s decision to no longer provide pension benefit accruals for active management employees under the qualified and non-qualified pension plans on or after January 1, 2010. The decrease in combined net periodic benefits expensesexpense in 20102011 is primarily due to QCII’s decision to no longer provide pension benefit accruals for active management employees under the qualified and non-qualified pension plans, the elimination of the qualified and non-qualified pension plan death benefits for eligible beneficiaries of certain retirees and reduced interest expense, partially offset by an increase in actuarial losses. Actuarial gains or losses reflect the differences between earlier actuarial assumptions and what actually occurred.acquisition accounting. We expect to record combined net periodic expenseincome of approximately $109$7 million in 2011.2012. The expected decrease inshift from recording combined net periodic expense in 2011 isto recording combined net periodic income was primarily due to decreased interest cost partially offset by a decrease in the expected returnnet actuarial losses. For additional information on assets.

    Other expenses decreased primarily dueour pension and post-retirement benefit plans, see Note 8—Employee Benefits to lower professional and maintenance fees.our consolidated financial statements in Item 8 of this report.

      Operating Expenses—Affiliates Expenses

    Affiliates expenses include charges for our use of long-distance services, wholesale Internet access and insurance, occupancy charges and certain retiree benefits. Affiliates expenses increased for the years ended December 31, 2010 as compared to the prior year period. This increase in affiliates expenses was primarily due to insurance premium discounts and refunds recognized in 2009.

    2009 COMPARED TO 2008

    Operating Revenue

    Operating revenue decreased primarily due to lower legacy services revenue as a result lower local services revenue due to continued access line losses, lower access services revenue and declining revenue frombenefits provided by our traditional WAN services. Operating revenue also decreased due to lower revenue from affiliates and other services driven by reduced support associated with an affiliate’s winding down of its wireless business. These decreases in overall operating revenue were partially offset by increased strategic services revenue as a result of increased broadband and video subscribers and our transition to selling Verizon Wireless services. We believe declining general economic conditions negatively impacted our revenue in 2009.

    The following table compares our operating revenue for the years ended December 31, 2009 and 2008:

       Years Ended
    December 31,
       Increase/
    (Decrease)
      %
    Change
     
       2009   2008   2009 v
    2008
      2009 v
    2008
     
       (Dollars in millions)    

    Operating revenue:

           

    Strategic services

      $2,900    $2,789    $111    4

    Legacy services

       4,996     5,615     (619  (11)% 

    Affiliates and other services

       1,835     1,984     (149  (8)% 
                    

    Total operating revenue

      $9,731    $10,388    $(657  (6)% 

    The following table summarizes our total broadband and video subscribers and access lines by customer channel as of December 31, 2009 and 2008:

       December 31,   Increase/
    Decrease
      %
    Change
     
       2009   2008   2009 v
    2008
      2009 v
    2008
     
       (in thousands)    

    Total broadband subscribers

       2,803     2,574     229    9

    Total video subscribers

       932     772     160    21

    Access lines:

           

    Mass markets

       6,865     7,807     (942  (12)% 

    Business markets(1)

       2,003     2,146     (143  (7)% 

    Wholesale markets

       1,057     1,174     (117  (10)% 
                    

    Total access lines

       9,925     11,127     (1,202  (11)% 
                    

    Strategic Services

    Strategic services revenue increased primarily due to an increase in broadband subscribers, partially offset by rate discounts. Strategic services revenue also increased due to selling Verizon Wireless services. An increase in video subscribers as of December 31, 2009 compared to December 31, 2008 also contributed to the increase in strategic services revenue.

    Legacy Services

    Legacy services revenue decreased primarily due to a decline in local and access services revenue due to access line losses and a declining demand for UNEs for the year ended December 31, 2009 compared to the same period in 2008. Legacy services revenue also decreased due to lower revenue from our traditional WAN services, driven by customer migration to more advanced technology services.

    Affiliates and Other Services Revenue

    Affiliates services revenue decreased primarily due to reduced support provided to an affiliate associated with the affiliate’s winding down of its wireless business as we transitioned to selling Verizon Wireless services. In addition, we had reduced support associated with an affiliate’s winding down of its video and data products and related services. These decreases in affiliates services were partially offset by an increase in services we provided to support an affiliate’s growth in strategic service offerings. We estimate that the profit from affiliates services was approximately $300 million and $380 million before income taxes for the years ended December 31, 2009 and 2008, respectively.

    Operating Expenses

    The following table provides further detail regarding our operating expenses for the years ended December 31, 2009 and 2008:

       Years Ended
    December 31,
       Increase/
    (Decrease)
      %
    Change
     
       2009   2008   2009 v
    2008
      2009 v
    2008
     
       (Dollars in millions)    

    Cost of sales (exclusive of depreciation and amortization):

           

    Employee-related costs

      $1,084    $1,231    $(147  (12)% 

    Other

       620     668     (48  (7)% 
                    

    Total cost of sales

       1,704     1,899     (195  (10)% 

    Selling:

           

    Employee-related costs

       979     1,063     (84  (8)% 

    Marketing, advertising and external commissions

       401     456     (55  (12)% 

    Other

       265     293     (28  (10)% 
                    

    Total selling

       1,645     1,812     (167  (9)% 

    General, administrative and other operating:

           

    Employee-related costs

       627     459     168    37

    Taxes and fees

       393     372     21    6

    Real estate and occupancy costs

       134     156     (22  (14)% 

    Other

       515     569     (54  (9)% 
                    

    Total general, administrative and other operating

       1,669     1,556     113    7

    Affiliates

       175     185     (10  (5)% 

    Depreciation and amortization

       1,976     2,073     (97  (5)% 
                    

    Total operating expenses

      $7,169    $7,525    $(356  (5)% 
                    

    Cost of Sales (exclusive of depreciation and amortization)

    Employee-related costs decreased primarily due to lower salaries, wages and benefits related to employee reductions in our network operations as we continued to manage our workforce to our workload. In addition, severance expense decreased because we terminated fewer employees in 2009 as compared to 2008.

    Other cost of sales decreased primarily due to lower professional fees and network expenses due to our continued focus on managing costs associated with our network, along with decreased volumes.

    Selling Expenses

    Employee-related costs decreased due to lower salaries and wages related to prior period employee reductions, and decreased internal commissions driven by lower sales headcount and lower attainment of sales targets. These decreases were partially offset by increases in severance expenses.

    Marketing, advertising and external commissions decreased primarily due to reduced spending associated with direct mail and media, along with the migration to internal sales call centers from using third-party sales call centers.

    Other selling costs decreased primarily due to lower professional fees as a result of a favorable rate change in credit processing fees and other cost savings initiatives.

    General, Administrative and Other Operating Expenses

    Employee-related costs increased primarily due to an increase in pension and post-retirement benefits expenses. We recorded combined net periodic benefits expense of $193 million and net periodic benefits income of $13 million for the years ended December 31, 2009 and 2008, respectively. The 2009 expense is net of a $12 million gain allocated to us as a result of QCII’s decision to no longer provide pension benefit accruals for active management employees under the qualified and non-qualified pension plans on or after January 1, 2010. The shift from recording combined net periodic income to recording combined net periodic expense was primarily due to a decrease in expected return on plan assets as a result of lower plan asset values and an increase in net actuarial losses. Actuarial gains or losses reflect the differences between earlier actuarial assumptions and what actually occurred.

    Taxes and fees increased as a result of a $40 million favorable property tax settlement and other favorable adjustments recorded in 2008. These increases were partially offset by lower USF charges resulting from continued access line erosion and a decrease in current year property taxes.

    Real estate and occupancy costs decreased primarily due to lower fuel costs, resulting from fewer miles driven and lower fuel prices. Real estate and occupancy costs also decreased because we had fewer operating leases in 2009 as compared to 2008.

    Other expenses decreased primarily due to lower professional fees, the 2008 impairments of certain assets related to QCII’s transition to selling Verizon Wireless services and decreased supplies expense due to cost cutting measures.

    Affiliates Expenses

    Affiliates expenses decreased primarily due to reduced insurance costs driven by decreases in our workforce, and reduced support charges from our wireless affiliate partially offset by increases in wholesale Internet access in support of our broadband services.affiliates.

    Depreciation and Amortization

    The following table provides detail regarding depreciation and amortization expense for the years ended December 31, 2010, 2009 and 2008:expense:

       Years Ended December 31,   Increase/(Decrease)  % Change 
       2010   2009   2008   2010 v
    2009
       2009 v
    2008
      2010 v
    2009
      2009 v
    2008
     
       (Dollars in millions)       

    Depreciation and amortization:

                

    Depreciation

      $1,639    $1,752    $1,855    $(113  $(103  (6)%   (6)% 

    Amortization

       234     224     218     10     6    4  3
                               

    Total depreciation and amortization

      $1,873    $1,976    $2,073    $(103  $(97  (5)%   (5)% 
                               

    Although our capital expenditures fluctuate from year to year, we continue to see decreased depreciation expense due to significantly lower capital expenditures and the changing mix of our investment in property, plant and equipment since 2002. If we do not significantly shorten our estimates of the useful lives of our assets, we expect that our depreciation expense will continue to decrease for the foreseeable future. Amortization expense increased due to an increase in internally developed capitalized software.

    Effective January 1, 2009, we changed our estimates of the economic lives of certain copper cable and telecommunications equipment assets. These changes resulted in additional depreciation expense of approximately $36 million and reduced net income, net of deferred taxes, by $22 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. These assets were fully depreciated as of December 31, 2009.

    Other Consolidated Results

    The following table provides detail regarding other expense (income)—net and income tax expense for the years ended December 31, 2010, 2009 and 2008:

       Years Ended December 31,   Increase/(Decrease)  % Change 
         2010      2009       2008     2010 v
    2009
      2009 v
    2008
      2010 v
    2009
      2009 v
    2008
     
       (Dollars in millions)       

    Other expense (income)—net:

              

    Interest expense on long-term borrowings—net

      $615   $632    $589    $(17 $43    (3)%   7

    Other—net

       (5  9     7     (14  2    nm    29
                             

    Total other expense (income)—net

      $610   $641    $596    $(31 $45    (5)%   8
                             

    Income tax expense

      $791   $724    $829    $67   $(105  9  (13)% 

     
     Successor  
     Predecessor Combined Predecessor Increase/
    (Decrease)
     % Change 
     
     Nine Months
    Ended
    December 31,
    2011
      
     Three Months
    Ended
    March 31,
    2011
     Year Ended
    December 31,
    2011
     Year Ended
    December 31,
    2010
     Combined
    2011 v
    Predecessor
    2010
     Combined
    2011 v
    Predecessor
    2010
     
     
     (Dollars in millions)
     

    Depreciation

     $914    393  1,307  1,652  (345) (21)%

    Amortization

      952    58  1,010  221  789  nm 
                     

    Total depreciation and amortization

     $1,866    451  2,317  1,873  444  24%
                     

    nm—Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.

    Other Expense (Income)—Net

    Interest expense on long-term borrowings—net decreased in 2010 compared to 2009 primarily due to a decrease in interest expense on        As of April��1, 2011, our interest rate hedges partially offset by increased interest expenseproperty, plant and equipment was recorded at fair value and as a result net property, plant and equipment decreased $2.499 billion due to CenturyLink's indirect acquisition of higher average debt levels.us. The decrease in asset value resulted in lower depreciation expense for the combined year ended December 31, 2011. 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 $598 million of amortization expense for the combined year ended December 31, 2011. In addition, capitalized software was recorded at a fair value of $1.702 billion, an increase of $887 million, resulting in amortization expense of $412 million for the combined year ended December 31, 2011 as compared to $221 million for the predecessor year ended December 31, 2010.


    Table of Contents

    Other Consolidated Results

            The following table summarizes other income (expense) and income tax expense:

     
     Successor  
     Predecessor Combined Predecessor Increase/
    (Decrease)
     % Change 
     
     Nine Months
    Ended
    December 31,
    2011
      
     Three Months
    Ended
    March 31,
    2011
     Year Ended
    December 31,
    2011
     Year Ended
    December 31,
    2010
     Combined
    2011 v
    Predecessor
    2010
     Combined
    2011 v
    Predecessor
    2010
     
     
     (Dollars in millions)
     

    Interest expense

     $(299)   (150) (449) (615) (166) (27)%

    Other income (expense)

      (8)   2  (6) 5  nm  nm 
                      

    Total other income (expense)

     $(307)   (148) (455) (610) (155) 25%
                      

    Income tax expense

     $349    191  540  791  (251) (32)%

    nm—Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.

      Other Income (Expense)

            Interest expense on long-term borrowings—net increaseddecreased in 2009 compared to 2008the combined year ended December 31, 2011 primarily due to the issuanceamortization of $811 millionthe net premium associated with our long-term debt, which resulted from the accounting for CenturyLink's indirect acquisition of new debt in the second quarter of 2009, partially offset by decreased interest as a result of maturities and decreasing interest rates on floating rate debt.us.

    Other—net includes, among other things, interest income, income tax penalties, other interest expense (such as interest on income taxes), and equity method investment losses. The change in other—net in 2010 compared to 2009 is due to more equity method investment losses in 2009. The change in other—net in 2009 compared to 2008 is due to more investment equity method investment losses in 2009, partially offset by a decrease in tax related interest from uncertain tax positions.

      Income Tax Expense

    The effective income tax rate is the provision for income taxes as a percentage of income before income taxes. Our effective income tax rate for the combined year ended December 31, 2011 and the predecessor years ended December 31, 2010 and 2009 was 39%, 42% and 2008 was 42%, 38% and 37%, respectively.

    Income tax expense for the year ended December 31, 2010 increased by $67 million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 and the tax treatment of the expenses allocated to us when QCII accelerated the vesting of certain stock-based compensation.

    Among other things, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will disallow federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program. Although this tax increase does not take effect until 2013, under accounting principles generally accepted in the U.S. we recognize the full accounting impact in the period in which the laws are enacted, which increased our effective tax rate for the year ended December 31, 2010 by 2.9 percentage points.

    On December 21, 2010, QCII accelerated the vesting of certain restricted stock and performance share awards issued under its Equity Incentive Plan in order to preserve certain economic benefits to its stockholders that otherwise would have been lost in connection with QCII’s pending merger with CenturyLink. CertainCenturyLink's acquisition of QCII. However, certain of the expenses that were allocated to us for this acceleration are not deductible for income tax purposes and as such they increased our effective tax rate for the year ended December 31, 2010 by 1.1 percentage points.

    Income tax expense in 2009 compared to 2008 decreased due to the decrease in income before income taxes.


    Liquidity and Capital Resources

    We are a wholly owned subsidiaryTable of QSC, which is a wholly owned subsidiary of QCII. As such, factors relating to, or affecting, QCII’s liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market’s perception of us. QCII and its consolidated subsidiaries had total borrowings—net of $11.947 billion and $14.200 billion as of December 31, 2010 and 2009, respectively.

    QCII has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and intercompany obligations vary from time to time and are classified as short-term borrowings.

    Near-Term ViewContents

    We expect that our cash on hand and expected net cash generated by operating activities will exceed our cash needs over the next 12 months. At December 31, 2010, we held cash and cash equivalents of $192 million, and QCII had an additional $180 million in cash and cash equivalents as well as $1.035 billion available under its currently undrawn revolving credit facility (referred to as the Credit Facility). The Credit Facility will be terminated at the time of the closing of QCII’s merger with CenturyLink.

    During the year ended December 31, 2010, our net cash generated by operating activities totaled $3.235 billion. For the coming 12 months, our expected financing and investing cash needs include:

    capital expenditures of approximately $1.3 billion;

    $825 million of debt maturing in September 2011; and

    dividends to QSC.

    We have significant discretion in how we use our cash to pay for capital expenditures and for other costs of our business, as only a minority of our capital expenditures is dedicated to preservation activities or government mandates. We evaluate capital expenditure projects based on expected strategic impacts (such as forecasted revenue growth or productivity, expense and service impacts) and our expected return on investment. If we are not successful in maintaining or increasing our net cash generated by operating activities in the near term, we may use this discretion to decrease our capital expenditures, which may impact future years’ operating results and cash flows. Also, we lease certain facilities and equipment under various capital lease arrangements when the

    leasing arrangements are more favorable to us than purchasing the assets. For the year ended December 31, 2010, we entered into capital leases for approximately $116 million of assets, which allowed us to reduce our initial cash outlays. We may continue to use lease financing for some portion of our capital spending.

    At December 31, 2010, our current liabilities exceeded our current assets by $1.716 billion. This working capital deficit increased $1.242 billion as compared to our working capital deficit at December 31, 2009. The increase was primarily due to dividends declared to QSC, capital expenditures and the reclassification of non-current borrowings to current, partially offset by net income before depreciation and amortization.

    In general, we intend to refinance our debt as it matures, but would need to do so in a manner consistent with the terms of QCII’s merger agreement with CenturyLink. Any time we deem conditions favorable, we may attempt to improve our liquidity position by accessing debt markets in a manner designed to create positive economic value. The unstable economy may impair our ability to refinance maturing debt at terms that are as favorable as those from which we previously benefited or at terms that are acceptable to us.

    Long-Term View

    We have historically operated with a working capital deficit due to our practice of declaring and paying regular cash dividends to QSC, and it is likely that we will operate with a working capital deficit in the future. As discussed below, we continue to generate substantial cash from operations. We believe that these cash flows, combined with continued access to the capital markets to refinance debt as it comes due, will provide sufficient liquidity to continue our planned investing and financing activities.

    Debt

    We have a significant amount of debt maturing in the next several years, including $825 million maturing in 2011, $1.500 billion maturing in 2012, $750 million maturing in 2013 and $600 million in 2014. We believe that we will continue to have access to capital markets to refinance our debt as necessary. In general, we intend to refinance our debt as it matures.

    The Credit Facility, which makes available to QCII $1.035 billion of additional credit subject to certain restrictions as described below, is currently undrawn and expires in September 2013. The Credit Facility has 13 lenders, with commitments ranging from $25 million to $100 million. QCII’s merger agreement with CenturyLink allows QCII to draw on the facility with the intent to repay the borrowings within 90 days. This facility has a cross payment default provision, and this facility and certain other debt issues of QCII and its other subsidiaries also have 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. These provisions generally provide that a cross default under these debt instruments could occur if:

    QCII fails to pay any indebtedness when due in an aggregate principal amount greater than $100 million;

    any indebtedness is accelerated in an aggregate principal amount greater than $100 million; or

    judicial proceedings are commenced to foreclose on any of QCII’s assets that secure indebtedness in an aggregate principal amount greater than $100 million.

    Upon a cross default, the creditors of a material amount of QCII’s debt may elect to declare that a default has occurred under their debt instruments and to accelerate the principal amounts due to those creditors. Cross acceleration provisions are similar to cross default provisions, but permit a default in a second debt instrument to be declared only if, in addition to a default occurring under the first debt instrument, the indebtedness due under the first debt instrument is actually accelerated. As a wholly owned subsidiary of QCII, in the event of such a cross-default or cross-acceleration, our business operations and financial condition could be affected, potentially impacting our credit ratings and access to the capital markets.

    The Credit Facility also contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the legal matters discussed in “Legal Proceedings” in Item 3 of this report. In addition, to the extent that QCII’s earnings before interest, taxes, depreciation and amortization, or EBITDA (as defined in QCII’s debt covenants), is reduced by cash settlements or judgments relating to the matters discussed in that note, QCII’s debt to consolidated EBITDA ratios under certain debt agreements will be adversely affected. This could reduce QCII’s liquidity and flexibility due to potential restrictions on drawing on its Credit Facility and potential restrictions on incurring additional debt under certain provisions of its debt agreements. As a wholly owned subsidiary of QCII, our business operations and financial condition could be similarly affected, potentially impacting our credit ratings and access to capital markets.

    We may also need to obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets), but would need to do so in a manner consistent with the terms of QCII’s merger agreement with CenturyLink, if:

    revenue and cash provided by operations significantly decline;

    unstable economic conditions continue to persist;

    competitive pressures increase;

    we are required to contribute a material amount of cash to QCII’s pension plan; or

    QCII becomes subject to significant judgments or settlements in one or more of the matters discussed in “Legal Proceedings” in Item 3 of this report.

    Pension Plan

    Benefits paid by QCII’s pension plan are paid through a trust. This pension plan is measured annually at December 31. The accounting unfunded status of the pension plan was $585 million at December 31, 2010. Cash funding requirements can be significantly impacted by earnings on investments, the discount rate, changes in the plan and funding laws and regulations. As a result, it is difficult to determine future funding requirements with a high level of precision; however, in general, current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Based on current funding laws and regulations, QCII will not be required to make a cash contribution in 2011. QCII expects to begin making required contributions to the plan during 2012 and estimates that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, QCII currently expects that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plan and funding laws and regulations.

    Substantially all 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. See additional information about QCII’s pension benefits in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report.

    Post-Retirement Benefits

    Certain of QCII’s post-retirement health care and life insurance benefits plans are unfunded. As of December 31, 2010, the unfunded status of all of QCII’s post-retirement benefit plans was $2.522 billion. A trust holds assets that are used to help cover the health care costs of retirees who are former occupational (also referred to as union) employees.

    QCII did not make any cash contributions to this trust in 2010 and does not expect to make any significant cash contributions to this trust in the future. QCII therefore anticipates that the majority of the costs that have historically been paid out of this trust will need to be paid by us at some point in the future. As of December 31,

    2010, the fair value of the trust assets was $801 million; however, a portion of these assets is comprised of investments with restricted liquidity. In 2009 QCII estimated that the trust would be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Based on returns on trust assets during 2010, QCII still believes that the more liquid assets in the trust will be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Thereafter, covered benefits for its eligible retirees who are former occupational employees will be paid either directly by us or from the trust as the remaining assets become liquid. This five year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits. QCII’s estimate of the annual long-term rate of return on the plan assets is 7.5% based on the currently held assets; however, actual returns could vary widely in any given year. The benefits reimbursed from plan assets were $186 million in 2010.

    Our employees may become eligible to participate in the QCII post-retirement plan. 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 post-retirement contribution. See additional information about QCII’s post-retirement benefits in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report.

    Historical View

    The following table summarizes cash flow activities for the years ended December 31, 2010, 2009 and 2008:

       Years Ended December 31,   Increase/(Decrease)  % Change 
       2010   2009   2008   2010 v
    2009
       2009 v
    2008
      2010 v
    2009
      2009 v
    2008
     
       (Dollars in millions)       

    Cash flows:

                

    Provided by operating activities

      $3,235    $3,167    $3,479    $68    $(312  2  (9)% 

    Used for investing activities

       1,256     1,100     1,402     156     (302  14  (22)% 

    Used for financing activities

       2,801     1,286     2,136     1,515     (850  118  (40)% 

    Operating Activities

    Cash provided by operating activities increased in 2010 as compared to 2009 primarily due to decreased tax-related payments to QSC as a result of changes in bonus depreciation tax laws. Cash provided by operating activities also increased in 2010 as compared to 2009 due to lower payments for employee-related expenses resulting from reduced headcount. These increases in cash provided by operating activities were partially offset by a decline in cash received from customers as a result of decreased revenue.

    Cash provided by operating activities decreased in 2009 as compared to 2008 primarily due to increased tax-related payments to QSC as a result of our utilization in 2008 of deferred tax assets acquired as a result of QCII merging into us two of QSC’s other wholly owned subsidiaries.

    Investing Activities

    Cash used for investing activities increased in 2010 as compared to 2009 primarily due to increased capital expenditures. The increase in capital spending was due to a cautious investment climate in late 2008 and early 2009, increased spending on our strategic initiatives and timing of cash payments. We may continue to use lease financing in 2011 for some portion of our capital spending. Our capital expenditures continue to be focused on our strategic services such as broadband. In 2011, we anticipate that our fiber investment, which includes fiber to the cell site, or FTTCS, will increase. Our projected capital expenditures for 2011 will be up to $1.3 billion.

    Cash used for investing activities decreased in 2009 as compared to 2008 primarily due to lower capital expenditures. Lower capital spending was the result of initiatives related to decreasing per unit capital costs, a slowdown in new housing construction, which was down 40% as compared to 2008, and other lower customer-driven capital requirements. We also took advantage of favorable interest rates and increased our capital leasing activity, which further reduced our cash payments for capital equipment.

    Financing Activities

    For the year ended December 31, 2010, we paid $2.260 billion in dividends to QSC and we repaid $534 million of long-term borrowings (including current maturities).

    For the year ended December 31, 2009, we paid $2.000 billion in dividends to QSC, issued $811 million of new debt resulting in aggregate net proceeds of $738 million and repaid $25 million of long-term borrowings including current maturities.

    For the year ended December 31, 2008, we paid $2.000 billion in dividends to QSC, repaid $347 million of long-term borrowings including current maturities, and received equity infusions of $231 million.

    We may continue to 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. We were in compliance with all provisions and covenants of our borrowings as of December 31, 2010. For additional information on our 2010 and 2009 financing activities, see Note 8—Borrowings to our consolidated financial statements in Item 8 of this report.

    Letters of Credit

    We maintain letter of credit arrangements with various financial institutions for up to $57 million. We had outstanding letters of credit of approximately $51 million as of December 31, 2010. On January 18, 2011, QCII entered into $7 million of additional letters of credit.

    Credit Ratings

    Due to our general expectation that we will refinance our debt maturities, our credit ratings can have significant impact on our liquidity and capital resources. Debt ratings by the various rating agencies reflect each agency’s opinion of the ability of the issuers to repay debt obligations as they come due. In general, lower ratings result in higher borrowing costs and impaired ability to borrow under acceptable terms. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization.

    The table below summarizes our long-term debt ratings as of December 31, 2010:

    December 31,
    2010

    Moody’s

    Baa3

    S&P

    BBB-

    Fitch

    BBB-

    Since QCII’s announcement of its pending merger with CenturyLink:

    on August 13, 2010, Moody’s Investors Service upgraded our rating from Ba1 to Baa3 (investment grade);

    Standard & Poor’s placed our rating on “CreditWatch” with developing implications, meaning that S&P could raise, maintain or lower the rating; and

    Fitch Ratings affirmed its previous rating of BBB- with a stable outlook.

    With respect to Moody’s, a rating of Baa indicates that the security is subject to moderate credit risk, is considered medium grade and as such may possess certain speculative characteristics. The “1, 2, 3” modifiers show relative standing within the major categories, 1 being the highest, or best, modifier in terms of credit quality.

    With respect to S&P and Fitch, a rating of BBB indicates that there are currently expectations of adequate protection. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category. The plus and minus symbols show relative standing within major categories.

    While we have been able to obtain financing historically and our ratings have improved since QCII’s pending merger with CenturyLink was announced, given our current credit ratings our ability to raise additional capital under acceptable terms and conditions may be impaired.

    Risk Management

    We are exposed to market risks arising from changes in interest rates. The objective of our interest rate risk management program is to manage the level and volatility of our interest expense. We have used derivative financial instruments to manage our interest rate risk exposure on our debt and we may employ them in the future.

    Near-Term Maturities

    As of December 31, 2010, we had $825 million of long-term notes maturing in the subsequent 12 months. We would be exposed to changes in interest rates at any time that we choose to refinance any of this debt. A hypothetical increase of 100 basis points in the interest rate on a refinancing of the entire current portion of long-term notes would decrease annual pre-tax earnings by approximately $8 million.

    Floating-Rate Debt

    As of December 31, 2010, we had $750 million of floating interest rate debt outstanding, all of which was exposed to changes in interest rates. The exposure for these instruments is linked to the London Interbank Offered Rate, or LIBOR. A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease annual pre-tax earnings by approximately $8 million.

    Investments

    As of December 31, 2010, our cash and investments managed by QSC included $188 million invested in highly liquid cash-equivalent instruments and $52 million invested in currently non-liquid auction rate securities. As interest rates change, so will the interest income derived from these instruments. Assuming that these investment balances were to remain constant, a hypothetical decrease of 100 basis points in interest rates would decrease annual pre-tax earnings by approximately $2 million.

    Future Contractual Obligations

    The following table summarizes our estimated future contractual obligations as of December 31, 2010:

      Payments Due by Period 
      2011  2012  2013  2014  2015  2016 and
    Thereafter
      Total 
      (Dollars in millions) 

    Future contractual obligations(1):

           

    Debt and lease payments:

           

    Long-term debt

     $825   $1,500   $750   $600   $400   $3,893   $7,968  

    Capital lease and other obligations

      52    46    39    28    16    3    184  

    Interest on long-term borrowings and capital leases(2)

      597    463    380    363    301    2,945    5,049  

    Operating leases

      88    59    40    34    29    67    317  
                                

    Total debt and lease payments

      1,562    2,068    1,209    1,025    746    6,908    13,518  
                                

    Other long-term liabilities

      3    2    2    2    2    43    54  
                                

    Purchase commitments:

           

    Telecommunications and information technology

      2    2    2    1    1    1    9  

    Advertising, promotion and other services(3)

      64    41    31    27    24    44    231  
                                

    Total purchase commitments

      66    43    33    28    25    45    240  
                                

    Non-qualified pension obligation(4)

      2    2    2    2    2    21    31  
                                

    Total future contractual obligations

     $1,633   $2,115   $1,246   $1,057   $775   $7,017   $13,843  
                                

    (1)The table does not include:

    costs that are contingent upon completion of QCII’s pending merger with CenturyLink;

    our open purchase orders as of December 31, 2010. These purchase orders are generally at fair value, are generally cancelable without penalty and are part of normal operations;

    other long-term liabilities, such as accruals for legal matters and income taxes, that are not contractual obligations by nature. We cannot determine with any degree of reliability the years in which these liabilities might ultimately settle;

    affiliate cash funding requirements for pension benefits payable to certain eligible current and future retirees allocated to us by QCII. The accounting unfunded status of QCII’s pension plan was $585 million at December 31, 2010. Benefits paid by QCII’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’s cash funding requirements can be significantly impacted by earnings on investments, the discount rate changes in the plan and funding laws and regulations. As a result, it is difficult to determine future funding requirements with a high level of precision; however, in general, current funding laws require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Based on current funding laws and regulations, QCII will not be required to make a cash contribution in 2011. QCII expects to begin making required contributions to the plan during 2012 and estimates that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, QCII currently expects that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes

    in the plan and funding laws and regulations. Substantially all of our employees participate in the QCII pension plan. 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;

    affiliate post-retirement benefits payable to certain eligible current and future retirees. Although we had an affiliate liability recorded on our balance sheet as of December 31, 2010 representing our allocated net benefit obligation for post-retirement benefits, not all of this amount is a contractual obligation. Certain of these plans are unfunded and net payments made by us totaled $112 million in 2010, including payments for benefits that are not contractual obligations. Assuming our future proportionate share of QCII’s total post-retirement benefits payments is consistent with an average of our proportionate share over the prior three years, total undiscounted future payments estimated to be made by us for benefits that are both contractual obligations and non-contractual obligations are approximately $4.0 billion over approximately 80 years. However, this estimate is impacted by various actuarial and market assumptions, and ultimate payments will differ from this estimate. In 1989, a trust was created and funded by QCII to help cover the health care costs of retirees who are former occupational employees. QCII did not make any cash contributions to this trust in 2010 and does not expect to make any significant cash contributions to this trust in the future. QCII anticipates that the majority of the costs that have historically been paid out of this trust will need to be paid by us at some point in the future. As of December 31, 2010, the fair value of the trust assets was $801 million; however, a portion of these assets is comprised of investments with restricted liquidity. In 2009 QCII estimated that the trust would be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Based on returns on trust assets during 2010, QCII still believes that the more liquid assets in the trust will be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Thereafter, covered benefits for QCII’s eligible retirees who are former occupational employees will be paid either directly by us or from the trust as the remaining assets become liquid. This five year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits. QCII’s estimate of the annual long-term rate of return on the plan assets is 7.5% based on the currently held assets; however, actual returns could vary widely in any given year. The benefits reimbursed from plan assets were $186 million in 2010. See additional information on our benefits plans in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of this report;

    contract termination fees. These fees are non-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business and to optimize our cost structure, we enter into contracts with terms greater than one year to purchase goods and services. Assuming we exited these contracts in 2011, termination fees for these contracts would be $31 million. In the normal course of business, we believe the payment of these fees is remote; and

    potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business. The nature and terms of these arrangements vary. Historically, we have not incurred significant costs related to performance under these types of arrangements.

    (2)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 as of December 31, 2010.

    (3)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.

    (4)Non-qualified pension payment estimates assume we pay the same proportionate share of QCII’s total payments as the average we paid over the prior three years.

    Off-Balance Sheet Arrangements

    We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support, and we do not engage in leasing, hedging, research and development services, or other relationships that expose us to any significant liabilities that are not reflected on the face of the consolidated financial statements or in the Future Contractual Obligations table above.

    Critical Accounting Policies and Estimates

            Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations. For additional information on the application of theseoperations related to (i) business combinations; (ii) goodwill, customer relationships and other significant accounting policies, see Note 2—Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of this report.intangible assets; (iii) property, plant and equipment; (iv) pension and post-retirement benefits; (v) intercompany revenues and expenses; (vi) affiliates transactions; and (vii) 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. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, intercompany allocations and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. 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.

    Business Combinations

            We have accounted for CenturyLink's indirect acquisition of us under the acquisition method of accounting, whereby the tangible and separately identifiable intangible assets acquired and liabilities assumed are recognized at their estimated fair values at the acquisition date. The portion of the purchase price in excess of the estimated fair value of the net tangible and separately identifiable intangible assets acquired represents goodwill. The allocation of the purchase price related to CenturyLink's indirect acquisition of us involves estimates and judgments by our management that may be adjusted during the measurement period, but in no case beyond one year from the acquisition date. The fair values recorded are made based on management's best estimates and assumptions. In arriving at the fair values of assets acquired and liabilities assumed, we consider the following generally accepted valuation approaches: the cost approach, income approach and market approach. Our estimates may also include assumptions about projected growth rates, cost of capital, effective tax rates, tax amortization periods, technology life cycles, the regulatory and legal environment, and industry and economic trends. Small changes in the underlying assumptions can impact the estimates of fair value by material amounts, which can in turn materially impact our results of operations.

            Our acquisition resulted in the assignment of the aggregate consideration to the assets acquired and liabilities assumed based on preliminary estimates of their acquisition date fair values. The fair value of the aggregate consideration transferred exceeded the acquisition date fair value of the recorded tangible and intangible assets and assumed liabilities by an estimated $9.453 billion, which has been recognized as goodwill. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As such, we have not completed our valuation analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair values of the acquired assets and assumed liabilities, along with the related allocations to goodwill and intangible assets. The amounts recorded related to the acquisition are preliminary and subject to revision pending the final fair valuation analysis. We expect to complete our final fair value determinations no later than the first quarter of 2012. Our final fair value determinations may be significantly different than those reflected in our consolidated financial statements as of the successor date of December 31, 2011.

    Goodwill, Customer Relationships and Other Intangible Assets

            We are required to review 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 fair value. Our annual measurement date for testing goodwill


    Table of Contents

    impairment is September 30. The impairment testing is done at the reporting unit level; in reviewing the criteria for reporting units when allocating the goodwill resulting from CenturyLink's indirect acquisition of us, we have determined that we are one reportable unit.

            We early adopted the provisions of Accounting Standards Update ("ASU") 2011-08, Testing Goodwill for Impairment, during the third quarter of 2011, which permits us to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two step goodwill impairment test. If, after completing our qualitative assessment we determine that it is more likely than not that the carrying value exceeds estimated fair value, we compare the fair value to ourcarrying value (including goodwill). If the estimated fair valueis greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second calculation is required in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value. We elected to early adopt the provisions of ASU 2011-8 and perform a qualitative assessment as of our September 30 measurement date given the six month proximity of the goodwill impairment measurement date and the acquisition date resulting in the creation of the goodwill.

            As a result of CenturyLink's indirect acquisition of us and the related acquisition accounting, the carrying value of our assets and liabilities equaled our fair value as of April 1, 2011. A decrease in our fair value in excess of a reduction in our carrying value will result in us having a carrying value in excess of our fair value, which may result in an impairment of our goodwill. There is significant judgment in estimating the fair value of the company. The factors that most significantly impact our estimate of fair value include forecasted cash flows and a risk adjusted discount rate. The applicable risk adjusted discount rate is impacted by the market risk free rate of return and our risk rating.

            The qualitative analysis included assessing the impact of changes in certain factors from April 1, 2011 (the acquisition date on which all assets and liabilities were assigned a fair value) to September 30, 2011 (the goodwill impairment testing date), including (i) changes in forecasted operating results and comparing actual results to those utilized in the April 1, 2011 fair value assignment; (ii) changes in our weighted average cost of capital from April 1, 2011 to September 30, 2011; (iii) changes in the industry or our competitive environment since the acquisition date; (iv) changes in the overall economy, our market share and interest rates since the acquisition date; (v) trends in the stock price of CenturyLink and related market capitalization and enterprise values; (vi) trends in peer companies total enterprise value metrics; (vii) control premiums paid for recent industry transactions; and (viii) additional factors such as a management turnover, changes in regulation and changes in litigation matters.

            Based on our qualitative assessment, we concluded that it was more likely than not that the estimated fair value of our reporting unit exceeded its carrying value as of the successor date of September 30, 2011 and thus, determined it was not necessary to perform the two step goodwill impairment test. We believe the more impactful assessments include our actual results compared to those forecasted as of the successor date of April 1, 2011 and the decline in our weighted average cost of capital since April 1, 2011. To date, our actual operating results have been comparable to those forecasted as of April 1, 2011 and, as of December 31, 2011, we believe the forecasted results of future periods are not materially different than those used as of April 1, 2011.

            Our weighted average cost of capital declined 100 basis points from the April 1, 2011 valuation to the September 30, 2011 testing date, which would serve to increase the estimated fair value of the reporting unit when utilizing a discounted cash flow methodology. Based on our review of all other qualitative factors, we concluded there were no other significant economic, industry, operational or performance-related changes from April 1, 2011 to September 30, 2011 that would adversely impact our qualitative assessment.


    Table of Contents

            Should our future operating results not meet forecasted expectations or should our weighted average cost of capital increase significantly in the future, we may be required to assess our goodwill for impairment prior to the next required testing date of September 30, 2012. In addition, we cannot assure that other adverse conditions will not trigger future goodwill impairment testing 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. These factors include, but are not limited to, (i) further weakening in the overall economy; (ii) a significant decline in our ultimate parent's, CenturyLink, stock price and resulting market capitalization; (iii) changes in the discount rate; (iv) successful efforts by our competitors to gain market share in our markets; (v) adverse changes as a result of regulatory actions; and (vi) a significant adverse change in legal factors or in the overall business climate. 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 testing date of September 30, 2012.

    Property, Plant and Equipment

            Property, plant and equipment acquired since the acquisition date is stated at original cost plus the estimated value of any associated legally or contractually required retirement obligations.

            We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, replacement history and assumptions about technology evolution to estimate the remaining life of our asset base. The changes in our estimates incorporated as a result of our most recent review did not have a material impact on the level of our depreciation expense.

            Due to rapid changes in technology and the competitive environment, selecting 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 one year increase or decrease in the estimated remaining useful lives of our property, plant and equipment would have decreased depreciation by approximately $180 million or increased depreciation by approximately $260 million, respectively.

            We periodically perform evaluations of the recoverability of the carrying value of our long-lived assets using gross undiscounted cash flow projections. These evaluations require identification of the lowest level of identifiable, largely independent, cash flows for purposes of grouping assets and liabilities subject to review. The cash flow projections include long-term forecasts of revenue growth, gross margins and capital expenditures. All of these items require significant judgment and assumptions.

    Pension and Post-Retirement Benefits

            Substantially all of our employees participate in the QCII pension plan. QCII also maintains a non-qualified pension plan for certain of our eligible highly compensated employees. In addition, certain employees may become eligible to participate in QCII's post-retirement health care and life insurance benefit plans. QCII allocates the 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. 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 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


    Table of Contents

    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.

            In computing the pension and post-retirement health care and life insurance benefits expenses and obligations, the most significant assumptions QCII makes include discount rate, 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.

            Changes in any of the above factors QCII made in computing the pension and post-retirement health care and life insurance benefit expenses could impact general, administrative and other operating expenses and the affiliate benefits receivable or payable allocated to us as described above. For further discussion of the QCII pension, non-qualified pension and post-retirement benefit plans and the critical accounting estimates, see QCII's Annual Report on Form 10-K for the year ended December 31, 2011.

    Intercompany Revenue and ChargesExpenses

    We charge our affiliates based on tariffed rates for telecommunications and data services and either fully distributed cost or market rates for other services. Our fully distributed costs methodology includes employee costs, facilities costs, overhead costs and a return on investment component.

    Our affiliates charge us for services rendered by their employees primarily by applying the fully distributed cost methodology discussed above. Our affiliates also contract services from third parties on our behalf. For these services, the third parties bill our affiliates who in turn charge us for our respective share of these third-party expenses.

    The methodologies discussed above for determining affiliates revenue and charges are based on rules that the FCC adopted pursuant to the Communications Act, as amended by the Telecommunications Act. We believe the accounting estimates related to affiliates revenue and charges are “critical"critical accounting estimates”estimates" because determining market rates and determining the allocation methodology and the supporting allocation factors: (i) requires judgment and is subject to refinement as facts and circumstances change or as new cost drivers are identified, (ii) are based on regulatory rules which are subject to change and (iii) QCII occasionally changes which affiliates provide them services which can impact overall costs and related affiliates charges, all of which require significant judgment and assumptions.

    Affiliates Transactions

    We record intercompany charges at the amounts billed to us by our affiliates. Regulatory rules require certain expenses to be recorded at market price or fully distributed cost, as more fully described in Note 16—Related Party Transactions to our consolidated financial statements in Item 8 of this report.cost. Our compliance with regulations is subject to review by regulators. Adjustments to intercompany charges that result from these reviews are recorded in the period they become known.

    Because of the significance of the services we provide to our affiliates and our other affiliates transactions, the resultresults of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.


    Loss Contingencies and Litigation Reserves

    QCII and we are involved in several material legal proceedings, as described in more detail in “Legal Proceedings” in Item 3Table of this report. We assess potential losses in relation to any such matters to which we are a party and in relation to other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, our earnings will be increased or decreased accordingly. If the differences are material, our consolidated financial statements could be materially impacted. If a loss is considered reasonably possible, we disclose the item and any determinable estimate of the loss if material but we do not recognize any expense for the potential loss.

    For matters related to income taxes, if the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain. The overall tax liability recorded for uncertain tax positions as of December 31, 2010 and 2009 considers the anticipated utilization of any applicable tax credits.

    To the extent we have recorded tax liabilities that are more or less than the actual liability that ultimately results from the resolution of an uncertain tax position, our earnings will be increased or decreased accordingly. Also, as we become aware of new interpretations of relevant tax laws and as we discuss our interpretations with taxing authorities, we may in the future change our assessments of the sustainability of an uncertain tax position or of the amounts that may be sustained upon audit. We believe that the estimates, judgments and assumptions made in accounting for these matters are reasonable, based on information currently available. However, as our assessments change and as uncertain tax positions are resolved, the impact to our consolidated financial statements could be material.Contents

    DeferredIncome Taxes

    We        Until April 1, 2011, we were included in the consolidated federal income tax return of QCII. Since CenturyLink's acquisition of QCII on April 1, 2011, we are included in the consolidated federal income tax return of QCII.CenturyLink. Under QCII’sCenturyLink's tax allocation policy, QCIICenturyLink treats our consolidated results as if we were a separate taxpayer. The policy requires us to pay our tax liabilities in cash based upon our separate return taxable income. We are also included in the combined state tax returns filed by QCII,CenturyLink and the same payment and allocation policy applies.

    Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax credit carryforwards and differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.

    The measurement of deferred taxes often involves an exercise of judgment related to the computation and realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken and the resulting tax basis, are more likely than not to be sustained if they are audited by taxing authorities. Also,

    assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of our income among the states in which we operate. These matters, and others,other matters involve the exercise of significant judgment. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.

            We record deferred income tax assets and liabilities as described above. Valuation allowances are established when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be recovered. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate. In making this evaluation, we rely on our recent history of pre-tax earnings, estimated timing of future deductions and benefits represented by the deferred tax assets and our forecasts of future earnings, the latter two of which involve the exercise of significant judgment. As of the successor date of December 31, 2011, we concluded that it was more likely than not that we would realize the majority of our deferred tax assets; therefore, our valuation allowance did not require material adjustments. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that a valuation allowance for certain deferred tax assets is appropriate, which could materially impact our financial condition or results of operations. See Note 12- Income Taxes for additional information.

    Recently Issued Accounting Pronouncements

            In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update simplifies the goodwill impairment assessment by allowing a company to first review qualitative factors to determine the likelihood of whether the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a company would not be required to perform the two-step goodwill impairment test for that reporting unit. This update is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. This ASU, which we adopted during the third quarter of 2011, did not have any impact on our consolidated financial statements as


    Table of Contents

    our qualitative analysis as of September 30, 2011, indicated that more likely than not, the fair value of our single reporting unit exceeded its carrying value as of that date.

            In October 2009, the FASB issued ASU 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update requires the use of the relative selling price method when allocating revenue in these types of arrangements. This method requires a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update was effective for us on January 1, 2011 and we have adopted it prospectively for revenue arrangements entered into or materially modified after January 1, 2011. This standard update has not had and is not expected to have a material impact on our consolidated financial statements since the allocation of revenue has historically been based upon the relative fair value of the elements as determined by reference to vendor specific objective evidence of fair value when the elements have been sold on a stand-alone basis.

    Liquidity and Capital Resources

    Overview

            We are a wholly owned subsidiary of QSC, which is a direct wholly owned subsidiary of QCII and as of April 1, 2011, became an indirect wholly owned subsidiary of CenturyLink. As such, factors relating to, or affecting, CenturyLink's liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market's perception of us.

            CenturyLink has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and intercompany obligations vary from time to time and are classified as short-term loans. Under these arrangements, the majority of our cash balance is transferred on a daily basis to CenturyLink as a short-term affiliate loan. From time to time we may declare and pay dividends to QSC in excess of our earnings to the extent permitted by applicable law. Given our upgrade to an investment grade rating on April 1, 2011, our debt covenants do not limit the amount of dividends we can pay to QSC. Given our cash management arrangement with our ultimate parent, CenturyLink, and the resulting amounts due to us from CenturyLink, a significant component of our liquidity is dependent upon CenturyLink's ability to repay its obligation to us.

            As of the successor date of December 31, 2011, our current liabilities exceeded our current assets by $918 million compared to $3.734 billion as of April 1, 2011. Our working capital deficit decreased $2.816 billion primarily due to net income before depreciation, amortization and net proceeds from our long term debt issuances, partially offset by capital expenditures and dividends declared to QSC. 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 loans from CenturyLink.

    Debt and Other Financing Arrangements

            Until April 1, 2011, QCII had a revolving credit facility, which made available to us $1.035 billion of additional credit subject to certain restrictions. That credit facility was terminated in conjunction with CenturyLink's acquisition of QCII. In January 2011, CenturyLink entered into a new four-year revolving credit facility (the "Credit Facility") that allows CenturyLink to borrow up to $1.700 billion including $400 million of letter of credit capacity, for the general corporate purposes of itself and its


    Table of Contents

    subsidiaries. CenturyLink also maintains a separate letter of credit arrangement with a financial institution to which we have access. As of the successor date of December 31, 2011, CenturyLink had approximately $1.4 billion and $31 million available for future use under the Credit Facility and the separate letter of credit arrangement, respectively.

            As of the successor date of December 31, 2011, our long-term debt (including current maturities) totaled $8.325 billion, compared to $8.012 billion outstanding as of the predecessor date of December 31, 2010. Substantially all of the $313 million increase in our debt is attributable to our recent debt issuances offset by repayments of maturing long-term debt.

            Subject to market conditions, from time to time we expect to continue to issue debt securities to refinance our maturing debt. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned us by the three major credit rating agencies, among other factors.

            On October 4, 2011, we issued $950 million aggregate principal amount of our 6.75% Notes due 2021 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $927 million. The notes are our senior unsecured obligations and may be redeemed, in whole or in part, at a redemption price equal to the greater of their principal amount or the present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rate specified in the indenture agreement plus 50 basis points. In October 2011, we used the net proceeds from this offering, together with the $557 million of net proceeds received on September 21, 2011 from the debt issuance described below and available cash, to redeem the $1.500 billion aggregate principal amount of our 8.875% Notes due 2012 and to pay all related fees and expenses, which resulted in an immaterial loss.

            On September 21, 2011, we issued $575 million aggregate principal amount of our 7.50% Notes due 2051 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $557 million. The notes are our senior unsecured obligations and may be redeemed, in whole or in part, on or after September 15, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.

            On June 8, 2011, we issued $661 million aggregate principal amount of our 7.375% Notes due 2051 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $642 million. The notes are our unsecured obligations and may be redeemed, in whole or in part, on or after June 1, 2016 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date. We used the net proceeds, together with available cash, to redeem $825 million aggregate principal amount of our 7.875% Notes due 2011 and to pay related fees and expenses.

            We were in compliance with all provisions and covenants of our debt agreements as of the successor date of December 31, 2011. See Note 4—Long-Term Debt to our consolidated financial statements in Item 8 of this report for additional information about our long-term debt.


    Table of Contents

    Future Contractual Obligations

            The following table summarizes our estimated future contractual obligations as of the successor date of December 31, 2011:

     
     2012 2013 2014 2015 2016 2017 and
    thereafter
     Total 
     
     (Dollars in millions)
     

    Long-term debt, including current maturities and capital lease obligations

     $64  805  634  420  812  5,270  8,005 

    Interest on long-term debt and capital leases(1)

      553  536  518  458  408  6,207  8,680 

    Operating leases

      50  33  27  22  18  36  186 

    Purchase commitments(2)

      70  47  33  30  30  35  245 

    Non-qualified pension obligation

      2  2  2  2  2  18  28 

    Other

      2  2  2  2  1  31  40 
                    

    Total future contractual obligations(3)

     $741  1,425  1,216  934  1,271  11,597  17,184 
                    

    (1)
    Interest paid in all years may differ due to future refinancing of debt. Interest on our floating rate debt was calculated for all years using the rates effective at December 31, 2011.

    (2)
    We have various long-term, non-cancelable purchase commitments for advertising and promotion services, including advertising and marketing at sports arenas and other venues and events. We also have service related commitments with various vendors for data processing, technical and software support services. Future payments under certain service contracts will vary depending on our actual usage. In the table above we estimated payments for these service contracts based on the level of services we expect to receive.

    (3)
    The table does not include:

    our open purchase orders as of the successor date of December 31, 2011. These purchase orders are generally at fair value, and are generally cancelable without penalty;

    other long-term liabilities, such as accruals for legal matters and other taxes that are not contractual obligations by nature. We cannot determine with any degree of reliability the years in which these liabilities might ultimately settle;

    affiliate cash funding requirements for pension benefits payable to certain eligible current and future retirees allocated to us by QCII. Benefits paid by QCII'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's cash funding projections are discussed further below;

    affiliate post-retirement benefits payable to certain eligible current and future retirees. Not all of QCII'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's benefits plans in Note 8—Employee Benefits Item 8 of QCII's annual report on Form 10-K;

    contract termination fees. These fees are non-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business and to optimize our cost structure, we enter into contracts with terms greater than one year to purchase goods and services. Assuming we exited these contracts in 2012, termination fees for these contracts would be $56 million. In the normal course of business, we believe the payment of these fees is likely to be remote; and

    Table of Contents

      potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business. The nature and terms of these arrangements vary. Historically, we have not incurred significant costs related to performance under these types of arrangements.

    Capital Expenditures

            We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand our service offerings. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted revenue growth or productivity, expense and service impacts) and our expected return on investment. The amount of capital investment is influenced by, among other things, demand for our services and products, cash generated by operating activities and regulatory considerations.

            Our capital expenditures continue to be focused on our strategic services primarily our broadband services. In 2012, we anticipate that our fiber investment, which includes fiber to the tower, or FTTT, will be similar to that spent in 2011. FTTT is a type of telecommunications network consisting of fiber-optic cables that run from a telecommunication provider's broadband interconnection points to cellular towers. FTTT allows for the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional telecommunications network.

    Pension and Post-Retirement BenefitsPost-retirement Benefit Obligations

    Substantially all        QCII is subject to material obligations under its existing defined benefit pension and other post-retirement benefit plans. As of the April 1, 2011, the acquisition date, QCII recognized liabilities for the accounting unfunded status of pension and other post-retirement benefit obligations of $627 million and $2.706 billion, respectively. See Note 8—Employee Benefits to our consolidated financial statements in Item 8 of this report for additional information about our pension and other post-retirement benefit arrangements.

            A substantial portion of our employees participate in the QCII pension plan. Historically, QCII also maintains a non-qualifiedhas only required us to pay our portion of its pension plan for certain of our eligible highly compensated employees. In addition, certain employees may become eligible to participate in QCII’s post-retirement health care and life insurance benefit plans. QCII allocates the 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. The amounts contributed by us through QCIIOur 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’sQCII's affiliates. Historically, QCII has only required us to pay our portion of its required

            Benefits paid by QCII's qualified pension contribution. The allocation of expense to us is based upon demographics of our employees and retirees compared to all the remaining participants. However, significant year over yearplan are paid through a trust. Cash funding requirements can be significantly impacted by earnings on investments, discount rates, changes in QCII’s funded status affecting accumulated other comprehensive income mayplan benefits and funding laws and regulations. QCII opted to make a contribution of $307 million in December 2011, and therefore, will not havebe required to make a contribution in 2012 based on current funding laws and regulations. Although potentially significant initial impactin the aggregate, QCII currently expects that plan contributions in 2013 and beyond will decrease from the 2011 contribution amount. However, the actual amount of required plan contributions in 2013 and beyond will depend on the affiliate receivable or payable that is allocated to us.earnings on investments, discount rates, demographic experience, changes in plan benefits and changes in funding laws and regulations.

    In computing the pension and        Certain of QCII's post-retirement health care and life insurance benefits expenses and obligations,plans are unfunded. A trust holds assets that are used to help cover the most significant assumptions QCII makes include discount rate, expected rate of return on plan assets, health care trend rates and QCII’s evaluationcosts of certain retirees. As 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.

    Changes in any of the above factors QCII made in computing the pension and post-retirement health care and life insurance benefit expenses could impact general, administrative and other operating expenses and the affiliate benefits receivable or payable allocated to us as described above. For further discussion of the QCII pension, non-qualified pension and post-retirement benefit plans and the critical accounting estimates, see QCII’s Annual Report on Form 10-K for the year ended December 31, 2010.

    Revenue Recognition and Related Reserves

    We recognize revenue for services when the related services are provided. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments received, primarily activation fees and installation charges, as well as the associated customer acquisition costs, are deferred and recognized over the expected customer relationship period, which ranges from eighteen months to over ten years depending on the service. Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable based on objective evidence. If the elements are deemed separable and separate earnings processes exist, total consideration is allocated to each element based on the relative fair values of the separate elements and the revenue associated with each element is recognized as earned. If these criteria are not satisfied, the total advance payment is deferred and recognized ratably over the longer of the contractual period or the expected customer relationship period.

    We believe that the accounting estimates related to customer relationship periods and to the assessment of whether bundled elements are separable are “critical accounting estimates” because: (i) they require management to make assumptions about how long we will retain customers; (ii) the assessment of whether bundled elements are separable is subjective; (iii) the impact of changes in actual retention periods versus these estimates on the revenue amounts reported in our consolidated statements of operations could be material; and (iv) the assessment of whether bundled elements are separable may result in revenue being reported in different periods than significant portions of the related costs.

    As the telecommunications market experiences greater competition and customers shift from traditional land-based telecommunications services to wireless and Internet-based services, our estimated customer relationship period could decrease and we will accelerate the recognition of deferred revenue and related costs over a shorter estimated customer relationship period.

    Economic Lives of Assets to be Depreciated or Amortized

    We perform annual internal studies or reviews to determine depreciable lives for our property, plant and equipment. These studies utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution, and, in certain instances, actuarially determined probabilities to calculate the remaining life of our asset base.

    Due to rapid changes in technology and the competitive environment, selecting 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 one year increase or decrease in the estimated remaining useful lives of our property, plant and equipment would have decreased depreciation by approximately $230 million or increased depreciation by approximately $310 million, respectively. The effect of a one half year increase or decrease in the estimated remaining useful lives of our capitalized software would have decreased amortization by approximately $30 million or increased amortization by approximately $40 million, respectively.

    Recoverability of Long-Lived Assets

    We periodically perform evaluations of the recoverability of the carrying value of our long-lived assets using gross undiscounted cash flow projections. These evaluations require identification of the lowest level of identifiable, largely independent, cash flows for purposes of grouping assets and liabilities subject to review. The cash flow projections include long-term forecasts of revenue growth, gross margins and capital expenditures. All of these items require significant judgment and assumptions. We believe our estimates are reasonable, based on information available at the time they were made. However, if our estimates of our future cash flows had been different, we may have concluded that some of our long-lived assets were not recoverable, which would likely have caused us to record a material impairment charge. Also, if our future cash flows are significantly lower than our projections we may determine at some futuresuccessor date that some of our long-lived assets are not recoverable.

    Derivative Financial Instruments

    As of December 31, 2010, we did not have any derivative financial instruments. However, we sometimes use derivative financial instruments, specifically interest rate swap contracts, to manage interest rate risks. We execute these instruments with financial institutions we deem creditworthy and monitor our exposure to these counterparties. An interest rate hedge is generally designated as either a cash flow hedge or a fair value hedge. In a cash flow hedge, a borrower of variable interest debt agrees with another party to make fixed payments equivalent to paying fixed rate interest on debt in exchange for receiving payments from the other party equivalent to receiving variable rate interest on debt, the effect of which is to eliminate some portion of the variability in the borrower’s overall cash flows. In a fair value hedge, a borrower of fixed rate debt agrees with another party to make variable payments equivalent to paying variable rate interest on the debt in exchange for receiving fixed payments from the other party equivalent to receiving fixed rate interest on debt, the effect of which is to eliminate some portion of the variability in2011, the fair value of the borrower’s overall debt portfoliotrust assets was $643 million; however, a portion of these assets is comprised of investments with restricted liquidity. QCII estimates that the more liquid assets in the trust will be adequate to provide continuing reimbursements for covered post-retirement health care costs for approximately four years. Thereafter, covered benefits will be paid either directly by QCII or from the trust as the remaining assets become liquid. This projected four year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits.


    Table of Contents

    Other Matters

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

    Historical Information

            The following table summarizes cash flow activities:

     
     Successor  
     Predecessor Combined Predecessor Increase /
    (Decrease)
     
     
     Nine
    Months
    Ended
    December 31,
    2011
      
     Three
    Months
    Ended
    March 31,
    2011
     Year
    Ended
    December 31,
    2011
     Year
    Ended
    December 31,
    2010
     Combined
    2011 v
    Predecessor
    2010
     
     
     (Dollars in millions)
      
     

    Net cash provided by operating activities

     $2,201    869  3,070  3,235  (165)

    Net cash used in investing activities

      (1,191)   (335) (1,526) (1,256) 270 

    Net cash used in financing activities

      (1,208)   (525) (1,733) (2,801) (1,068)

            Net cash provided by operating activities decreased primarily due to changes in interest rates.

    We recognize all derivatives on our consolidated balance sheets at fair value. We generally designate the derivativedecreased cash payments received from customers as either a cash flow hedge or a fair value hedge on the date on which we enter into the derivative instrument. Cash flows from derivative instruments that are cash flow hedges or fair value hedges are classified in cash flows from operations.

    For a derivative that is designated as and meets allresult of the required criteria for a cash flow hedge, we record in accumulated other comprehensive income, which is included in accumulated deficit in our consolidated balance sheets, any changesdecreased revenues in the fair value ofcombined year ended December 31, 2011 compared to the derivative. We then reclassify these amounts into earnings as the underlying hedged item affects earnings. In addition, if there are any changes in the fair value of the derivative arising from ineffectiveness of the cash flow hedging relationship, we record those amounts immediately in other expense (income)—net in our consolidated statements of operations. For a derivative that is designated as and meets all of the required criteria for a fair value hedge, we record in other expense (income)—net in our consolidated statements of operations the changes in fair value of the derivative and the underlying hedged item. However, if the terms of this type of derivative match the terms of the underlying hedged item such that we qualify to assume no ineffectiveness, then the fair value of the derivative is measured and the change in the fair value for the period is assumed to equal the change in the fair value of the underlying hedged item for the period, with no impact in other expense (income)—net.

    We assess quarterly whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item or whether our initial assumption of no ineffectiveness is still valid. If we determine that a derivative is not highly effective as a hedge, a derivative has ceased to be a highly effective hedge or our assumption of no ineffectiveness is no longer valid, then we discontinue hedge accounting with respect to that derivative prospectively. We record immediately in earnings changes in the fair value of derivatives that are not designated as hedges.

    predecessor year ended December 31, 2010. For additional information about our operating results, see "Results of Operations" above.

            Net cash used in investing activities increased in the combined year ended December 31, 2011 as compared to the predecessor year ended December 31, 2010 primarily due to increases in short-term affiliate loans resulting from the majority of our cash balance being transferred on a daily basis to CenturyLink and payments for property, plant and equipment.

            Net cash used in financing activities decreased primarily due to $2.126 billion of net proceeds from the issuance of debt, as well as a $830 million decrease in dividends paid to QSC for the combined year ended December 31, 2011, as compared to the predecessor year ended December 31, 2010. This decrease was partially offset by a $1.848 billion increase in payments of long-term debt for the combined year ended December 31, 2011 compared to the predecessor year ended December 31, 2010. For additional information regarding our derivative financial instruments,financing activities, see Note 9—Derivative Financial Instruments4—Long-Term Debt to our consolidated financial statements in Item 8 of this report.

    Recently Issued Accounting PronouncementsCertain Matters Related to CenturyLink's Acquisition of QCII

    In October 2009,        Effective after CenturyLink's indirect acquisition of us, we are included in the FASB issued Accounting Standards Update, or ASU, Number 2009-13, “Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangementsconsolidated federal income tax return of CenturyLink. CenturyLink is in the process of developing a consensuspost-acquisition intercompany agreement for allocation of consolidated income tax liabilities. We will continue to account for income tax expense on a stand-alone basis. We are also included in certain combined state tax returns filed by CenturyLink and the same accounting will apply.

            As the successor date of December 31, 2011, we had paid certain costs that were associated with the CenturyLink acquisition. These costs include compensation costs comprised of retention bonuses


    Table of Contents

    and severance. The final amounts and timing of the FASB Emerging Issues Task Force.” This ASU establishescompensation 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.

            In accounting for the CenturyLink's indirect acquisition of us, we recorded our debt securities at their estimated fair values, which totaled $8.688 billion as of April 1, 2011. Our acquisition date fair value estimates were based primarily on quoted market prices in active markets and other observable inputs where quoted market prices were not available. The fair value our debt securities exceeded their stated principal balances on the acquisition date by $672 million, which is being recognized as a new selling price hierarchyreduction to use when allocatinginterest expense over the sales priceremaining terms of a multiple element arrangement between delivered and undelivered elements. This ASU is generally expected to result in revenue recognition for more delivered elements than under current rules.the debt.

    Market Risk

            We are requiredexposed to adopt this ASU prospectivelymarket risk from changes in interest rates on our variable rate long-term debt obligations. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.

            From time to time over the past several years, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for newfixed interest rates or materially modified agreements(ii) to swap obligations to pay fixed interest rates for variable interest rates; however, as of January  1,the successor date of December 31, 2011 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.

            As of the successor date of December 31, 2011, we have approximately $8.1 billion (excluding capital lease and other obligations) of long-term debt outstanding, 91% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We also held $750 million of floating rate debt exposed to changes in the London InterBank Offered Rate (LIBOR). A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease our annual pre-tax earnings by $8 million.

            Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may differ materially from those presented above if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed as of the successor date of December 31, 2011. The adoption

    Off-Balance Sheet Arrangements

            We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we do not engage in leasing, hedging, or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of this ASU will not have a material effect on ourthe consolidated financial positionstatements or results of operations.in the Future Contractual Obligations table above or (ii) discussed under the heading "Market Risk" above.

    ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The information in “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management”Market Risk" in Item 7 of this report is incorporated herein by reference.


    Table of Contents

    ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Report of Independent Registered Public Accounting Firm

    The Board of Directors and Stockholder


    Qwest Corporation:

    We have audited the accompanying consolidated balance sheets of Qwest Corporation and subsidiaries (the Company) as of December 31, 2011(Successor date) and 2010 and 2009,(Predecessor date) and the related consolidated statements of operations, stockholder’sstockholder's (deficit) equity and comprehensive income, and cash flows for the periods from April 1, 2011 to December 31, 2011 (Successor period), and from January 1, 2011 to March 31, 2011 (Predecessor period) and each of the years in the three-yeartwo-year period ended December 31, 2010.2010 (Predecessor periods). These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

    We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Qwest Corporation and subsidiaries as of December 31, 2011 (Successor period) and 2010 and 2009,(Predecessor date) and the results of their operations and their cash flows for the periods from April 1, 2011 to December 31, 2011 (Successor period), and from January 1, 2011 to March 31, 2011 and each of the years in the three-yeartwo-year period ended December 31, 2010 (Predecessor periods), in conformity with U.S. generally accepted accounting principles.

            As discussed in note 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.

    /s/ KPMG LLP


    KPMG LLP
    Denver, Colorado
    March 2, 2012

    February 21, 2011


    QWEST CORPORATION

    Table of Contents


    QWEST CORPORATION

    CONSOLIDATED STATEMENTS OF OPERATIONS


     
     Successor  
     Predecessor 
     
     Nine Months
    Ended
    December 31,
    2011
     


     Three Months
    Ended
    March 31, 2011
     Year Ended
    December 31,
    2010
     Year Ended
    December 31,
    2009
     
     
     (Dollars in millions)
     

    OPERATING REVENUES

                   

    Operating revenues

     $5,419    1,870  7,700  8,075 

    Operating revenues—affiliates

      1,216    398  1,571  1,656 
                

    Total operating revenues

      6,635    2,268  9,271  9,731 
                

    OPERATING EXPENSES

                   

    Cost of services and products (exclusive of depreciation and amortization)          

      1,833    626  2,585  2,796 

    Selling, general and administrative          

      1,499    501  2,136  2,222 

    Operating expenses—affiliates

      238    52  194  175 

    Depreciation and amortization

      1,866    451  1,873  1,976 
                

    Total operating expenses

      5,436    1,630  6,788  7,169 
                

    OPERATING INCOME

      1,199    638  2,483  2,562 

    OTHER INCOME (EXPENSE)

                   

    Interest expense

      (299)   (150) (615) (632)

    Other income (expense)

      (8)   2  5  (9)
                

    Total other income (expense)

      (307)   (148) (610) (641)
                

    INCOME BEFORE INCOME TAX EXPENSE

      892    490  1,873  1,921 

    Income tax expense

      349    191  791  724 
                

    NET INCOME

     $543    299  1,082  1,197 
                

       

       Years Ended December 31, 
       2010  2009   2008 
       (Dollars in millions) 

    Operating revenue:

         

    Operating revenue

      $7,700   $8,075    $8,576  

    Operating revenue—affiliates

       1,571    1,656     1,812  
                  

    Total operating revenue

       9,271    9,731     10,388  
                  

    Operating expenses:

         

    Cost of sales (exclusive of depreciation and amortization)

       1,655    1,704     1,899  

    Selling

       1,457    1,645     1,812  

    General, administrative and other operating

       1,609    1,669     1,556  

    Affiliates

       194    175     185  

    Depreciation and amortization

       1,873    1,976     2,073  
                  

    Total operating expenses

       6,788    7,169     7,525  
                  

    Operating income

       2,483    2,562     2,863  

    Other expense (income)—net:

         

    Interest expense on long-term borrowings—net

       615    632     589  

    Other—net

       (5  9     7  
                  

    Total other expense (income)—net

       610    641     596  
                  

    Income before income taxes

       1,873    1,921     2,267  

    Income tax expense

       791    724     829  
                  

    Net income

      $1,082   $1,197    $1,438  
                  

    The See accompanying notes are an integral part of theseto consolidated financial statements.


    QWEST CORPORATION

    Table of Contents


    QWEST CORPORATION

    CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME


     
     Successor  
     Predecessor 
     
     Nine Months
    Ended
    December 31,
    2011
      
     Three Months
    Ended
    March 31,
    2011
     Year Ended
    December 31,
    2010
     Year Ended
    December 31,
    2009
     
     
     (Dollars in millions)
     

    NET INCOME

     $543    299  1,082  1,197 
                

    OTHER COMPREHENSIVE INCOME

                   

    Unrealized gain (loss) on investments and other, net of tax

          1  (4) 9 
                

    Other comprehensive income

          1  (4) 9 
                

    COMPREHENSIVE INCOME

     $543    300  1,078  1,206 
                

       

       December 31, 
       2010  2009 
       (Dollars in millions) 
    ASSETS   

    Current assets:

       

    Cash and cash equivalents

      $192   $1,014  

    Accounts receivable—net of allowance of $48 and $53, respectively

       720    774  

    Accounts receivable—affiliates

       193    71  

    Deferred income taxes—net

       159    167  

    Prepaid expenses and other

       197    245  
             

    Total current assets

       1,461    2,271  

    Property, plant and equipment—net

       10,132    10,638  

    Capitalized software—net

       913    880  

    Prepaid pension—affiliates

       899    952  

    Other

       281    297  
             

    Total assets

      $13,686   $15,038  
             
    LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY   

    Current liabilities:

       

    Current portion of long-term borrowings

      $871   $515  

    Accounts payable

       463    419  

    Accounts payable—affiliates

       242    201  

    Dividends payable—Qwest Services Corporation

       140    100  

    Accrued expenses and other

       909    941  

    Current portion of post-retirement, other post-employment benefits and other—affiliates

       180    176  

    Deferred revenue and advance billings

       372    393  
             

    Total current liabilities

       3,177    2,745  

    Long-term borrowings—net of unamortized debt discount and other of $140 and $155, respectively

       7,141    7,871  

    Post-retirement, other post-employment benefits and other—affiliates

       2,501    2,573  

    Deferred income taxes—net

       1,327    1,127  

    Other

       371    410  
             

    Total liabilities

       14,517    14,726  
             

    Commitments and contingencies (Note 17)

       

    Stockholder’s (deficit) equity:

       

    Common stock—one share without par value, owned by Qwest Services Corporation

       11,425    11,346  

    Accumulated deficit

       (12,256  (11,034
             

    Total stockholder’s (deficit) equity

       (831  312  
             

    Total liabilities and stockholder’s (deficit) equity

      $13,686   $15,038  
             

    The See accompanying notes are an integral part of theseto consolidated financial statements.


    QWEST CORPORATION

    Table of Contents


    QWEST CORPORATION

    CONSOLIDATED BALANCE SHEETS

     
     Successor  
     Predecessor 
     
     December 31,
    2011
      
     December 31,
    2010
     
     
     (Dollars in millions)
     

    ASSETS

             

    CURRENT ASSETS

             

    Cash and cash equivalents

     $3    192 

    Accounts receivable, less allowance of $42 and $48

      712    720 

    Short-term affiliate loans

      198     

    Deferred income taxes, net

      168    159 

    Other

      98    181 
            

    Total current assets

      1,179    1,252 

    NET PROPERTY, PLANT AND EQUIPMENT

             

    Property, plant and equipment

      8,457    44,205 

    Accumulated depreciation

      (915)   (34,045)
            

    Net property, plant and equipment

      7,542    10,160 

    GOODWILL AND OTHER ASSETS

             

    Goodwill

      9,453     

    Customer relationships, net

      5,101     

    Other intangible assets, net

      1,460    888 

    Other

      197    270 
            

    Total goodwill and other assets

      16,211    1,158 
            

    TOTAL ASSETS

     $24,932    12,570 
            

    LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

             

    CURRENT LIABILITIES

             

    Current maturities of long-term debt

     $64    871 

    Accounts payable

      654    679 

    Accounts payable—affiliates, net

      189    205 

    Dividends payable—Qwest Services Corporation

      310    140 

    Accrued expenses and other liabilities

             

    Salaries and benefits

      257    326 

    Other taxes

      221    193 

    Other

      129    170 

    Advance billings and customer deposits

      273    372 
            

    Total current liabilities

      2,097    2,956 
            

    LONG-TERM DEBT

      8,261    7,141 
            

    DEFERRED CREDITS AND OTHER LIABILITIES

             

    Deferred income taxes, net

      2,860    1,327 

    Affiliates obligations, net

      1,572    1,602 

    Other

      255    375 
            

    Total deferred credits and other liabilities

      4,687    3,304 
            

    COMMITMENTS AND CONTINGENCIES (Note 16)

             

    STOCKHOLDER'S EQUITY (DEFICIT )

             

    Common stock—one share without par value, owned by Qwest Services Corporation

      9,972    11,425 

    Accumulated deficit

      (85)   (12,256)
            

    Total stockholder's equity (deficit)

      9,887    (831)
            

    TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

     $24,932    12,570 
            

    See accompanying notes to consolidated financial statements.


    Table of Contents


    QWEST CORPORATION

    CONSOLIDATED STATEMENTS OF CASH FLOWS

     
     Successor  
     Predecessor 
     
      
     
     
     Nine Months
    Ended
    December 31,
    2011
     

     Three Months
    Ended
    March 31,
    2011
     Year Ended
    December 31,
    2010
     Year Ended
    December 31,
    2009
     
     
     (Dollars in millions)
     
     
      
      
      
      
      
     

    OPERATING ACTIVITIES

                   

    Net income

     $543    299  1,082  1,197 

    Adjustments to reconcile net income to net cash provided by operating activities:

                   

    Depreciation and amortization

      1,866    451  1,873  1,976 

    Deferred income taxes

      150    76  241  (137)

    Provision for uncollectible accounts

      44    17  70  85 

    Long-term debt (premium) discount amortization

      (133)   3  11  8 

    Changes in current assets and liabilities:

                   

    Accounts receivable

      (71)   18  (22) 48 

    Accounts payable

      (47)   (20) 51  19 

    Accounts receivable and payable—affiliates, net

      (108)   93  (81)  

    Accrued income and other taxes

      (36)   50  (16) (122)

    Other current assets and other current liabilities, net

      (6)   (89) 11  10 

    Changes in other noncurrent assets and liabilities

      11    (36) 15  27 

    Changes in other noncurrent assets and liabilities—affiliates

      (53)     7  44 

    Other, net

      41    7  (7) 12 
                

    Net cash provided by operating activities

      2,201    869  3,235  3,167 
                

    INVESTING ACTIVITIES

                   

    Payments for property, plant and equipment and capitalized software

      (1,036)   (341) (1,240) (1,106)

    Changes in interest in investments managed by Qwest Services Corporation

          4  (17) 13 

    Changes in short-term affiliate loans

      (157)        

    Other, net

      2    2  1  (7)
                

    Net cash used in investing activities

      (1,191)   (335) (1,256) (1,100)
                

    FINANCING ACTIVITIES

                   

    Payments of long-term debt

      (2,368)   (14) (534) (25)

    Net proceeds from issuance of long-term debt

      2,126        738 

    Dividends paid to Qwest Services Corporation

      (900)   (530) (2,260) (2,000)

    Other, net

      (66)   19  (7) 1 
                

    Net cash used in financing activities

      (1,208)   (525) (2,801) (1,286)
                

    Net (decrease) increase in cash and cash equivalents

      (198)   9  (822) 781 

    Cash and cash equivalents at beginning of period

      201    192  1,014  233 
                

    Cash and cash equivalents at end of period

     $3    201  192  1,014 
                

    Supplemental cash flow information:

                   

    Income taxes (paid to) refunded from Qwest Services Corporation, net

     $(327)   116  (677) (968)

    Interest paid (net of capitalized interest of $8, $3, $12 and $10)

     $(464)   (149) (603) (597)

       

       Years Ended December 31, 
       2010  2009  2008 
       (Dollars in millions) 

    Operating activities:

        

    Net income

      $1,082   $1,197   $1,438  

    Adjustments to reconcile net income to net cash provided by operating activities:

        

    Depreciation and amortization

       1,873    1,976    2,073  

    Deferred income taxes

       241    (137  215  

    Provision for bad debt—net

       70    85    83  

    Other non-cash charges—net

       5    17    41  

    Changes in operating assets and liabilities:

        

    Accounts receivable

       (22  48    3  

    Accounts receivable—affiliates

       (9  55    (68

    Prepaid expenses and other current assets

       67    10    29  

    Accounts payable, accrued expenses and other current liabilities

       (3  28    (112

    Accounts payable, accrued expenses and other current
    liabilities—affiliates

       (66  (163  (71

    Deferred revenue and advance billings

       (29  (39  (36

    Other non-current assets and liabilities including affiliates

       26    90    (116
                 

    Cash provided by operating activities

       3,235    3,167    3,479  
                 

    Investing activities:

        

    Expenditures for property, plant and equipment and capitalized software

       (1,240  (1,106  (1,404

    Changes in interest in investments managed by Qwest Services Corporation

       (17  13    (13

    Other

       1    (7  15  
                 

    Cash used for investing activities

       (1,256  (1,100  (1,402
                 

    Financing activities:

        

    Proceeds from long-term borrowings

       —      738    —    

    Repayments of long-term borrowings, including current maturities

       (534  (25  (347

    Repayments of long-term borrowings, including current maturities—affiliates

       —      —      (22

    Dividends paid to Qwest Services Corporation

       (2,260  (2,000  (2,000

    Equity infusions from Qwest Services Corporation

       —      —      231  

    Other

       (7  1    2  
                 

    Cash used for financing activities

       (2,801  (1,286  (2,136
                 

    Cash and cash equivalents:

        

    (Decrease) increase in cash and cash equivalents

       (822  781    (59

    Beginning balance

       1,014    233    292  
                 

    Ending balance

      $192   $1,014   $233  
                 

    TheSee accompanying notes are an integral part of theseto consolidated financial statements.


    QWEST CORPORATION

    Table of Contents


    QWEST CORPORATION

    CONSOLIDATED STATEMENTS OF STOCKHOLDER’SSTOCKHOLDER'S EQUITY (DEFICIT) EQUITY

    AND COMPREHENSIVE INCOME

     
     Successor  
     Predecessor 
     
     Nine Months
    Ended
    December 31,
    2011
     

     Three Months
    Ended
    March 31,
    2011
     Year Ended
    December 31,
    2010
     Year Ended
    December 31,
    2009
     
     
      
      
      
      
      
     
     
     (Dollars in millions)
     

    COMMON STOCK

                   

    Balance at beginning of period

     $9,973    11,425  11,346  11,326 

    Asset transfers

      (1)     79  20 
                

    Balance at end of period

      9,972    11,425  11,425  11,346 
                

    ACCUMULATED DEFICIT

                   

    Balance at beginning of period

          (12,256) (11,034) (10,540)

    Net income

      543    299  1,082  1,197 

    Dividends declared to Qwest Services Corporation

      (628)   (1,000) (2,300) (1,700)

    Change in other comprehensive income

          1  (4) 9 
                

    Balance at end of period

      (85)   (12,956) (12,256) (11,034)
                

    TOTAL STOCKHOLDER'S EQUITY (DEFICIT)

     $9,887    (1,531) (831) 312 
                

       Common
    Stock
      Accumulated
    Deficit
      Total  Comprehensive
    Income
     
       (Dollars in millions) 

    Balance as of December 31, 2007

      $11,132   $(9,762 $1,370   

    Net income

       —      1,438    1,438   $1,438  

    Dividends declared on common stock

       —      (2,200  (2,200 

    Other comprehensive income—net of taxes:

         

    Unrealized loss on derivative instruments, net of deferred taxes of $3

       —      (6  (6  (6

    Unrealized loss on auction rate securities and other, net of deferred taxes of $5

       —      (8  (8  (8
            

    Total comprehensive income—net

         $1,424  
            

    Equity infusions from Qwest Services Corporation

       231    —      231   

    Other net asset transfers

       (37  (2  (39 
                  

    Balance as of December 31, 2008

       11,326    (10,540  786   

    Net income

       —      1,197    1,197   $1,197  

    Dividends declared on common stock

       —      (1,700  (1,700 

    Other comprehensive income—net of taxes:

         

    Unrealized gain on derivative instruments, net of deferred taxes of $4

       —      7    7    7  

    Unrealized gain on auction rate securities and other, net of deferred taxes of $1

       —      2    2    2  
            

    Total comprehensive income—net

         $1,206  
            

    Other net asset transfers

       20    —      20   
                  

    Balance as of December 31, 2009

       11,346    (11,034  312   

    Net income

       —      1,082    1,082   $1,082  

    Dividends declared on common stock

       —      (2,300  (2,300 

    Other comprehensive income—net of taxes:

         

    Unrealized loss on derivative instruments, net of deferred taxes of $1

       —      (1  (1  (1

    Unrealized loss on auction rate securities and other, net of deferred taxes of $2

       —      (3  (3  (3
            

    Total comprehensive income—net

         $1,078  
            

    Other net asset transfers

       79    —      79   
                  

    Balance as of December 31, 2010

      $11,425   $(12,256 $(831 
                  

    TheSee accompanying notes are an integral part of theseto consolidated financial statements.


    QWEST CORPORATION

    Table of Contents


    QWEST CORPORATION

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    For the Years Ended December 31, 2010, 2009 and 2008

    Unless the context requires otherwise, references in this report to “QC”"QC" refer to Qwest Corporation, references to “Qwest,” “we,” “us,” the “Company”"Qwest," "we," "us," and “our”"our" refer to Qwest Corporation and its consolidated subsidiaries, references to “QSC”"QSC" refer to our direct parent company, Qwest Services Corporation and its consolidated subsidiaries, and references to “QCII”"QCII" refer to QSC's direct parent company and our ultimateindirect parent company, Qwest Communications International Inc., and its consolidated subsidiaries and references to "CenturyLink" refer to QCII's direct parent company and our ultimate parent company, CenturyLink, Inc. and its consolidated subsidiaries.

    Note 1: Business(1) Basis of Presentation and BackgroundSummary of Significant Accounting Policies

    Basis of Presentation

    We offerare an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local, network access, private line (including special access), broadband, data, Internet,wireless and video services. In certain local and voiceregional markets, we also provide local access and fiber transport services withinto competitive local exchange carriers.

            We generate the majority of our revenues from services provided in the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.

    CenturyLink Merger

    On April 21, 2010, QCII entered into a merger agreement whereby CenturyLink, Inc. (“CenturyLink”) will acquire QCII in a tax-free, stock-for-stock transaction. Under the terms of the agreement, QCII’s stockholders will receive 0.1664 shares of CenturyLink common stock for each share of QCII’s common stock they own at closing. Based on QCII’s and CenturyLink’s number of outstanding shares as of the date of the merger agreement, at closing CenturyLink shareholders are expected to own approximately 50.5% and QCII’s stockholders are expected to own approximately 49.5% of the combined company. On July 15, 2010, QCII and CenturyLink received notification from the Department of Justice and the Federal Trade Commission that they received early termination of the waiting period under the Hart-Scott-Rodino Act, and as such have clearance from a federal antitrust perspective to proceed with the merger. On August 24, 2010, stockholders of each company approved all proposals relating to the merger. Completion of this transaction remains subject to a number of regulatory approvals as well as other customary closing conditions. QCII and CenturyLink have received most of the necessary approvals from state public service or public utility commissions, but they still need approvals from the Federal Communications Commission (“FCC”) and several other state public service or public utility commissions. While the timing of the receipt of these approvals cannot be predicted with certainty, QCII currently expects to receive all required approvals in the first quarter and is planning toward an April 1st closing date. If the merger agreement is terminated under certain circumstances, QCII may be obligated to pay CenturyLink a termination fee of $350 million.

    We are wholly owned by QSC, which is wholly owned by QCII. Our operations are included in the consolidated operations of QCII and generally account for the majority of QCII’s consolidated revenue. In addition to our operations, QCII maintains a national telecommunications network. Through its fiber-optic network, QCII provides the following products and services that we do not provide:

    Data integration;

    Dedicated Internet access;

    Hosting services;

    Long-distance services that allow calls that cross telecommunications geographical areas;

    Managed services;

    Multi-protocol label switching; and

    Voice over Internet Protocol, or VoIP.

    For certain products and services we provide, and for a variety of internal communications functions, we use parts of QCII’s telecommunications network to transport voice and data traffic. Through its network, QCII also

    QWEST CORPORATION

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

    For the Years Ended December 31, 2010, 2009 and 2008

    provides nationally and globally some data and Internet access services that are similar to services we provide within our local service area. These services include private line and our traditional wide area network (“WAN”) services, which consist of asynchronous transfer mode (“ATM”) and frame relay.

    Note 2: Summary of Significant Accounting Policies

    Basis of Presentation

    The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries over which we exercise control. All intercompany amounts and transactions with our consolidated subsidiaries have been eliminated.

    Reclassifications        On April 1, 2011, our indirect parent QCII became a wholly owned subsidiary of CenturyLink, Inc. in a tax-free, stock-for-stock transaction. Although we continued as a surviving corporation and legal entity after the acquisition, the accompanying consolidated statements of operations, comprehensive income, cash flows and stockholder's equity (deficit) are presented for two periods: predecessor and successor, which relates to the period preceding the acquisition and the period succeeding the acquisition. On the date of the acquisition, April 1, 2011, our assets and liabilities were recognized at their fair value. This revaluation has been reflected in our financial statements and, therefore, has resulted in a new basis of accounting for the "successor period". This new basis of accounting means that our financial statements for the successor periods are not comparable to our previously reported financial statements, including the predecessor period financial statements in this report.

    During the first quarter of 2010,2011, we changed the definitions we use to classify expenses as cost of sales,services and products and selling, expenses or general administrative and other operating expensesadministrative, and as a result, certain expenses in our consolidated statements of operations for the prior year have beenwe reclassified previously reported amounts to conform to the current yearperiod presentation. We revised our definitions so that our expense classifications are more consistent with the expense classifications used by our new ultimate parent company, CenturyLink. These revisions resulted in the reclassification of $930 million and $1.092 billion from selling, general and administrative to cost of services and products for the predecessor years ended December 31, 2010 and 2009, respectively. Our newcurrent definitions of these expenses are as follows:

      Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which are third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents

    Table of Contents

    Cost of sales (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers and affiliates. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages and certain benefits); equipment sales expenses (such as modem expenses); rents and utilities expenses incurred by our network operations; fleet expenses; and other expenses directly related to our network operations (such as professional fees and outsourced services).


    QWEST CORPORATION

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    (1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)

        and utilities expenses; equipment sales expenses (such as modem expenses); costs for universal service funds ("USF") (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); and other expenses directly related to our network.

      Selling, general and administrative expenses are expenses incurred in selling products and services to our customers, and affiliates. These expenses include: employee-related expenses directly attributable to selling products or services (such as salaries, wages, internal commissions and certain benefits); marketing and advertising; external commissions; bad debt expense; and other selling expenses (such as professional fees and outsourced services).

    General, administrative and other operating expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses for administrative functions (such as salaries, wages and certain benefits); taxes and fees (such as property and other taxes and universal service funds (“USF”) charges); rents and utilities expenses incurred by our administrative offices; and other general, administrative and other operating expenses (such as professional fees). These expenses also include our combined net periodic pension and post-retirement benefits expenses for all eligible employees and retirees allocated to us from QCII.

    These definitions reflect changes primarily to reclassify expenses for: rent and utilities incurred by our network operations; fleet; network and supply chain management; and insurance and risk management from general, administrative and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to cost of sales, where theseselling products or services and employee-related expenses are more aligned with how we now manage our business. We believe these changes allow users of our financial statements to better understand our expense structure.for administrative functions; marketing and advertising; taxes (such as property and other taxes) and fees; external commissions; bad debt expense; and other selling, general and administrative expenses.

        These expense classifications may not be comparable to those of other companies. We also 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. These changes resulted in the reclassification of $199 million and $212 million from the general, administrative and other operating expenses and selling expenses categories to cost of sales for the years ended December 31, 2009 and 2008, respectively.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

        

We have also reclassified certain other prior year balance sheet amounts presented in our Annual Report on Form 10-K foras of the year endedpredecessor date of December 31, 20092010. We made these changes so that the classifications of our assets and liabilities are more consistent with the asset and liability classifications used by our new ultimate parent company, CenturyLink. These reclassifications primarily included combining $899 million non-current prepaid pension asset—affiliates and $2.501 billion non-current post-retirement, other post-employment benefits and other—affiliates into $1.602 billion non-current affiliates obligations, net. We also combined $193 million accounts receivable—affiliates, $180 million current portion of post-retirement, other post-employment benefits and other—affiliates into accounts payable—affiliates, net. We reclassified $220 million from accrued expenses and other current liabilities to conform to the current year presentation.accounts payable. In addition, we reclassified $25 million from capitalized software, net into net property, plant and equipment.

Summary of Significant Accounting Policies

    Use of Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we made when accounting for items and matters such as, but not limited to, investments, long-term contracts, customer retention patterns, allowance for doubtful accounts, depreciation, amortization, asset valuations, internal labor capitalization rates, affiliates transactions, intercompany allocations, recoverability of assets (including deferred tax assets), impairment assessments, pension, post-retirement and other post-employment benefits, taxes, certain liabilities and other provisions and contingencies are reasonable, based on information available at the time they were made. Our accounting for CenturyLink's indirect acquisition of us required extensive use of estimates in determining the acquisition date fair values of our assets and liabilities. These estimates, intercompany allocations, judgments and assumptions can affect the reported amounts of assets, liabilities and components of stockholder’sstockholder's equity or deficit or equity as of the dates of the consolidated balance sheets, as well as the reported amounts of revenue, expenses and components of cash flows during the periods presented in our consolidated statements of operations, our consolidated statements of comprehensive income and our consolidated


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)

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 17—16—Commitments and Contingencies for additional information.

For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.

For matters related to income taxes, if the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.

For all of these and other matters, actual results could differ from our estimates.

    Affiliates Transactions

    We record intercompany charges at the amounts billed to us by our affiliates. Regulatory rules require certain expenses to be recorded at market price or fully distributed cost, as more fully described in Note 16—Related Party Transactions. Our compliance with regulations is subject to review by regulators. Adjustments to intercompany charges that result from these reviews are recorded in the period they become known.

    Because of the significance of the services we provide to our affiliates and our other affiliates transactions, the results of operations, financial position, and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.

    In the normal course of business, we transfer assets to and from our parent, QSC which are recorded through our equity. It is QCII’s and our policy to record asset transfers based on carrying values.

    QWEST CORPORATION

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

    For the Years Ended December 31, 2010, 2009 and 2008

    Revenue Recognition

We recognize revenue for services when the related services are provided. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments include activation fees and installation charges, which we recognize as revenue over the expected customer relationship period, which ranges from eighteen months to over ten years depending on the service. We also defer costs for customer acquisitions. The deferral of customer acquisition costs is limited to the amount of revenue deferred on advance payments. Costs in excess of advance payments are recorded as expense in the period such costs are incurred. Expected customer relationship periods are estimated using historical experience. Termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.

        We offer bundle discounts to our customers who receive certain groupings of services. These bundle discounts are recognized concurrently with the associated revenues and are allocated to the various services in the bundled offering based on the estimated selling price of services included in each bundled combination. Revenues from installation activities are deferred and recognized as revenue over the estimated life of the customer relationship. The costs associated with such installation activities, up to the related amount of deferred revenue, are deferred and recognized as an operating expense over the same period.

Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable based on objective evidence.separable. If the elements are deemed separable and separate earnings processes exist, the revenue associated with each element is allocated to each element based on the relative fair valuesestimated 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 attributableallocated to the equipment sale as long as all the conditions for revenue recognition have been satisfied. AnyThe portion of the advance payment in excessallocated to the service based


Table of theContents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)

upon its relative fair value of the equipmentselling price is recognized ratably over the longer of the contractual period or the expected customer relationship period. If separate earnings processes do not exist,

        We have periodically transferred optical capacity assets on our network to other telecommunications service carriers. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the total advance payment is deferredexclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years. We account for the cash consideration received on transfers of optical capacity assets and recognizedon all of the other elements deliverable under an IRU, as revenue ratably over the longerterm of the contractual period or the expected customer relationship period.agreement. We have not recognized revenue on any contemporaneous exchanges of our optical capacity assets for other optical capacity assets.

We offer some products and services that are provided by third-party vendors. 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. For example, the revenue from DIRECTV and Verizon Wireless services that we offer through sales agency relationships is reported on a 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 and act as an agent or broker. Based on our agreements with DIRECTV and Verizon Wireless, we offer these services through sales agency relationships which are reported on a net basis.

    Affiliates Transactions

        We record intercompany charges at the amounts billed to us by our affiliates. Regulatory rules require certain expenses to be recorded at market price or fully distributed cost. Our compliance with regulations is subject to review by regulators. Adjustments to intercompany charges that result from these reviews are recorded in the period they become known.

Allocation        Because of Bundle Discounts

We offer bundle discountsthe significance of the services we provide to our customers who receive certain groupingsaffiliates and our other affiliates transactions, the results of services. These bundle discountsoperations, financial position and cash flows presented herein are recognized concurrently withnot necessarily indicative of the associated revenueresults of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.

        In the normal course of business, we transfer assets to and from our parent, QSC which are allocatedrecorded through our equity. It is our policy to the various services in the bundled offerings. The allocation isrecord asset transfers based on carrying values. We have recorded $28 million of noncash dividends associated with asset transfers to QSC during the relative fair value of services included in each bundle combination.successor nine months ended December 31, 2011.

    USF, Gross Receipts Taxes and Other Surcharges

In determining whether to include in our revenue and expenses the taxes and surcharges collected from customers and remitted to governmental authorities, including 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 taxes on a gross basis and include them in our revenue and general, administrativecosts of services and other operating expenses.products.

        In jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and do not include them in our revenue and general, administrativecosts of services and other operating expenses.products.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2009(1) Basis of Presentation and 2008Summary of Significant Accounting Policies (Continued)

Our revenue and general, administrative and other operating expenses included taxes and surcharges accounted for on a gross basis of $186 million, $182 million and $199 million for the years ended December 31, 2010, 2009 and 2008, respectively.

    Advertising Costs

Costs related to advertising are expensed as incurred. AdvertisingFor the successor nine months ended December 31, 2011 our advertising expense was $292 million, $328$174 million and $394$65 million for the predecessor three months ended March 31, 2011 and $292 million and $328 million for the predecessor years ended December 31, 2010 and 2009, and 2008, respectively, andrespectively. This expense is included in selling, expensesgeneral and general, administrative and other operating expenses in our consolidated statements of operations.

    Legal Costs

In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. We expense these costs as the related services are received.

    Income Taxes

We        Until April 1, 2011, we were included in the consolidated federal income tax return of QCII. Since CenturyLink's acquisition of QCII on April 1, 2011, we are included in the consolidated federal income tax return of QCII.CenturyLink. Under QCII’sCenturyLink's tax allocation policy, QCIICenturyLink treats our consolidated results as if we were a separate taxpayer. The policy requires us to pay our tax liabilities in cash based upon our separate return taxable income. We are also included in QCII’sthe combined state tax returns filed by CenturyLink and the same payment and allocation policies apply.policy applies.

The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods, adjustments to our liabilities for uncertain tax positions and amortization of investment tax credits. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.

We use the deferral method of accounting for federal investment tax credits earned prior to the repeal of such credits in 1986. We also defer certain transitional investment tax credits earned after the repeal, as well as investment tax credits earned in certain states. We amortizeIn the predecessor periods, we amortized these credits ratably over the estimated service lives of the related assets as a credit to our income tax expense in our consolidated statements of operations.

    Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. InSubsequent to CenturyLink's indirect acquisition of us, our cash collections are transferred to CenturyLink on a daily basis and our parent funds our cash disbursement needs. The net cash transferred to CenturyLink has been reflected as short-term affiliate loans 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


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)

cash equivalents, we requirerequired that individual securities have original maturities of three months or less and that individual investment funds have dollar-weighted average maturities of ninety days or less. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition and in high quality and relatively risk-free investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to credit worthiness of any particular financial institution.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for payment. TheseDisbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. A delay in funding results in a temporary source of financing. The activity related toUntil the issued checks are presented for payment, the book overdrafts is included in “other” in financing activities in our consolidated statements of cash flows. Book overdrafts are included in accounts payable on our consolidated balance sheets. Assheet. This activity is included in the operating activities section in our consolidated statements of December 31, 2010 and 2009, the book overdraft balance was $20 million and $27 million, respectively.cash flows.

    Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivablereceivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables less an allowance for doubtful accounts. The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. We generally consider our accounts past due if they are outstanding over 30 days. Our collection process varies by the customer segment, amount of the receivable, and our evaluation of the customer’scustomer'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, Plant and Equipment

        As a result of CenturyLink's indirect acquisition of us, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Therefore, the allocated fair values of the assets represent their new basis of accounting in our consolidated financial statements. This resulted in adjustments to our property, plant and equipment accounts, including accumulated depreciation at the acquisition date. The adjustments related to CenturyLink's indirect acquisition of us are described in Note 2—Acquisition of QCII by CenturyLink and Note 6—Property, Plant and Equipment.

Property, plant and equipment are carriedacquired since the acquisition date is stated at original cost plus the estimated value of any associated legally or contractually required retirement obligations. Property, plant and equipment areis 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, 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


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)

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 perform annual internal studies or reviews to determineevaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our studiesreviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to calculateestimate the remaining life of our asset base. The changes in our estimates incorporated as a result of our most recent reviews did not have a material impact on the level of our depreciation expense.

We have asset retirement obligations associated with the legally or contractually required removal of a limited group ofreview property, plant and equipment assets from leased properties, and the disposal of certain hazardous materials present in our owned properties. When an asset retirement obligation is identified, usually in association with the acquisition of the asset, we record the fair value of the obligation as a liability. The fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated asset. Where the removal obligation is not legally binding, the net cost to remove assets is expensed in the period in which the costs are actually incurred.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Capitalized Software

Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line group method over its estimated useful life. 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 internally developed software to be used internally 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 and training costs are expensed in the period in which they are incurred. We review the economic lives of our capitalized software annually.

Impairment of Long-Lived Assets

We review long-lived assets, other than intangible assets with indefinite lives, for impairment at the QCII level whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For measurement purposes, long-lived assets areproperty, plant and equipment is grouped with other assets and liabilities includingat the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, of QCII.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’sgroup'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.

    Derivative Financial InstrumentsGoodwill, Customer Relationships and Other Intangible Assets

As of December 31, 2010 we did not have any derivative financial instruments. However, we sometimes use derivative financial instruments, specifically interest rate swap contracts, to manage interest rate risks. We execute these instruments with financial institutions we deem creditworthy        Intangible assets arising from business combinations, such as goodwill and monitor our exposure to these counterparties. An interest rate hedge is generally designated as either a cash flow hedge or a fair value hedge. In a cash flow hedge, a borrower of variable interest debt agrees with another party to make fixed payments equivalent to paying fixed rate interest on debt in exchange for receiving payments from the other party equivalent to receiving variable rate interest on debt, the effect of which is to eliminate some portion of the variability in the borrower’s overall cash flows. In a fair value hedge, a borrower of fixed rate debt agrees with another party to make variable payments equivalent to paying variable rate interest on the debt in exchange for receiving fixed payments from the other party equivalent to receiving fixed rate interest on debt, the effect of which is to eliminate some portion of the variability in the fair value of the borrower’s overall debt portfolio due to changes in interest rates.

We recognize all derivatives on our consolidated balance sheetscustomer relationships are initially recorded at fair value. We generally designateamortize customer relationships primarily over an estimated life of 10 years, using either the derivativesum-of-the-years-digits or straight-line methods, depending on the type of customer. We amortize capitalized software using the straight-line method over estimated lives ranging up to seven years. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of an intangible asset, we classify the intangible asset as eitherindefinite lived and such intangible assets are not amortized.

        As a cash flow hedge or aresult of CenturyLink's indirect acquisition of us, the software used by us for internal use was adjusted to fair value hedge on the date on which we enter into the derivative instrument. Cash flows from derivative instruments that are fair value hedges or cash flow hedges are classified in cash flows from operations.

For a derivative that is designated as and meets all of the required criteriaacquisition date. During the predecessor and successor periods, we have capitalized certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a cash flow hedge, we recordtask it previously did not perform. Software maintenance, data conversion and training costs are expensed in accumulated other comprehensive income,the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized software is included in accumulated deficitother intangible assets, net, in our consolidated balance sheets, any changes in the fair valuesheets.


Table of the derivative. We then reclassify these amounts into earnings as the underlying hedged item affects earnings. In addition, if there are any changes in the fair value of the derivative arising from ineffectiveness of the cash flow hedging relationship, we record those amountsContents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

For(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)

        We review customer relationships for impairment whenever facts and circumstances indicate that the Years Ended December 31, 2010, 2009carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount is not recoverable and 2008

immediately in other expense (income)—net in our consolidated statements of operations. For a derivative that is designated as and meets allexceeds 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 and discounted cash flows, as appropriate.

        We are required to review goodwill for impairment at least annually, or more frequently if events or a change in circumstances indicate that an impairment may have occurred. Our annual measurement date for testing goodwill impairment is September 30. We are required to write-down the value of goodwill in periods in which the recorded amount of goodwill exceeds the fair value. The impairment testing is at the reporting unit level, and in reviewing the criteria for a fair value hedge,reporting units when allocating the goodwill resulting from CenturyLink's indirect acquisition of us, we record in other expense (income)—net inhave determined that our consolidated statementsoperations consist of operations the changes in fair valueone reporting unit, consistent with our determination that our business consists of the derivative and the underlying hedged item. However, if the terms of this type of derivative match the terms of the underlying hedged item such that we qualify to assume no ineffectiveness, then the fair value of the derivative is measured and the change in the fair value for the period is assumed to equal the change in the fair value of the underlying hedged item for the period, with no impact in other expense (income)—net.

We assess quarterly whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item or whether our initial assumption of no ineffectiveness is still valid. If we determine that a derivative is not highly effective as a hedge, a derivative has ceased to be a highly effective hedge or our assumption of no ineffectiveness is no longer valid, then we discontinue hedge accounting with respect to that derivative prospectively. We record immediately in earnings changes in the fair value of derivatives that are not designated as hedges.one operating segment. See Note 9—Derivative Financial Instruments3—Goodwill, Customer Relationships and Other Intangible Assets for additional information.

    Fair Value of Financial Instruments

    Our financial instruments consist of cash and cash equivalents, auction rate securities, accounts receivable, accounts payable, interest rate hedges and long-term notes including the current portion. The carrying values of cash and cash equivalents, auction rate securities, accounts receivable, accounts payable and interest rate hedges approximate their fair values. The carrying value of our long-term notes, including the current portion, reflects original cost net of unamortized discounts and other. See Note 3—Fair Value of Financial Instruments for a more detailed discussion of the fair value of our other financial instruments.

    Pension and Post-Retirement Benefits

Substantially all of our employees participate in the QCII pension plan. QCII also maintains a non-qualified pension plan for certain of our eligible highly compensated employees. In addition, certain employees may become eligible to participate in QCII’sQCII's post-retirement health care and life insurance benefit plans. QCII allocates the 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. 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’sQCII'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’sQCII'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.

For further information on QCII pension, non-qualified pension, post-retirement and other post-employment benefit plans, see QCII’sQCII's Annual Report on Form 10-K for the year ended December 31, 2010.2011.

Recently Issued Accounting Pronouncements

In October 2009,September 2011, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("ASU") Number 2009-13, “Revenue Recognition (ASC 605) Multiple-Deliverable Revenue Arrangements2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update simplifies the goodwill impairment assessment by allowing a consensus of the FASB Emerging Issues Task Force.” This ASU establishes a new selling price hierarchycompany to use when allocating the sales price of a multiple element arrangement between delivered and undelivered elements.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

This ASU is generally expected to result in revenue recognition for more delivered elements than under current rules. We are required to adopt this ASU prospectively for new or materially modified agreements entered into on or after January 1, 2011. The adoption of this ASU will not have a material effect on our financial position or results of operations.

Note 3: Fair Value of Financial Instruments

Our financial instruments consisted of cash and cash equivalents, auction rate securities, accounts receivable, accounts payable, interest rate hedges and long-term notes including the current portion. The carrying values of the following items approximate their fair values: cash and cash equivalents, auction rate securities, accounts receivable, accounts payable and interest rate hedges. The carrying value of our long-term notes, including the current portion, reflects original cost net of unamortized discounts and other and was $7.828 billion as of December 31, 2010. For additional information, see Note 8—Borrowings.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB.

The table below presents the fair values for auction rate securities, interest rate hedges and long-term notes including the current portion, as well as the input levels usedfirst review qualitative factors to determine these fair values asthe likelihood of December 31, 2010 and 2009:

   Level   Fair value as of December 31, 
         2010            2009     
       (Dollars in millions) 

Assets:

      

Auction rate securities

   3    $52    $41  

Fair value hedges

   3     —       2  
            

Total assets

    $52    $43  
            

Liabilities:

      

Long-term notes, including the current portion

   1 & 2    $8,482    $8,495  

Cash flow hedges

   3     —       3  
            

Total liabilities

    $8,482    $8,498  
            

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

The three levels of the fair value hierarchy as defined by the FASB are as follows:

Input Level

Description of Input

Level 1

Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2

Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

We determinedwhether the fair value of our auction rate securities using a probability-weighted discounted cash flow modelreporting unit is less than its carrying amount before applying the two-step goodwill impairment test. If it is determined that takes into consideration the weighted average of the following factors:

coupon rate of 5.44%;

probability that we will be able to sell the securities in an auction or that the securities will be redeemed early of 75.23%;

probability that a default will occur of 20.98% with a related recovery rate of 55.00%; and

discount rate of 7.81%.

We determined the fair value of our interest rate hedges using projected future cash flows, discounted at the mid-market implied forward London Interbank Offered Rate (“LIBOR”). For additional information on our derivative financial instruments, see Note 9—Derivative Financial Instruments.

We determined the fair values of our long-term notes, 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.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

The table below presents a rollforward of the instruments valued using Level 3 inputs for the years ended December 31, 2010 and 2009:

   Instruments Valued Using Level 3 Inputs 
   Auction rate
securities
  Investment
fund
  Fair value
hedges
  Cash flow
hedges
 
   (Dollars in millions) 

Balance at December 31, 2008

  $43   $9   $—     $(8

Transfers into (out of) Level 3

   —      —      —      —    

Additions

   —      1    —      —    

Dispositions and settlements

   (4  (11  —      —    

Realized and unrealized gains:

     

Included in long-term borrowings—net

   —      —      2    —    

Included in other (expense) income—net

   —      1    —      —    

Included in other comprehensive income

   2    —      —      5  
                 

Balance at December 31, 2009

   41    —      2    (3
                 

Transfers into (out of) Level 3

   —      —      —      —    

Additions

   16    —      —      —    

Dispositions and settlements

   —      —      (7  —    

Realized and unrealized gains:

     

Included in long-term borrowings—net

   —      —      5    —    

Included in other (expense) income—net

   —      —      —      —    

Included in other comprehensive (loss) income

   (5  —      —      3  
                 

Balance at December 31, 2010

  $52   $—     $—     $—    
                 

Note 4: Investments

QSC manages the majority of our cash and investments. Our proportionate ownership of these investments, including illiquid investments, can change because we record our portion of the entire portfolio of cash and investments managed by QSC. Our allocated portion changes as our cash balances change compared to the cash balances of our affiliate companies. These changes are reflected on a net basis in cash flows from investing activities on our consolidated statements of cash flows.

As of December 31, 2010 and 2009, our investments included auction rate securities of $52 million and $41 million, respectively, which are classified as non-current, available-for-sale investments and are included in other non-current assets at their estimated fair value on our consolidated balance sheets. Auction rate securities are generally long-term debt instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, generally every 28 days. This mechanism generally allows existing investors to rollover their holdings and continue to own their respective securities or liquidate their holdings by selling their securities at par value. Prior to August 2007, we invested in these securities for

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

short periods of time as part of our cash management program. However, the uncertainties in the credit markets have prevented us and other investors from liquidating holdings of these securities in auctions since the third quarter of 2007. Because we are uncertain as to when the liquidity issues relating to these investments will improve, we continued to classify these securities as non-current as of December 31, 2010. These securities:

are structured obligations of special purpose reinsurance entities associated with life insurance companies and are referred to as “Triple X” securities;

currently pay interest every 28 days at one-month LIBOR plus 200 basis points;

are rated A;

are insured against loss of principal and interest by two bond insurers, one of which had a credit rating of B and the other of which was not rated and in the fourth quarter of 2009 was prohibited by its regulator from making any claim payments;

are collateralized by the issuers; and

mature between 2033 and 2036.

The following table summarizes the fair value of these auction rate securities, the cumulative net unrealized loss, net of deferred income taxes, related to these securities and the cost basis of these securities as of December 31, 2010 and 2009:

   December 31, 
   2010   2009 
   (Dollars in millions) 

Auction rate securities—fair value

  $52    $41  

Classification

   Non-current, available-for-sale investments  

Balance sheet location (reported at estimated fair value)

   Other non-current assets  

Cumulative net unrealized loss, net of deferred income taxes

  $9    $6  

Auction rate securities—cost basis

  $68    $51  

The following table summarizes our unrealized gain (loss), net of deferred income taxes, due to the change in the amount of auction rate securities allocated to us by QSC for the years ended December 31, 2010 and 2009:

   Years Ended December 31, 
   2010  2009 
   (Dollars in millions) 

Unrealized (loss) gain, net of deferred income taxes

  $(3 $2  

These unrealized losses were recorded in accumulated other comprehensive income, which is included in accumulated deficit in our consolidated balance sheets. We consider the decline in fair value to be a temporary impairment because we believe it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a company would not be required to perform the two-step goodwill impairment test for that reporting


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Basis of Presentation and Summary of Significant Accounting Policies (Continued)

unit. This update is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. This ASU, which we will ultimately recoveradopted during the entire $68third quarter of 2011, did not have any impact on our consolidated financial statements as our qualitative analysis as of September 30, 2011, indicated that more likely than not, the fair value of our single reporting unit exceeded its carrying value as of that date.

        In October 2009, the FASB issued ASU 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update requires the use of the relative selling price method when allocating revenue in these types of arrangements. This method requires a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update was effective for us on January 1, 2011 and we have adopted it prospectively for revenue arrangements entered into or materially modified after January 1, 2011. This standard update has not had and is not expected to have a material impact on our consolidated financial statements since the allocation of revenue has historically been based upon the relative fair value of the elements as determined by reference to vendor specific objective evidence of fair value when the elements have been sold on a stand-alone basis.

(2) Acquisition of QCII by CenturyLink

        On April 1, 2011, our indirect parent QCII became a wholly owned subsidiary of CenturyLink.

        Since April 1, 2011, our results of operations have been included in the consolidated results of operations of CenturyLink. CenturyLink has accounted for its acquisition of QCII and us under the acquisition method of accounting, which resulted in the assignment of the purchase price to the assets acquired and liabilities assumed based on our preliminary estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As such, we have not completed our valuation analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of the assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets. The fair values of certain tangible assets, certain liabilities and residual goodwill are the most significant areas not yet finalized and therefore are subject change. We expect to complete our final fair value determinations no later than the first quarter of 2012. Our final fair value determinations may be significantly different than those reflected in our consolidated financial statements as of the successor date of December 31, 2011.

        Based on our preliminary estimate, the aggregate consideration exceeds the aggregate estimated fair value of the assets acquired and liabilities assumed by $9.453 billion, which amount 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. Our aggregate consideration allocation is based on our preliminary estimate of enterprise value of $18.661 billion less the fair value of our debt of $8.688 billion.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2) Acquisition of QCII by CenturyLink (Continued)

        The following is our preliminary assignment of the aggregate consideration:

 
 April 1, 2011 
 
 (Dollars in millions)
 

Cash, accounts receivable and other current assets

 $1,102 

Property, plant and equipment

  7,496 

Identifiable intangible assets:

    

Customer relationships

  5,699 

Capitalized software

  1,702 

Other noncurrent assets

  201 

Current liabilities, excluding current maturities of long-term debt

  (2,458)

Current maturities of long-term debt

  (2,378)

Long-term debt

  (6,310)

Deferred credits and other liabilities

  (4,534)

Goodwill

  9,453 
    

Aggregate consideration

 $9,973 
    

        We retrospectively adjusted our previously reported preliminary assignment of the aggregate Qwest consideration for changes to our original estimates of the fair value of certain items at the acquisition date. These changes are the result of additional information obtained since the filing of our Form 10-Q for the quarter ended September 30, 2011. Identifiable intangible assets decreased due to a $353 million cost basis,decrease in part becausecustomer relationships valuation. Property, plant and equipment increased by $69 million primarily from a revision to our buildings asset valuation. Deferred credits and other liabilities decreased by $103 million primarily from a change in deferred income taxes and a revision to our pension and post retirement asset valuation. Goodwill increased by $171 million as an offset to the securities are rated investment grade, the securities are collateralizedabove mentioned changes. The adjustment to intangible assets and property, plant and equipment valuations and the issuers continueresulting application of depreciation and amortization expense did not result in a material change to previously reported depreciation and amortization expense.

        We have recognized $146 million of expense associated with activities related to CenturyLink's indirect acquisition of us during the successor nine months ended December 31, 2011. These expenses were comprised primarily of severance, retention bonuses, share-based compensation allocated to us by QCII and system integration consulting. During the predecessor three months ended March 31, 2011, we recognized $2 million of expenses associated with our activities related to the acquisition. As of April 1, 2011, as part of acquisition accounting, we also included in our goodwill $22 million for certain performance awards and $14 million related to retention bonuses, all of which were contingent solely on the completion of the acquisition and had no benefit to CenturyLink after the acquisition.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Goodwill, Customer Relationships and Other Intangible Assets

        Goodwill, customer relationships and other intangible assets consisted of the following:

 
  
 Successor  
 Predecessor 
 
 Weighted
Average of
Remaining Lives
 December 31,
2011
  
 December 31,
2010
 
 
  
  
  
  
 
 
  
 (Dollars in millions)
 

Goodwill

 N/A $9,453     
          

Customer relationships, less accumulated amortization of $598 and $—

 9.3 years $5,101     
          

Other intangible assets subject to amortization

           

Capitalized software, less accumulated amortization of $354 and $1,741

 4.1 years $1,460    888 
          

        As of the successor date of December 31, 2011, the gross carrying amounts of goodwill, customer relationships and other intangible assets were $16.966 billion. These assets were recorded at fair value on April 1, 2011 as a result of CenturyLink's indirect acquisition of us.

        Total amortization expense for intangible assets was as follows:

 
 Successor  
 Predecessor 
 
 Nine Months
Ended
December 31,
2011
 


 Three Months
Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 
 
  
  
  
  
  
 
 
 (Dollars in millions)
 

Amortization expense for intangible assets

 $952    58  221  208 

        We amortize customer relationships over an estimated life of 10 years, using either the sum-of-the-years-digits or 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) 

Year ending December 31,

    

2012

 $1,074 

2013

  1,010 

2014

  884 

2015

  776 

2016

  670 

2017 and thereafter

  2,147 

        We regularly review the estimated lives and methods used to amortize our software and customer relationships. The actual amounts of amortization expense may differ materially from our estimated future amortization, depending on the results of our periodic reviews of estimated lives, amortization methods and our final determinations of acquisition date fair value related to our intangible assets.

        We early adopted the provisions of ASU 2011-08, Testing Goodwill for Impairment, during the third quarter of 2011, which permits us to make required interest payments. At some point in the future, we may determinea qualitative assessment of whether it is more likely


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) Goodwill, Customer Relationships and Other Intangible Assets (Continued)

than not that the decline ina reporting unit's fair value is otherless than temporary if, among other factors:

its carrying amount before applying the issuers cease making required interest payments;

two step goodwill impairment test. If, after completing our qualitative assessment we believedetermine that it is more likely than not that the carrying value exceeds estimated fair value, we compare the fair value to ourcarrying value (including goodwill). If the estimated fair valueis greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second calculation is required in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value. We elected to early adopt the provisions of ASU 2011-8 and perform a qualitative assessment given the six month proximity of the goodwill impairment date and the acquisition date resulting in the creation of the goodwill.

        As a result of the acquisition and related acquisition accounting, the carrying value of our assets and liabilities equaled our fair value as of April 1, 2011. A decrease in our fair value in excess of a reduction in the carrying value of our net assets will result in us having a carrying value in excess of our fair value, which may result in an impairment of our goodwill. There is significant judgment in estimating the fair value of the company. The factors that most significantly impact our estimate of fair value include forecasted cash flows and a risk adjusted discount rate. The applicable risk adjusted discount rate is impacted by the market risk free rate of return and a risk premium associated with a group of peer telecommunications companies, which have been deemed to be requiredmarket participants for purposes of determining the fair value of the company.

        The qualitative analysis included assessing the impact of changes in certain factors from April 1, 2011 (the acquisition date on which all assets and liabilities were assigned a fair value) to sell these securities before their values recover;September 30, 2011 (the goodwill impairment testing date), including (i) changes in forecasted operating results and comparing actual results to those utilized in the April 1, 2011 fair value assignment; (ii) changes in our weighted average cost of capital from April 1, 2011 to September 30, 2011; (iii) changes in the industry or

we change our intent to holdcompetitive environment since the securities due to eventsacquisition date; (iv) changes in the overall economy, our market share and market interest rates since the acquisition date; (v) trends in the stock price of CenturyLink and related market capitalization and enterprise values; (vi) trends in peer companies total enterprise value metrics; (vii) control premiums paid for recent industry transactions; and (viii) additional factors such as a changemanagement turnover, changes in regulation and changes in litigation matters.

        Based on our qualitative assessment, we concluded that it was more likely than not that the termsestimated fair value of our reporting unit exceeded its carrying value as of September 30, 2011 and thus, determined it was not necessary to perform the securities.two step goodwill impairment test. We believe the more impactful assessments include our actual results compared to those forecasted as of April 1, 2011 and the decline in our weighted average cost of capital since April 1, 2011. To date, our actual operating results have been comparable to those forecasted as of April 1, 2011 and, as of September 30, 2011, we believe the forecasted results of future periods are not materially different than those estimated as of April 1, 2011.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

For(4) Long-Term Debt

        Long-term debt, including unamortized discounts and premiums, is as follows:

 
  
  
 Successor  
 Predecessor 
 
  
  
 Year Ended
December 31,
2011
  
 Year Ended
December 31,
2010
 
 
 Interest Rates Maturities  
 
 
  
 
 
  
  
  
  
  
 
 
  
  
 (Dollars in millions)
 

Notes(1)

 6.500%-8.375% 2013-2051 $4,647    4,786 

Debentures

 6.875%-7.750% 2014-2043  3,182    3,182 

Capital lease and other obligations

 Various Various  176    198 

Unamortized premiums (discounts)

      320    (154)
            

Total long-term debt

      8,325    8,012 
            

Less current maturities

      (64)   (871)
            

Long-term debt, excluding current maturities

     $8,261    7,141 
            

(1)
Our $750 million Notes due 2013 are floating rate notes which are re-measured every three months. As of the Years Endedmost recent measurement date (December 15, 2011) the rate for these notes was 3.796% which is not included in the rates stated above.

New Issuances

        On October 4, 2011, we issued $950 million aggregate principal amount of our 6.75% Notes due 2021 in exchange for net proceeds, after deducting underwriting discounts and expenses, of $927 million. The notes are our senior unsecured obligations and may be redeemed, in whole or in part, at a redemption price equal to the greater of their principal amount or the present value of the remaining principal and interest payments discounted at a U.S. Treasury interest rate specified in the indenture agreement plus 50 basis points.

        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.

        Until April 1, 2011, QCII had a revolving credit facility, which made available to us $1.035 billion of additional credit subject to certain restrictions. That credit facility was terminated in conjunction with CenturyLink's acquisition of QCII. In January 2011, CenturyLink entered into a new four-year revolving credit facility with various lenders (the "Credit Facility") that allows CenturyLink to borrow up to $1.700 billion for the general corporate purposes of itself and its subsidiaries. Up to $400 million


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4) Long-Term Debt (Continued)

of the Credit Facility can be used for letters of credit, which reduce the amount available for other extensions of credit. Interest is assessed on borrowings using the London Interbank Offered Rate ("LIBOR") plus an applicable margin between 0.5% and 2.5% per annum depending on the type of loan and CenturyLink's then-current senior unsecured long-term debt rating. As of the successor date of December 31, 2010, 20092011, CenturyLink had approximately $277 million and 2008

$129 million outstanding under the Credit Facility and the separate letter of credit arrangement, respectively. We are not guarantors of the Credit Facility or any other debt obligations of our affiliates.

        In April 2009, we issued approximately $811 million aggregate principal amount of 8.375% Notes due 2016. We used the net proceeds, after deducting underwriting discounts and expenses, of $738 million for general corporate purposes, including repayment of indebtedness and funding or refinancing investments in our telecommunication assets. The notes are unsecured obligations and rank equally in right of payment with all other unsecured and unsubordinated indebtedness. The covenant and default terms are substantially the same as those associated with our other long-term borrowings.

Note 5:Repayments

        In October 2011, we used the net proceeds of $927 million from the October 4, 2011 debt issuance, together with the $557 million of net proceeds received from the September 21, 2011 debt issuance described above and available cash, to redeem the $1.5 billion aggregate principal amount of our 8.875% Notes due 2012 and to pay all related fees and expenses, which resulted in an immaterial loss.

        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.

        In June 2010, we paid at maturity the $500 million aggregate principal amount of our 6.95% Term Loan due 2010.

        Aggregate maturities of our long-term debt (excluding unamortized premiums, discounts, and other):

 
 (Dollars in millions) 

2012

 $64 

2013

  805 

2014

  634 

2015

  420 

2016

  812 

2017 and thereafter

  5,270 
    

Total notes and debentures

 $8,005 
    

Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4) Long-Term Debt (Continued)

Interest Expense

        Interest expense includes interest on long-term debt and capital lease obligations. The following table presents the amount of gross interest expense, net of capitalized interest:

 
 Successor  
 Predecessor 
 
 Nine Months
Ended
December 31,
2011
 


 Three Months
Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 
 
  
  
  
  
  
 
 
 (Dollars in millions)
 

Interest expense on long-term debt:

               

Gross interest expense

 $304    153  627  642 

Capitalized interest

  (5)   (3) (12) (10)
            

Total interest expense on long-term debt

 $299    150  615  632 
            

Long-Term Debt Covenants

        The indentures governing our notes contain certain covenants including, but not limited to: (i) a prohibition on certain liens on our assets; and (ii) a limitation on mergers or sales of all, or substantially all, of our assets, which limitation requires that a successor assume the obligation with regard to these notes. These indentures do not contain any cross-default provisions. We were in compliance with all of the provisions and covenants of our debt agreements as of the successor date of December 31, 2011.

(5) Accounts Receivable

The following table presents details of our accounts receivable balances as of December 31, 2010 and 2009:balances:

 
 Successor  
 Predecessor 
 
 December 31,
2011
  
 December 31,
2010
 
 
  
  
  
 
 
 (Dollars in millions)
 

Trade receivables

 $470    469 

Earned and unbilled receivables

  134    140 

Purchased and other receivables

  150    159 
        

Total accounts receivable

  754    768 

Less: allowance for doubtful accounts

  (42)   (48)
        

Accounts receivable, less allowance

 $712    720 
        

        

   December 31, 
   2010   2009 
   (Dollars in millions) 

Total accounts receivable—net:

    

Trade receivables

  $469    $530  

Earned and unbilled receivables

   140     147  

Purchased and other receivables

   159     150  
          

Total accounts receivable

   768     827  

Less: allowance for doubtful accounts

   (48   (53
          

Accounts receivable non-affiliates—net

   720     774  

Accounts receivable—affiliates

   193��    71  
          

Total accounts receivable—net

  $913    $845  
          

We are exposed to concentrations of credit risk from residential customers within our local service area and from other telecommunications service providers. We generally do not require collateral to secure our receivable balances. We have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other telecommunications service providers primarily on a recourse basis and include these amounts in our


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(5) Accounts Receivable (Continued)

accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables.

The following table presents details of our allowance for doubtful accounts:

 
 Allowance for
Doubtful Accounts
 
 
 (Dollars in millions)
 

Balance at January 1, 2009 (Predecessor)

 $52 

Charged to expense-net

  85 

Deductions

  (84)
    

Balance at December 31, 2009 (Predecessor)

  53 

Charged to expense-net

  70 

Deductions

  (75)
    

Balance at December 31, 2010 (Predecessor)

  48 

Charged to expense-net

  17 

Deductions

  (18)
    

Balance at March 31, 2011 (Predecessor)

 $47 
    

Fair value adjustment

  (47)
    

Balance at April 1, 2011 (Successor)

 $ 

Charged to expense-net

  44 

Deductions

  (2)
    

Balance at December 31, 2011 (Successor)

 $42 
    

        As a result of CenturyLink's indirect acquisition of us, the allowance for doubtful accounts foras of the years ended December 31, 2010, 2009acquisition date of $47 million was reduced to zero and 2008:our gross accounts receivable were reduced by $47 million to reflect its acquisition date fair value.

(6) Property, Plant and Equipment

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

   Balance at
beginning
of period
   Charged to
expense-net
   Deductions   Balance at
end of
period
 
   (Dollars in millions) 

Allowance for doubtful accounts:

        

2010

  $53    $70    $75    $48  

2009

   52     85     84     53  

2008

   55     83     86     52  


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 6:(6) Property, Plant and Equipment (Continued)

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

 
  
 Successor  
 Predecessor 
 
 Depreciable Lives December 31,
2011
  
 December 31,
2010
 
 
  
 (Dollars in millions)
 

Property, plant and equipment:

           

Land

 N/A $368    97 

Fiber, conduit and other outside plant(1)

 8-45 years  3,255    20,431 

Central office and other network electronics(2)

 7-10 years  2,185    18,932 

Support assets(3)

 5-30 years  2,486    4,637 

Construction in progress(4)

 N/A  163    108 
          

Gross property, plant and equipment

    8,457    44,205 
          

Accumulated depreciation

    (915)   (34,045)
          

Net property, plant and equipment

   $7,542    10,160 
          

(1)
Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.

(2)
Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.

(3)
Support assets consist of buildings, computers and other administrative and support equipment.

(4)
Construction in progress includes property of the foregoing categories that has not been placed in service as it is still under construction.

        We recorded depreciation expense of $914 million, $393 million, $1.652 billion and $1.768 billion for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009, are as follows:respectively.

(7) Severance

        

       December 31, 
   Depreciable
Lives
   2010  2009 
       (Dollars in millions) 

Property, plant and equipment—net:

     

Land

   N/A    $97   $97  

Buildings

   15-30 years     2,897    2,868  

Communications equipment

   7-10 years     18,380    18,297  

Other network equipment

   8-45 years     20,932    20,626  

General purpose computers and other

   5-11 years     1,752    1,719  

Construction in progress

   N/A     99    53  
           

Total property, plant and equipment

     44,157    43,660  

Less: accumulated depreciation

     (34,025  (33,022
           

Property, plant and equipment—net

    $10,132   $10,638  
           

We recorded depreciation expensePeriodically, we have reductions in our workforce and have accrued liabilities for related severance costs. These workforce reductions resulted primarily from the progression of $1.639 billion, $1.752 billionour integration plans related to CenturyLink's indirect acquisition of us, increased competitive pressures and $1.855 billion for the years ended December 31, 2010, 2009 and 2008, respectively. Although our capital expenditures fluctuate from year to year, we continue to see decreased depreciation expensereduced workload demands due to significantly lower capital expenditures and the changing mixloss of our investment in property, plant and equipment since 2002.access lines.

Effective January 1, 2009, we changed our estimates of the economic lives of certain copper cable and telecommunications equipment assets. These changes resulted in additional depreciation expense of approximately $36 million and reduced net income, net of deferred taxes, by $22 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. These assets were fully depreciated as of December 31, 2009.

Asset Retirement Obligations

As of December 31, 2010, our asset retirement obligations balance was primarily related to estimated future costs of removing circuit equipment from leased properties and estimated future costs of properly disposing of asbestos        We report severance liabilities within accrued expenses and other hazardous materials upon remodeling or demolishing buildings. Asset retirement obligations are includedliabilities-salaries and benefits in other long-term liabilities on our consolidated balance sheets. The following table provides asset retirement obligation activity for the years ended December 31, 2010, 2009sheets and 2008:

   December 31, 
   2010  2009  2008 
   (Dollars in millions) 

Asset retirement obligations:

  

Balance as of January 1

  $31   $32   $30  

Accretion expense

   2    2    2  

Liabilities incurred

   —      —      —    

Liabilities settled and other

   (3  (2  (1

Change in estimate

   1    (1  1  
             

Balance as of December 31

  $31   $31   $32  
             

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 7: Capitalized Software

Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line group method over its estimated useful life. As of December 31, 2010 and 2009, our capitalized software had carrying costs of $2.674 billion and $2.479 billion, respectively, and accumulated amortization was $1.761 billion and $1.599 billion, respectively. We recorded amortization expense of $234 million, $224 million and $218 million for the years ended December 31, 2010, 2009 and 2008, respectively, for capitalized software based on a life range of four to seven years.

The weighted average remaining life of our capitalized software was 3.6 years as of December 31, 2010.

The estimated future amortization expense for capitalized software is as follows:

   Estimated
Amortization
 
   (Dollars in millions) 

Estimated future amortization expense:

  

2011

  $212  

2012

   189  

2013

   167  

2014

   142  

2015

   102  

2016 and thereafter

   101  
     

Total estimated future amortization expense

  $913  
     

Note 8: Borrowings

Current Portion of Long-Term Borrowings

As of December 31, 2010 and 2009, the current portion of our long-term borrowings consisted of:

   December 31, 
     2010       2009   
   (Dollars in millions) 

Current portion of long-term borrowings:

    

Long-term notes

  $825    $500  

Long-term capital lease and other obligations

   46     15  
          

Total current portion of long-term borrowings

  $871    $515  
          

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Long-Term Borrowings

As of December 31, 2010 and 2009, our long-term borrowings consisted of the following (for all notes with unamortized discount or premium, the face amount of the notes and the unamortized discount or premium are presented separately):

   December 31, 
   2010  2009 
   (Dollars in millions) 

Long-term borrowings:

   

Notes with various rates ranging from 3.552% to 8.875% including LIBOR plus 3.25% and maturities from 2011 to 2043

  $7,968   $8,468  

Unamortized discount

   (154  (165

Fair value hedge adjustment

   14    10  

Capital lease and other obligations

   184    73  

Less: current portion

   (871  (515
         

Total long-term borrowings

  $7,141   $7,871  
         

Our long-term notes and bonds had the following interest rates and contractual maturities as of December 31, 2010:

   Contractual Maturities 
   2011   2012   2013   2014   2015   2016 and
Thereafter
   Total 
   (Dollars in millions)     

Interest rates:

              

Up to 5%

  $—      $—      $750    $—      $—      $—      $750  

Above 5% to 6%

   —       —       —       —       —       —       —    

Above 6% to 7%

   —       —       —       —       —       1,500     1,500  

Above 7% to 8%

   825     —       —       600     400     1,582     3,407  

Above 8% to 9%

   —       1,500     —       —       —       811     2,311  
                                   

Total notes and bonds

  $825    $1,500    $750    $600    $400    $3,893    $7,968  
                                   

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Our long-term notes and bonds contractual maturities as of December 31, 2010:

   Maturities 
   2011   2012   2013   2014   2015   2016 and
Thereafter
   Total 
   (Dollars in millions)     

Notes and bonds:

              

Floating Rate Notes

  $—      $—      $750    $—      $—      $—      $750  

7.875% Notes

   825     —       —       —       —       —       825  

8.875% Notes

   —       1,500     —       —       —       —       1,500  

6.5% Notes

   —       —       —       —       —       500     500  

6.875% Debentures

   —       —       —       —       —       1,000     1,000  

7.125% Debentures

   —       —       —       —       —       250     250  

7.2% Debentures

   —       —       —       —       —       250     250  

7.25% Debentures

   —       —       —       —       —       500     500  

7.375% Debentures

   —       —       —       —       —       55     55  

7.5% Notes

   —       —       —       600     —       —       600  

7.5% Debentures

   —       —       —       —       —       484     484  

7.625% Notes

   —       —       —       —       400     —       400  

7.75% Debentures

   —       —       —       —       —       43     43  

8.375% Notes

   —       —       —       —       —       811     811  
                                   

Total notes and bonds

  $825    $1,500    $750    $600    $400    $3,893    $7,968  
                                   

Covenants

The indentures governing our notes contain certain covenants including, but not limited to: (i) a prohibition on certain liens on our assets; and (ii) a limitation on mergers or sales of all, or substantially all, of our assets, which limitation requires that a successor assume the obligation with regard to these notes. These indentures do not contain any cross-default provisions. We were in compliance with all of the provisions and covenants of our borrowing agreements as of December 31, 2010.

QCII and its other subsidiaries were in compliance with all of the provisions and covenants of their borrowing agreements as of December 31, 2010.

New Issuance

In April 2009, we issued approximately $811 million aggregate principal amount of 8.375% Senior Notes due 2016. We are using or used the net proceeds of $738 million for general corporate purposes, including repayment of indebtedness and funding or refinancing investments in our telecommunication assets.

The notes are unsecured obligations and rank equally in right of payment with all other unsecured and unsubordinated indebtedness. The covenant and default terms are substantially the same as those associated with our other long-term borrowings.

Repayments

In June 2010, we paid at maturity the $500 million aggregate principal amount of our 6.95% Term Loan due 2010.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Registered Exchange Offer

In November 2009, QC commenced a registered exchange offer for its 8.375% Notes due 2016 pursuant to the registration rights agreement that it entered into in connection with the issuance of these notes. QC completed the registered exchange offer in December 2009.

Interest Rate Hedges

During 2009 and 2008, QC entered into interest rate hedges as discussed in Note 9—Derivative Financial Instruments.

Interest Expense

Interest expense includes interest on long-term borrowings. Other interest expense, such as interest on income taxes, is included in other—net in our consolidated statements of operations. The following table presents the amount of gross interest expense, capitalized interest and cash paid for interest during the years ended December 31, 2010, 2009 and 2008:

   Years Ended December 31, 
     2010      2009      2008   
   (Dollars in millions) 

Interest expense on long-term borrowings—net:

    

Gross interest expense

  $627   $642   $603  

Capitalized interest

   (12  (10  (14
             

Total interest expense on long-term borrowings—net

  $615   $632   $589  
             

Cash paid for interest—net:

    

Cash interest paid on long-term borrowings and interest rate swaps

  $640   $621   $628  

Cash received from counterparties on interest rate swaps

   (37  (24  (46
             

Cash paid for interest—net

  $603   $597   $582  
             

Note 9: Derivative Financial Instruments

Interest Rate Hedges

During 2009 and 2008, we entered into the interest rate hedges described below as part of our short-term and long-term debt strategies.

In August 2009, we entered into interest rate hedges on $400 million of the outstanding $1.500 billion aggregate principal amount of our 8.875% Notes due in 2012. We designated these interest rate hedges as fair value hedges. We terminated these interest rate hedges in the third quarter of 2010. Upon termination, we received $10 million in cash for the fair value of the hedges and accrued interest. The accumulated $7 million increase in the carrying value of the notes is being amortized to interest expense using the effective interest method over the remaining term of the notes.

In March 2008, we entered into interest rate hedges on $500 million of the outstanding $750 million aggregate principal amount of our Floating Rate Notes due 2013. We designated these interest rate hedges as cash flow hedges. These hedges expired in March 2010. We did not recognize any gain or loss in earnings for hedge ineffectiveness during the lives of the hedges.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

As of December 31, 2010, we had no outstanding interest rate hedge contracts. The interest rate hedges that were previously outstanding had immaterial effects on our consolidated statements of operations and balance sheets in all periods presented.

Note 10: Severance

For the years ended December 31, 2010, 2009 and 2008, we recordedreport severance expenses of $65 million, $109 million and $127 million, respectively. A portion of our severance expenses is included in each of cost of sales,services and products and selling, expensesgeneral and general, administrative and other operating expenses in our consolidated statements of operations. As


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(7) Severance (Continued)

        Changes in our accrued liabilities for severance expenses were as follows:

 
 Severance 
 
 (Dollars in millions)
 

Balance at January 1, 2009 (Predecessor)

 $54 

Accrued to expense

  116 

Payments, net

  (88)

Reversal and adjustments

  (7)
    

Balance at December 31, 2009 (Predecessor)

  75 
    

Accrued to expense

  67 

Payments, net

  (109)

Reversals and adjustments

  (5)
    

Balance at December 31, 2010 (Predecessor)

  28 
    

Accrued to expense

  3 

Payments, net

  (11)

Reversals and adjustments

  (1)
    

Balance at March 31, 2011 (Predecessor)

  19 
    

Fair value adjustment

  (2)
    

Balance at April 1, 2011 (Successor)

  17 
    

Accrued to expense

  118 

Payments, net

  (97)

Reversals and adjustments

  (9)
    

Balance at December 31, 2011 (Successor)

 $29 
    

        Our severance expenses for the successor nine months ended December 31, 2010 and 2009, our severance liability was $282011 also included $12 million and $75 million, respectively, and is includedof share-based compensation associated with the accelerated vesting of stock awards that occurred in accrued expenses and other in our consolidated balance sheets.connection with workforce reductions relating to CenturyLink's indirect acquisition of us.

Note 11:(8) Employee Benefits

Pension and Post-Retirement Benefits

We are required to disclose the amount of our contributions to QCII relative to the QCII pension and post-retirement benefit plans. NoQCII opted to make a pension orcontribution of $307 million in December 2011, and therefore, will not be required to make a pension contribution in 2012 based on current funding laws and regulations. Although potentially significant in the aggregate, QCII currently expects that pension contributions in 2013 and beyond will decrease from the 2011 pension contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plan and funding laws and regulations. No post-retirement occupational health care trust contributions were made during the successor year ended December 31, 2011 or the predecessor years ended December 31, 2010 or 2009.and 2009 and we do not expect to make a contribution in 2012.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8) Employee Benefits (Continued)

        The unfunded status of QCII’sQCII's pension plan for accounting purposes was $585$627 million and $790$585 million as of the successor date of December 31, 2011 and as of the predecessor date of December 31, 2010, and 2009, respectively. The unfunded status of its post-retirement benefit plans for accounting purposes was $2.522$2.706 billion and $2.525$2.522 billion as of the successor date of December 31, 2011 and as of the predecessor date of December 31, 2010, and 2009, respectively. QCII allocates its pension, non-qualified pension and post-retirement benefit obligations to us using the amount of its funded or unfunded status and its related accumulated other comprehensive income balance. Therefore, significant year over year changes in QCII’sQCII's funded status affecting accumulated other comprehensive income may not have a significant initial impact on the assets or obligations that are allocated to us.

We recognized an allocated $51 million in pension income for the successor nine months ended December 31, 2011, as well as $11 million, $53 million and $104 million in pension expense for the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009, respectively. Our allocated pension income for 2008 was $28 million. Our allocated post-retirement benefit expense for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009 and 2008 was $84 million, $16 million, $72 million $89 million and $15$89 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’sQCII's total pension and post-retirement benefit expenses were 101%96%, 99%102%, 101% and 92%99% for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 2009 and 2008,2009, respectively. QCII allocates the expenses of these plans to us and its other affiliates. The allocation of 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 general, administrative and other operating expenses.

QCII sponsors a noncontributory qualified defined benefit pension plan (referred to as QCII’sQCII's pension plan) for substantially all management and occupationalof our employees. In addition to this tax qualified pension plan, QCII also maintains a non-qualified pension plan for certain eligible highly compensated employees. These plans also provide survivor and disability benefits to certain employees. In November 2009, QCII amended the pension plan and the non-qualified pension plans to no longer provide pension benefit accruals for active managementnon-represented employees after December 31, 2009. In addition, managementnon-represented employees hired after January 1, 2009 are not eligible to participate in the plans. Active managementnon-represented employees who participate in these plans retain their accrued pension benefit earned as of December 31, 2009 and certain participants will continue to earn interest credits on their benefit after December 31, 2009. Employees are eligible to receive their vested accrued benefit when they separate from Qwest.CenturyLink. The plans also provided a death benefit for eligible beneficiaries of certain retirees; however, QCII has eliminated this benefit effective March 1, 2010 for retirees who retired prior to January 1, 2004 and whose deaths occur after February 28, 2010. QCII previously eliminated the death benefit for eligible beneficiaries of certain retirees who retired after December 31, 2003.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

QCII maintains post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. The benefit obligation for QCII’sQCII's occupational health care and life insurance post-retirement plans is estimated based on the terms of QCII’sQCII's written benefit plans. In calculating this obligation, QCII considers numerous assumptions, estimates and judgments, including but not limited to, discount rates, health care cost trend rates and plan amendments. In 2008, we negotiated our current four-year collective bargaining agreements which covered approximately 14,20013,000 of our unionized employees as of the successor date of December 31, 2010.2011. The plan was amended to


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(8) Employee Benefits (Continued)

reflect changes affecting eligible post-1990 retirees who are former occupationalrepresented employees, including: (i) a Letter of Agreement that states such post-1990 retirees will begin contributing to the cost of health care benefits in excess of specified limits on the company-funded portion of retiree health care costs (also referred to as “caps”"caps") beginning 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 occupationalrepresented employees. These changes have been considered in calculating the benefit obligation under QCII’sQCII's occupational health care plan.

The terms of the post-retirement health care and life insurance plans between QCII and its eligible managementnon-represented employees and its eligible post-1990 managementnon-represented retirees are established by QCII and are subject to change at its discretion. QCII has a practice of sharing some of the cost of providing health care benefits with its managementnon-represented employees and post-1990 managementnon-represented retirees. The benefit obligation for the managementnon-represented post-retirement health care benefits is based on the terms of the current written plan documents and is adjusted for anticipated continued cost sharing with managementnon-represented employees and post-1990 managementnon-represented retirees. However, QCII’sQCII's contribution under its post-1990 management retirees’non-represented retirees' health care plan is capped at a specific dollar amount. Effective January 1, 2009, QCII amended its post-1990 managementnon-represented retiree plan to, among other things, (i) require retirees to pay increased out-of-pocket costs and (ii) eliminate the reimbursement of Medicare Part B premiums.

A putative class action purportedly filed on behalf of certain of QCII retirees was brought against QCII and certain other defendants in Federal District Court in Colorado in connection with QCII’s decision to reduce life insurance benefits for these retirees during 2006 and 2007. See Note 17—Commitments and Contingencies—Other Matters for additional information.

Medicare Prescription Drug, Improvement and Modernization Act of 2003

QCII sponsors post-retirement health care plans with several benefit options that provide prescription drug benefits that QCII deems actuarially equivalent to or exceeding Medicare Part D. QCII 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.

Other Benefit Plans

    Health Care and Life Insurance

We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our active health care benefit expenses were $167 million, $57 million, $224 million $233 million and $272$233 million for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009, and 2008, respectively. OccupationalRepresented employee benefits are based on negotiated collective bargaining agreements. Management employees and occupational employeesEmployees are required to partially fund the health care benefits provided by us, in addition to paying their own out-of-pocket costs. Participating managementnon-represented employees contributed $25 million, $8 million, $33 million and $32 million for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and $35 million inthe predecessor years ended December 31, 2010 2009 and 2008,2009, respectively. Participating occupationalrepresented employees contributed $9 million, $2 million, $11 million and $10 million for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and $4 million inthe predecessor years ended December 31, 2010 and 2009, and 2008, respectively. The basicOur group life insurance plan is fully insured and the premiums are paid by us.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

For(8) Employee Benefits (Continued)

        No contributions were made to the Years Ended December 31,post-retirement occupational health care trust in 2011 or 2010 2009 and 2008we do not expect to make a contribution in 2012.

    401(k) Plan

QCII sponsors a qualified defined contribution benefit plan covering substantially all management and occupationalof our employees. Under this plan, employees may contribute a percentage of their annual compensation to the plan up to certain maximums, as defined by the plan and by the Internal Revenue Service (“IRS”("IRS"). Currently, QCII, on our behalf, matches a percentage of our employees’employees' contributions in cash. We recognized $36 million, $12 million, $51 million $54 million and $59$54 million in expense related to this plan for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009, and 2008, respectively.

    Deferred Compensation Plans

QCII sponsors a non-qualified unfunded deferred compensation plansplan for various groups that include certain of our current and former highly compensated employees. One of these plans is open to new participants. Participants in these plans may, at their discretion, invest their deferred compensation in various investment choices including QCII’sCenturyLink's common stock. The valuesvalue of the assets and liabilities related to these plans arethis plan is not significant.

Note 12: Income Taxes(9) Stock-Based Compensation

We are included in        During the consolidated federal income tax returns and the combined state income tax returns of QCII. QCII treats our consolidated results as if we were a separate taxpayer. Our tax allocation policy requires us to pay our tax liabilities in cash based upon separate return taxable income. Because we are included in the consolidated federal income tax returns and the combined state income tax returns of QCII, any tax audits involving QCII will also involve us. The IRS examines all of QCII’s federal income tax returns because QCII is included in the coordinated industry case program.

As of December 31, 2010, the QCII federal income tax returns for tax years 2006-2007 and prior have been examined by the IRS. We received $11 million in the third quarter of 2010 as our share of the settlements, and we recorded a $4 million asset transfer with QSC to recognize the difference between the settlements recorded and the actual cash payment. In 2010, QCII filed amended federal income tax returns for 2006-2007 to make protective claims with respect to items reserved in QCII’s audit settlements and to correct items not addressed in prior audits. Those amended federal income tax returns are subject to adjustment in an IRS audit.

In 2009, QCII filed amended federal income tax returns for 2002-2005 to make protective claims with respect to items reserved in our audit settlements and to correct items not addressed in prior audits. Those amended federal income tax returns are subject to adjustment in an IRS audit. Additionally, our federal income tax returns filed for tax years after 2008 are still subject to adjustment in an IRS audit.

QCII also files combined income tax returns in many states, and these combined returns remain open for adjustments to its federal income tax returns. In addition, certain combined state income tax returns filed since 1996 are still open for state specific adjustments.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

A reconciliation of the unrecognized tax benefits for the years ended December 31, 2010 and 2009 follows:

   Unrecognized Tax Benefits 
     2010      2009   
   (Dollars in millions) 

Balance as of January 1

  $13   $95  

Additions for current year tax positions

   —      —    

Additions for prior year tax positions

   —      —    

Reductions for prior year tax positions

   —      (35

Settlements

   (13  (47

Reductions related to expirations of statute of limitations

   —      —    
         

Balance as of December 31

  $—     $13  
         

In accordance with our accounting policy, interest expense and penalties related to income taxes are included in the other—net line of our consolidated statements of operations. For thepredecessor year ended December 31, 2010, we recognized $1 million of interest benefit related to uncertain tax positions. For the years ended December 31, 2009 and 2008, we recognized $9 million and $20 million, respectively, for interest expense related to uncertain tax positions. As of December 31, 2010 and 2009, we had recorded liabilities for interest related to uncertain tax positions in the amounts of $6 million and $6 million, respectively. We made no accrual for penalties related to income tax positions.

Income Tax Expense

The components of the income tax expense from continuing operations are as follows:

   Years Ended December 31, 
     2010       2009      2008   
   (Dollars in millions) 

Income tax expense:

     

Current tax provision:

     

Federal

  $470    $740   $537  

State and local

   80     121    77  
              

Total current tax provision

   550     861    614  

Deferred tax expense (benefit):

     

Federal

   208     (109  180  

State and local

   33     (28  35  
              

Total deferred tax expense (benefit)

   241     (137  215  
              

Income tax expense

  $791    $724   $829  
              

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

The effective income tax rate for continuing operations differs from the statutory tax rate as follows:

   Years Ended December 31, 
     2010      2009      2008   
   (in percent) 

Effective income tax rate:

  

Federal statutory income tax rate

   35.0  35.0  35.0

State income taxes—net of federal effect

   3.9    3.1    3.2  

Medicare subsidiary

   2.7    —      —    

Excess compensation

   1.0    —      —    

Other

   (0.4  (0.4  (1.6
             

Effective income tax rate

   42.2  37.7  36.6
             

Deferred Tax Assets and Liabilities

The components of the deferred tax assets and liabilities are as follows:

   December 31, 
   2010  2009 
   (Dollars in millions) 

Deferred tax assets and liabilities:

   

Deferred tax liabilities:

   

Property, plant and equipment

  $(2,031 $(1,977

Receivable from an affiliate due to pension plan participation

   (340  (360

Other

   (94  (57
         

Total deferred tax liabilities

   (2,465  (2,394
         

Payable to affiliate due to post-retirement benefit plan participation

   1,031    1,139  

Other

   266    295  
         

Total deferred tax assets

   1,297    1,434  
         

Net deferred tax liabilities

  $(1,168 $(960
         

We have performed an evaluation of the recoverability of our deferred tax assets. It is our opinion that it is more likely than not that the deferred tax assets will be realized and should not be reduced by a valuation allowance.

Other Income Tax Information

We paid $677 million, $968 million, including $103 million as our share of QCII’s 2002-2005 tax years settlement with the IRS, and $629 million to QSC related to income taxes in 2010, 2009, and 2008, respectively. As of December 31, 2010 and 2009 we had approximately $8 million and $25 million, respectively, in amounts relating to taxes payable to QSC reflected in accounts payable-affiliates on our consolidated balance sheets.

Income tax expense in 2010 compared to 2009 increased by $55 million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Among other things, these laws will disallow federal income tax deductions for retiree prescription

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program. Although this tax increase does not take effect until 2013, under accounting principles generally accepted in the U.S. we recognize the full accounting impact in the period in which the laws are enacted.

In 2010, we increased our state tax rate based on a review of our state apportionment factors and the current tax rate of the states where we conduct business. This change resulted in a $2 million state deferred tax expense, net of federal effect.

In 2009, we reduced our state tax rate based on a review of our state apportionment factors and the current tax rate of the states where we conduct business. This change resulted in a $4 million state deferred tax benefit, net of federal effect.

We had unamortized investment tax credits of $61 million, $68 million and $76 million as of December 31, 2010, 2009 and 2008, 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 of $8 million, $8 million and $7 million are included in the provision for income taxes for the years ended December 31, 2010, 2009 and 2008, respectively.

Note 13: Stockholder’s (Deficit) Equity

We have one share of common stock (no par value) issued and outstanding, which is owned by QSC.

Equity Infusions

In 2010 and 2009, we did not receive any equity infusions.

In 2008, QCII moved to us most of the administrative and other functions of QSC and merged into us two of QSC’s other wholly owned subsidiaries that previously charged the majority of their costs to us. We received cash equity infusions from QSC of $190 million in connection with the transfer. We also received other cash equity infusions of $41 million in 2008.

Other Net Asset Transfers

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.

During 2009, QCII executed a settlement with the IRS relating to its audit of the 2002-2005 tax years. We paid $103 million in the fourth quarter of 2009 as our share of the settlement and recorded a $48 million asset transfer with QSC to recognize the difference between the settlement recorded and the actual cash payment. In 2008, QCII executed a settlement with the IRS relating to its audit of the 1998-2001 tax years. We paid an immaterial amount in the fourth quarter of 2008 as our share of the settlement. We recorded a $62 million asset transfer with QSC to recognize the difference between the settlement recorded and the actual cash payment.

In addition, in the normal course of business, we transfer assets and liabilities to and from QSC and its affiliates. It is our policy to record these asset transfers based on carrying values.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Dividends

We declared and paid the following cash dividends to QSC:

   Years Ended December 31, 
   2010   2009   2008 
   (Dollars in millions) 

Cash dividend declared to QSC

  $2,300    $1,700    $2,200  

Cash dividend paid to QSC

  $2,260    $2,000    $2,000  

On February 15, 2011, we paid a cash dividend to QSC of $150 million. On January 26, 2011, we declared a cash dividend to QSC of $1.000 billion.

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.

Note 14: Stock-Based Compensation

Our employees participate in QCII’sQCII's Equity Incentive Plan (“EIP”("EIP") and Employee Stock Purchase Plan (“ESPP”("ESPP"). For more information aboutDue to CenturyLink's acquisition of QCII and the purchasing of its outstanding stock, QCII no longer offers these plans, see QCII’s Annual Report on Form 10-K for the year ended December 31, 2010.plans.

Stock-Based Compensation Expense

Stock-based compensation expense isexpenses were included in cost of sales,services and products, and selling, expensesgeneral, and general, administrative and other operating expenses in our consolidated statements of operations. We recognizeDuring our predecessor years, we recognized compensation expense relating to awards granted to our employees under the EIP using the straight-line method over the applicable vesting periods. We recognizealso recognized compensation expense when our employees purchase QCII’spurchased QCII's common stock under the ESPP for the difference between the employees’employees' purchase pricesprice and the fair market valuesvalue of QCII’sQCII's stock.

For the successor nine months ended December 31, 2011, we were allocated a stock based compensation expense of $19 million from our ultimate parent company, CenturyLink. For the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010, 2009 and 2008,2009, our total stock-based compensation expense was approximately $3 million, $121 million $48 million and $43$48 million, respectively. We recognized an income tax benefit of $7 million, $1 million, $30 million $19 million and $17$19 million associated with our stock compensation expense during the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010, 2009 and 2008,2009, respectively.

As of December 31, 2010, QCII had $39 million of total unrecognized compensation expense related to unvested stock options, restricted stock and performance shares under the EIP. QCII expects to recognize this amount over the remaining weighted average service period of 1.8 years. We expect to recognize most of this $39 million of unrecognized compensation expense related to unvested stock-based compensation since we have the vast majority of the employees participating in the stock-based compensation plans. There is no unrecognized compensation expense related to the ESPP. QCII will continue to record stock-based compensation and it will continue to allocate a portion of these costs to us. However, based on the many factors that affect the allocation, the amount that is ultimately allocated to us as a result of stock-based compensation recorded at QCII may fluctuate.

On December 21, 2010, QCII accelerated the vesting of certain restricted stock and performance share awards issued under its Equity Incentive Plan in order to preserve certain economic benefits to its stockholders that otherwise would have been lost in connection with QCII’s pending merger with CenturyLink.CenturyLink's acquisition of


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(9) Stock-Based Compensation (Continued)

QCII. As the vast majority of affected employees are employed by us, QCII allocated substantially all of the $63 million expense associated with this accelerated vesting to us.

        Due to CenturyLink's acquisition of QCII, we now record the stock-based compensation expense that is allocated to us from CenturyLink which is included in operating expenses-affiliates in our consolidated statements of operations. Based on the many factors that affect the allocation, the amount of stock-based compensation expense recorded at CenturyLink and ultimately allocated to us may fluctuate. We cash settle the stock-based compensation expense allocated to us from CenturyLink.

QWEST CORPORATION(10) Products and Services Revenues

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009        We are an integrated communications company engaged primarily in providing an array of communications services in 14 states, including local, network access, broadband, data and 2008

Note 15: Contributionvideo services. We strive to QCII Segments

Our operations are integrated into and are part of the segments of QCII. Our business contributesmaintain our customer relationships by, among other things, bundling our service offerings to all three of QCII’s segments: business markets, mass markets and wholesale markets. QCII’s Chief Operating Decision Maker (“CODM”), who is also our CODM, reviews our financial information 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 informationcustomers with a complete offering of integrated communications services. We categorize our products and services into the following three categories:

    Strategic services, which include primarily private line (including special access), broadband, video (including DIRECTV) and Verizon Wireless services;

    Legacy services, which include primarily local, integrated services digital network ("ISDN") (which uses regular telephone lines to the CODM onsupport voice, video and data applications), switched access and traditional wide area network ("WAN") services (which allows a regular basis.

    Depending on the products orlocal communications network to link to networks in remote locations); and

    Affiliates and other services purchased, a customer may pay a service activation fee, a monthly service fee, a usage charge or a combination, which consist primarily of these. We generate the majority of our revenue by providing data, InternetUSF surcharges and voice services using our network as described further below. We also generate revenue from services we provide to our affiliates.

    Strategic services include broadband services and DIRECTV video services that we offer to consumers; private line services that we offer to other telecommunications providers and business customers; and Verizon Wireless services that customers buy as part of a bundle with one or more of our other products and services.

    Legacy services include local services and access services. Local services primarily consist of local exchange and switching services. Local services also include UNEs provided to our wholesale customers. Access services include fees we charge to other telecommunications providers to connect their customers and their networks to our network. Legacy services also include other data services such as ISDN, frame relay and ATM that we offer primarily to business customers.

    Affiliates and other services include providing We provide to our affiliates data, services, local services and billing and collections services that we also provide to external customers. In addition, we provide to our affiliates: marketing, sales and advertising;advertising services; computer system development and support services; network support and technical services; and other support services, such as legal, regulatory, finance and accounting, tax and human resourcesresources.

        Since the April 1, 2011 closing of CenturyLink's indirect acquisition of us, our operations are integrated into and executive support. We also generate other revenue from USF surchargesare reported as part of the segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") has become our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the leasing and subleasingSEC. Consequently, we do not provide our discrete financial information to the CODM on a regular basis.


Table of space in our office buildings, warehouses and other properties.Contents

Revenue from
QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(10) Products and Services Revenues (Continued)

        Our operating revenues for our products and services for the years ended December 31, 2010, 2009 and 2008 is summarized inconsisted of the following table:categories:

   Years Ended December 31, 
   2010   2009   2008 
   (Dollars in millions) 

Operating revenue:

      

Strategic services

  $3,059    $2,900    $2,789  

Legacy services

   4,456     4,996     5,615  

Affiliates and other services

   1,756     1,835     1,984  
               

Total operating revenue

  $9,271    $9,731    $10,388  
               
 
 Successor  
 Predecessor 
 
 Nine Months
Ended
December 31,
2011
 


 Three Months
Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 
 
  
  
  
  
  
 
 
 (Dollars in millions)
 

Strategic services

 $2,406    793  3,059  2,900 

Legacy services

  2,796    1,003  4,323  4,922 

Affiliates and other services

  1,433    472  1,889  1,909 
            

Total operating revenues

 $6,635    2,268  9,271  9,731 
            

Revenue from affiliates was 17% of total revenue for each of the years ended December 31, 2010, 2009 and 2008, respectively.        We do not have any single customer that provides more than 10% of our total operating revenue. Substantially all of our revenue comes from customers located in the United States.

        The table below presents the aggregate USF surcharges recognized on a gross basis:

 
 Successor  
 Predecessor 
 
 Nine Months
Ended
December 31,
2011
 


 Three Months
Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 
 
  
  
  
  
  
 
 
 (Dollars in millions)
 

Taxes and surcharges included in operating revenues and expenses

  122    43  186  182 

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 16:(11) Related Party Transactions

We provide to our affiliates data, Internet and voicetelecommunications services as well as local and billing and collections services that we also provide to external customers. In addition, we provide to our affiliates, marketing, sales and advertising, computer system and development support services, network support and technical services and other support services.

Below are details of the services we provided to our affiliates:

    Telecommunications services.  Data, Internet and voice services in support of our affiliates service offerings.

    Billing and collections services.  Billing and collections services in support of affiliates long-distance business.

    Marketing, sales and advertising.  Marketing, sales and advertising support joint marketing of our services, including the development of marketing and advertising plans, sales unit forecasts, market research, product management, sales training and compensation plans.

    Computer system and development support services.  Information technology services primarily include the labor cost of developing, testing and implementing the system changes necessary to support order entry, provisioning, billing, network and financial systems, as well as the cost of

Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(11) Related Party Transactions (Continued)

      improving, maintaining and operating our operations support systems and shared internal communications networks.

    Network support and technical services.  Network support and technical services relate to forecasting demand volumes and developing plans around network utilization and optimization, developing and implementing plans for overall product development, provisioning and customer care.

    Other support services.  Other support services include legal, regulatory, finance and accounting, tax, human resources and executive support. In addition, we sublease space in our office buildings, warehouses and other properties.

        

Telecommunications services.Data, Internet and voice services in support of our affiliates’ service offerings.

Billing and collections services.Billing and collections services in support of an affiliate’s long-distance business.

Marketing, sales and advertising. Marketing, sales and advertising support joint marketing of our services, including the development of marketing and advertising plans, sales unit forecasts, market research, product management, sales training and compensation plans.

Computer system and development support services. Information technology services primarily include the labor cost of developing, testing and implementing the system changes necessary to support order entry, provisioning, billing, network and financial systems, as well as the cost of improving, maintaining and operating our operations support systems and shared internal communications networks.

Network support and technical services. Network support and technical services relate to forecasting demand volumes and developing plans around network utilization and optimization, developing and implementing plans for overall product development, provisioning and customer care.

Other support services. Other support services include legal, regulatory, finance and accounting, tax, human resources and executive support. In addition, we sublease space in our office buildings, warehouses and other properties.

We charge our affiliates for services based on market price or fully distributed cost (“FDC”("FDC"). We charge our affiliates market price for services that we also provide to external customers, while other services that we provide only to our affiliates are priced by applying an FDC methodology. FDC rates include salaries and wages, payroll taxes, employee benefits, miscellaneous expenses, and charges for the use of our buildings, computing and software assets. Whenever possible, costs are directly assigned to our affiliates for the services they use. If costs cannot be directly assigned, they are allocated among all affiliates based upon cost causative measures; or if no cost causative measure is available, these costs are allocated based on a general allocator. We believe these cost allocation methodologies are reasonable. From time to time, QC adjustswe adjust the basis for allocating the costs of a shared service among affiliates. Such changes in allocation methodologies are generally billed prospectively.

We also purchase services from our affiliates including long-distance, wholesale Internet accesstelecommunication services, insurance, flight services and insurance.other support services such as legal, regulatory, finance and accounting, tax, human resources and executive support. Our affiliates charge us for these services based on market price or FDC.

(12) Income Taxes

        We were included in the consolidated federal income tax returns and the combined state income tax returns of QCII until CenturyLink's April 1, 2011 acquisition of QCII and the consolidated federal income tax returns and certain combined state income tax returns of CenturyLink subsequent to the acquisition. Both CenturyLink and QCII treat our consolidated results as if we were a separate taxpayer. The policy requires us to pay our tax liabilities in cash based upon our separate return taxable income. Because we are included in the consolidated federal income tax returns and the combined state income tax returns of QCII, any tax audits involving QCII will also involve us. The IRS examines all of QCII's federal income tax returns because QCII is included in the coordinated industry case program.

        As of December 31, 2010, the QCII federal income tax returns for tax years 2006-2007 and prior were examined by the IRS. We received $11 million in the third quarter of 2010 as our share of the settlements and we recorded a $4 million asset transfer with QSC to recognize the difference between the settlements recorded and the actual cash payment. In 2010, QCII filed amended federal income tax returns for 2006-2007 to make protective claims with respect to items reserved in QCII's audit settlements and 2009, we paid approximately $24 million and $27 million, respectively,to correct items not addressed in administrative feesprior audits. Those amended federal income tax returns are subject to adjustment in the ordinary coursean IRS audit.


Table of business to United Healthcare Services, Inc., which provides health benefit plans to most of our employees and is a subsidiary of UnitedHealth Group. QCII’s director, Anthony Welters, serves as Executive Vice President of UnitedHealth Group and as President of its Public and Senior Markets Group.Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

(12) Income Taxes (Continued)

        In 2009, QCII filed amended federal income tax returns for 2002-2005 to make protective claims with respect to items reserved in our audit settlements and to correct items not addressed in prior audits. Those amended federal income tax returns are subject to adjustment in an IRS audit. Additionally, our federal income tax returns filed for tax years after 2008 are still subject to adjustment in an IRS audit.

        QCII also files combined income tax returns in many states, and these combined returns remain open for adjustments to its federal income tax returns. In addition, certain combined state income tax returns filed since 1996 are still open for state specific adjustments.

        A reconciliation of the unrecognized tax benefits:


Unrecognized Tax Benefits

Successor
Predecessor

2011
2010

(Dollars in millions)

Balance at January 1

$13

Additions for current year tax positions

Additions for prior year tax positions

Reductions for prior year tax positions

Settlements

(13)

Reductions related to expirations of statute of limitations

Balance at December 31

$

        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. For the Years Endedsuccessor nine months ended December 31, 2011 and the predecessor three months ended March 31, 2011, we recognized immaterial amounts for interest related to uncertain tax positions. For the predecessor years ended December 31, 2010 and 2009, we recognized $1 million and 2008

Note 17: Commitments and Contingencies

Commitments

Future Contractual Obligations

The following table summarizes our estimated future contractual obligations as$9 million of interest benefit related to uncertain tax positions, respectively. As of the successor date of December 31, 2010:

   Payments Due by Period 
   2011   2012   2013   2014   2015   2016 and
Thereafter
   Total 
   (Dollars in millions) 

Future contractual obligations(1):

              

Debt and lease payments:

              

Long-term debt

  $825    $1,500    $750    $600    $400    $3,893    $7,968  

Capital lease and other obligations

   52     46     39     28     16     3     184  

Interest on long-term borrowings and capital leases(2)

   597     463     380     363     301     2,945     5,049  

Operating leases

   88     59     40     34     29     67     317  
                                   

Total debt and lease payments

   1,562     2,068     1,209     1,025     746     6,908     13,518  
                                   

Other long-term liabilities

   3     2     2     2     2     43     54  
                                   

Purchase commitments:

              

Telecommunications and information technology

   2     2     2     1     1     1     9  

Advertising, promotion and other services(3)

   64     41     31     27     24     44     231  
                                   

Total purchase commitments

   66     43     33     28     25     45     240  
                                   

Non-qualified pension obligation(4)

   2     2     2     2     2     21     31  
                                   

Total future contractual obligations

  $1,633    $2,115    $1,246    $1,057    $775    $7,017    $13,843  
                                   

(1)The table does not include:

costs that are contingent upon completion of QCII’s pending merger with CenturyLink;

our open purchase orders as2011 and the predecessor date of December 31, 2010. These purchase orders are generally at fair value, are generally cancelable without penalty2010, we had recorded liabilities for interest related to uncertain tax positions in the amounts of $5 million and are part$6 million, respectively. We made no accrual for penalties related to income tax positions. The interest benefit and accrued interest liability recognized as of normal operations;

other long-term liabilities, such as accruals for legal matters and income taxes, that are not contractual obligations by nature. We cannot determine with any degreethe successor date of reliability the years in which these liabilities might ultimately settle;

affiliate cash funding requirements for pension benefits payable to certain eligible current and future retirees allocated to us by QCII. The accounting unfunded status of QCII’s pension plan was $585 million at December 31, 2010. Benefits paid by QCII’s qualified pension plan are paid through a trust. Cash funding requirements for this trust are not included in this table as QCII2011 is not able to reliably estimate required contributionsrelated to the trust. QCII’s cash funding requirements can be significantly impacted by earnings on investments, the discount rate changes in the plan and funding laws and regulations. As a result, it is difficult to determine future funding requirements with a high levelcarryover effects of precision; however, in general, current funding laws require asettled positions.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

For(12) Income Taxes (Continued)

Income Tax Expense

        The components of the Years Endedincome tax expense from continuing operations are as follows:

 
 Successor  
 Predecessor 
 
 Nine Months
Ended
December 31,
2011
  
 Three Months
Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 
 
 (Dollars in millions)
 

Income tax expense:

               

Current tax provision:

               

Federal

 $173    104  470  740 

State and local

  26    11  80  121 
            

Total current tax provision

  199    115  550  861 

Deferred tax expense (benefit):

               

Federal

  128    61  208  (109)

State and local

  22    15  33  (28)
            

Total deferred tax expense (benefit)

  150    76  241  (137)
            

Income tax expense

 $349    191  791  724 
            

        The effective income tax rate for continuing operations differs from the statutory tax rate as follows:

 
 Successor  
 Predecessor 
 
 Nine Months
Ended
December 31,
2011
  
 Three Months
Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 
 
 (in percent)
 

Effective income tax rate:

               

Federal statutory income tax rate

  35.0%   35.0% 35.0% 35.0%

State income taxes—net of federal effect

  3.5    3.4  3.9  3.1 

Medicare subsidiary

        2.7   

Excess compensation

        1.0   

Other

  0.6    0.6  (0.4) (0.4)
            

Effective income tax rate

  39.1%   39.0% 42.2% 37.7%
            

Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(12) Income Taxes (Continued)

Deferred Tax Assets and Liabilities

        The components of the deferred tax assets and liabilities are as follows:

 
 Successor  
 Predecessor 
 
 December 31, 2011  
 December 31, 2010 
 
 (Dollars in millions)
 

Deferred tax assets and liabilities:

         

Deferred tax liabilities:

         

Property, plant and equipment

 $(1,315)   (2,031)

Intangibles assets

  (2,306)     

Receivable from an affiliate due to pension plan participation

  (364)   (340)

Other

  (147)   (94)
        

Total deferred tax liabilities

  (4,132)   (2,465)
        

Deferred tax assets:

         

Payable to affiliate due to post-retirement benefit plan participation

  941    1,031 

Debt premiums

  166      

Other

  333    266 
        

Total deferred tax assets

  1,440    1,297 
        

Net deferred tax liabilities

 $(2,692)   (1,168)
        

        We have performed an evaluation of the recoverability of our deferred tax assets. It is our opinion that it is more likely than not that the deferred tax assets will be realized and should not be reduced by a valuation allowance.

Other Income Tax Information

        We paid $211 million, $677 million, and $968 million, including $103 million as our share of QCII's 2002-2005 tax years settlement with the IRS, to QSC related to income taxes in the successor year ended 2011 and the predecessor years ended 2010 and 2009, respectively. As of the successor date of December 31, 2010, 2009 and 2008

company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Based on current funding laws and regulations, QCII will not be required to make a cash contribution in 2011. QCII expects to begin making required contributions to the plan during 2012 and estimates that these 2012 contributions could be between $300 million and $350 million. Although potentially significant in the aggregate, QCII currently expects that contributions in 2013 and beyond will decrease annually from the 2012 expected contribution amount. However, the actual amount of required contributions in 2013 and beyond will depend on earnings on investments, discount rates, demographic experience, changes in the plan and funding laws and regulations. Substantially all of our employees participate in the QCII pension plan. 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;

affiliate post-retirement benefits payable to certain eligible current and future retirees. Although2011 we had an affiliate liability recorded on our balance sheet asapproximate $19 million receivable from QSC relating to income taxes reflected in accounts receivable-affiliates. As of the predecessor date of December 31, 2010 representing our allocated net benefit obligation for post-retirement benefits, not all of this amount is a contractual obligation. Certain of these plans are unfunded and net payments made by us totaled $112we had approximately $8 million in amounts relating to taxes payable to QSC reflected in accounts payable-affiliates on our consolidated balance sheets.

        Income tax expense for the predecessor year ended December 31, 2010 including paymentscompared to 2009 increased by $55 million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Among other things, these laws will disallow federal income tax deductions for retiree prescription drug benefits thatto the extent we receive reimbursements for those benefits under the Medicare Part D program. Although this tax increase does not take effect until 2013, under accounting principles generally accepted in the U.S. we recognize the full accounting impact in the period in which the laws are not contractual obligations. Assumingenacted.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(12) Income Taxes (Continued)

        In the predecessor year ended December 31, 2010, we increased our future proportionate share of QCII’s total post-retirement benefits payments is consistent with an averagestate tax rate based on a review of our proportionate share overstate apportionment factors and the prior three years, total undiscounted future payments estimated to be made by us for benefits that are both contractual obligations and non-contractual obligations are approximately $4.0 billion over approximately 80 years. However, this estimate is impacted by various actuarial and market assumptions, and ultimate payments will differ from this estimate. In 1989, a trust was created and funded by QCII to help cover the health care costs of retirees who are former occupational employees. QCII did not make any cash contributions to this trust in 2010 and does not expect to make any significant cash contributions to this trust in the future. QCII anticipates that the majoritycurrent tax rate of the costs that have historically been paid outstates where we conduct business. This change resulted in a $2 million state deferred tax expense, net of this trust will need to be paid by us at some pointfederal effect.

        In the predecessor year ended December 31, 2009, we reduced our state tax rate based on a review of our state apportionment factors and the current tax rate of the states where we conduct business. This change resulted in a $4 million state deferred tax benefit, net of federal effect.

        We had unamortized investment tax credits of $2 million, $61 million and $68 million as of the future. Assuccessor date of December 31, 2011, and the predecessor dates of December 31, 2010 and 2009, respectively, which are included in other long-term liabilities on our consolidated balance sheets. These investment credits are amortized over the lives of the related assets. Amortization of investment tax credits was immaterial in 2011. Amortization of investment tax credits of $8 million is included in the provision for income taxes for the predecessor years ended December 31, 2010 and 2009.

(13) Fair Value Disclosure

        Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts receivable—affiliates, short-term affiliate loans, accounts payable, accounts payable—affiliates and long-term debt excluding capital lease obligations. The carrying amounts of our cash and cash equivalents, accounts receivable, accounts receivable—affiliates, short-term affiliate loans, accounts payable and accounts payable—affiliates approximate their fair values.

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB.

        The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:

Input Level
Description of Input
Level 1Observable inputs such as quoted market prices in active markets.
Level 2Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3Unobservable inputs in which little or no market data exists.

Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(13) Fair Value Disclosure (Continued)

        The following table presents the carrying amounts and estimated fair values of our investment securities, which are reported in noncurrent other assets, and long-term debt, excluding capital lease obligations, as well as the input levels used to determine the fair values:

 
  
 Successor
December 31, 2011
  
 Predecessor
December 31, 2010
 
 
 Input
Level
 Carrying Amount Fair Value  
 Carrying Amount Fair Value 
 
 (Dollars in millions)
 

Assets—Investments securities

  3 $      52  52 

Liabilities—Long-term debt excluding capital lease obligations

  2  8,149  8,352    7,814  8,482 

        During the second quarter of 2011, the rights to our auction rate securities were assigned to our ultimate parent CenturyLink. Upon assignment, the fair value of the trust assetsthose securities was $801 million; however,$42 million. We did not recognize a portiongain or loss on this assignment.

        The table below presents a rollforward of these assets is comprised of investments with restricted liquidity. In 2009 QCII estimated thatour auction rate securities valued using Level 3 inputs:

 
 Auction Rate
Securities
 
 
 (Dollars in millions)
 

Balance at January 1, 2010

 $41 

Additions

  16 

Dispositions and settlements

  (5)

Included in other comprehensive income (expense)

   
    

Balance at December 31, 2010 (Predecessor)

  52 

Dispositions and settlements

  (4)

Included in other comprehensive income (expense)

  1 
    

Balance at March 31, 2011 (Predecessor)

 $49 
    

Fair value adjustment

 
$

(7

)
    

Balance at April 1, 2011 (Successor)

  42 
    

Assignments to CenturyLink

  (42)
    

Balance at December 31, 2011 (Successor)

 $ 
    

        For the trust would be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Based on returns on trust assets during 2010, QCII still believes that the more liquid assets in the trust will be adequate to provide continuing reimbursements for its occupational post-retirement health care costs for approximately five years. Thereafter, covered benefits for QCII’s eligible retirees who are former occupational employees will be paid either directly by us or from the trust as the remaining assets become liquid. This five year period could be substantially shorter or longer depending on returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits. QCII’sliabilities measured at fair value on our acquisition date, we employed a variety of methods to determine these fair values, including quoted market price, observable market values of comparable assets, current replacement costs and discounted cash flow analysis. The factors that most significantly impact our estimate of fair value included forecasted cash flows and a market participant discount rate. The applicable market participant discount rate is impacted by the annual long-termmarket risk free rate of return onand risk premium associated with a group of peer telecommunication companies which have been deemed to be market participants for determining the plan assetsfair value. The discount rates used in our valuations ranged from 7.5% of 9.5% depending upon the asset or liability valued and relative risk associated with the cash flows.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(14) Stockholder's Equity (Deficit)

Common Stock

        We have one share of common stock (no par value) issued and outstanding, which is 7.5% based onowned by QSC.

Other Net Asset Transfers

        During 2010, we recorded a $56 million equity transaction for excess tax deductions, the currently held assets; however, actual returns could vary widelydifference between the acceleration of stock-based compensation expense for both performance and restricted shares and the tax deduction.

        In addition, in any given year. The benefits reimbursed from plan assets were $186 million in 2010;

contract termination fees. These fees are non-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business and to optimize our cost structure, we enter into contracts with terms greater than one year to purchase goods and services. Assuming we exited these contracts in 2011, termination fees for these contracts would be $31 million. In the normal course of business, we believetransfer assets and liabilities to and from QSC and its affiliates, which are recorded through our equity. It is our policy to record these asset transfers based on carrying values.

Dividends

        We declared the paymentfollowing cash and non-cash dividends to QSC:

 
  
  
 Predecessor 
 
 Successor  
 
 
  
  
 Years Ended
December 31,
 
 
 Nine Months
Ended
December 31,
2011
  
 Three Months
Ended
March 31,
2011
 
 
  
 
 
  
 2010 2009 
 
 (Dollars in millions)
 

Non-cash dividend to QSC(1)

 $28         

Cash dividend declared to QSC

  600    1,000  2,300  1,700 

Cash dividend paid to QSC

  900    530  2,260  2,000 

(1)
This was a non-cash transaction whereby we transferred assets via dividends to our parent company, QSC.

        The timing of these feescash payments for declared dividends to QSC is remote;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.

(15) Quarterly Financial Data (Unaudited)

 
 Quarterly Financial Data 
 
 Predecessor  
 Successor 
 
 First
Quarter
  
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 Nine
Months
Total
 
 
 (Dollars in millions)
 

2011

                  

Operating revenues

 $2,268    2,231  2,190  2,214  6,635 

Operating income

  638    370  412  417  1,199 

Income tax expense

  191    116  118  115  349 

Net income

  299    165  199  179  543 

Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2009 and 2008

potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business. The nature and terms of these arrangements vary. Historically, we have not incurred significant costs related to performance under these types of arrangements.

(2)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 as of December 31, 2010.

(3)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.

(4)Non-qualified pension payment estimates assume we pay the same proportionate share of QCII’s total payments as the average we paid over the prior three years.

Capital Leases

We lease certain facilities and equipment under various capital lease arrangements. Depreciation of assets under capital leases is included in depreciation and amortization expense. Payments on capital leases are included in repayments of long-term borrowings, including current maturities in the consolidated statements of cash flows.

The table below summarizes our capital lease activity as of and for the years ended December 31, 2010, 2009 and 2008:

   Years Ended
December 31,
 
   2010   2009   2008 
   (Dollars in millions) 

Capital leases:

      

Assets acquired through capital leases

  $116    $61    $10  

Assets included in property, plant and equipment

   223     109     107  

Accumulated depreciation

   51     25     64  

Depreciation expense

   28     20     21  

Cash payments towards capital leases

   25     24     25  

The future minimum payments under capital leases as of December 31, 2010 are included in our consolidated balance sheet as follows:

   Future Minimum
Payments
 
   (Dollars in millions) 

Capital lease obligations:

  

Total minimum payments

  $195  

Less: amount representing interest and executory costs

   (31
     

Present value of minimum payments

   164  

Less: current portion

   (36
     

Long-term portion

  $128  
     

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Operating Leases

Certain office facilities, real estate and equipment are subject to operating leases. We also have easement (or right-of-way) agreements with railroads and public transportation authorities that are accounted for as operating leases. For the years ended December 31, 2010, 2009 and 2008, rent expense under these operating leases was $200 million, $206 million and $223 million, respectively, and sublease rental income over the same periods was $15 million, $18 million and $19 million, respectively. Operating leases as reported in the table in “Future Contractual Obligations” above have not been reduced by minimum sublease rental income of $49 million, which we expect to realize under non-cancelable subleases.

Letters of Credit and Guarantees

On our behalf, QCII maintains letter of credit arrangements with various financial institutions. As of December 31, 2010, the amount of letters of credit outstanding was $51 million, and we had no outstanding guarantees. On January 18, 2011, QCII entered into $7 million of additional letters of credit.

Contingencies

QCII is involved in several legal proceedings to which we are not a party that, if resolved against QCII, could have a material adverse effect on our business and financial condition. We have included below a discussion of these matters. Only those matters to which we are a party represent contingencies for which we have accrued, or could reasonably anticipate accruing, liabilities if appropriate to do so. We are not a party to any of the matters discussed below and therefore have not accrued any liabilities for these matters.

In this section, when we refer to a class action as “putative” it is because a class has been alleged, but not certified in that matter. Until and unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to represent.

The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate QCII to indemnify its former directors, officers or employees with respect to certain of the matters described below, and QCII has been advancing legal fees and costs to certain former directors, officers or employees in connection with certain matters described below.

KPNQwest Litigation/Investigation

On September 29, 2010, the trustees in the Dutch bankruptcy proceeding for KPNQwest, N.V. (of which QCII was a major shareholder) filed a lawsuit in district court in Haarlem, the Netherlands, alleging tort and mismanagement claims under Dutch law. QCII and Koninklijke KPN N.V. (“KPN”) are defendants in this lawsuit along with a number of former KPNQwest supervisory board members and a former officer of KPNQwest, some of whom were formerly affiliated with QCII. Plaintiffs allege, among other things, that defendants’ actions were a cause of the bankruptcy of KPNQwest, and they seek damages for the bankruptcy deficit of KPNQwest, which is claimed to be approximately €4.2 billion (or approximately $5.6 billion based on the exchange rate on December 31, 2010), plus statutory interest.

On September 13, 2006, Cargill Financial Markets, Plc and Citibank, N.A. filed a lawsuit in the District Court of Amsterdam, the Netherlands, against QCII, KPN, KPN Telecom B.V., and other former officers, employees or supervisory board members of KPNQwest, some of whom were formerly affiliated with QCII. The

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

lawsuit alleges that defendants misrepresented KPNQwest’s financial and business condition in connection with the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of approximately €219 million (or approximately $290 million based on the exchange rate on December 31, 2010).

On August 23, 2005, the Dutch Shareholders Association (Vereniging van Effectenbezitters, or VEB) filed a petition for inquiry with the Enterprise Chamber of the Amsterdam Court of Appeals, the Netherlands, with regard to KPNQwest. VEB sought an inquiry into the policies and course of business at KPNQwest that are alleged to have caused the bankruptcy of KPNQwest in May 2002, and an investigation into alleged mismanagement of KPNQwest by its executive management, supervisory board members, joint venture entities (QCII and KPN), and KPNQwest’s outside auditors and accountants. On December 28, 2006, the Enterprise Chamber ordered an inquiry into the management and conduct of affairs of KPNQwest for the period January 1 through May 23, 2002. On December 5, 2008, the Enterprise Chamber appointed investigators to conduct the inquiry. VEB claims that certain individuals have assigned to it their claims for losses totaling approximately €40 million (or approximately $55 million based on the exchange rate on December 31, 2010), which those individuals allegedly incurred on investments in KPNQwest securities. VEB has not yet filed any adjudicative action to assert those claims.

On June 7, 2010, a number of parties, including QCII and KPN, reached a settlement with VEB for €19 million (or approximately $25 million based on the exchange rate on December 31, 2010), conditioned in part on the termination of the investigation by the Enterprise Chamber. Pursuant to the terms of the settlement, VEB formally requested that the Enterprise Chamber terminate the investigation. The Enterprise Chamber denied that request and directed the investigation to proceed. On an appeal of that decision, the Dutch Supreme Court reversed the Enterprise Chamber’s decision and, among other things, referred the case back to the Enterprise Chamber to terminate the investigation.

QCII will continue to defend against the pending KPNQwest litigation matters vigorously.

QCII Stockholder Litigation

In the weeks following the April 22, 2010 announcement of QCII’s pending merger with CenturyLink, purported QCII stockholders filed 17 lawsuits against QCII, its directors, certain of its officers, CenturyLink and SB44 Acquisition Company. The purported stockholder plaintiffs commenced these actions in three jurisdictions: the District Court for the City and County of Denver, the United States District Court for the District of Colorado, and the Delaware Court of Chancery. The plaintiffs generally allege that QCII’s directors breached their fiduciary duties in approving the merger and seek to enjoin the merger and, in some cases, damages if the merger is completed. Many of the lawsuits also challenge the sufficiency of the disclosures in the preliminary joint proxy statement-prospectus relating to the merger, which was filed with the SEC on June 4, 2010.

QCII, and its directors, believe that all of these actions are without merit. The defendants nevertheless negotiated with the purported stockholder plaintiffs regarding a settlement of the claims asserted in all of these actions, including the claims that challenge the sufficiency of the disclosures in the preliminary joint proxy statement-prospectus. On July 16, 2010, the parties entered into a memorandum of understanding reflecting the terms of their agreement-in-principle for a settlement of all of the claims asserted in these actions. Pursuant to this agreement, defendants included additional disclosures in the final joint proxy statement-prospectus filed with the SEC on July 19, 2010. On December 17, 2010, the United States District Court for the District of Colorado preliminarily approved the settlement, and notice was subsequently provided to stockholders of the proposed

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

final resolution. A final fairness hearing is scheduled for February 25, 2011. If the settlement is approved at the final hearing, all of these actions will be dismissed, with prejudice. The defendants intend to defend their positions in these matters vigorously to the extent they are not fully resolved by the settlement.

Other Matters

Several putative class actions relating to the installation of fiber-optic cable in certain rights-of-way were filed against several other subsidiaries of QCII on behalf of landowners on various dates and in various courts in Arizona, California, Colorado, Georgia, Illinois, Indiana, Kansas, Massachusetts, Mississippi, Missouri, Nevada, New Mexico, Oregon, South Carolina, Tennessee, Texas and Utah. For the most part, the complaints challenge the right to install fiber-optic cable in railroad rights-of-way. The complaints allege that the railroads own the right-of-way as an easement that did not include the right to permit the defendants to install fiber-optic cable in the right-of-way without the plaintiffs’ consent. Most of the actions purport to be brought on behalf of state-wide classes in the named plaintiffs’ respective states, although two of the currently pending actions purport to be brought on behalf of multi-state classes. Specifically, the Illinois state court action purports to be on behalf of landowners in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin, and the Indiana state court action purports to be on behalf of a national class of landowners. In general, the complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages. On July 18, 2008, a federal district court in Massachusetts entered an order preliminarily approving a settlement of all of the actions described above, except the action pending in Tennessee. On September 10, 2009, the court denied final approval of the settlement on grounds that it lacked subject matter jurisdiction. On December 9, 2009, the court issued a revised ruling that, among other things, denied a motion for approval as moot and dismissed the matter for lack of subject matter jurisdiction.

One of QCII’s other subsidiaries, Qwest Communications Company, LLC (“QCC”), is a defendant in litigation filed by several billing agents for the owners of payphones seeking compensation for coinless calls made from payphones. The matter is pending in the United States District Court for the District of Columbia. Generally, the payphone owners claim that QCC underpaid the amount of compensation due to them under Federal Communications Commission regulations for coinless calls placed from their phones onto QCC’s network. The claim seeks compensation for calls, as well as interest and attorneys’ fees. QCC will vigorously defend against this action.

A putative class action filed on behalf of certain of QCII’s retirees was brought against QCII, the Qwest Group Life Insurance Plan and other related entities in federal district court in Colorado in connection with QCII’s decision to reduce the life insurance benefit for these retirees to a $10,000 benefit. The action was filed on March 30, 2007. The plaintiffs allege, among other things, that QCII and other defendants were obligated to continue their life insurance benefit at the levels in place before QCII decided to reduce them. Plaintiffs seek restoration of the life insurance benefit to previous levels and certain equitable relief. The district court ruled in QCII’s favor on the central issue of whether QCII properly reserved our right to reduce the life insurance benefit under applicable law and plan documents. The plaintiffs subsequently amended their complaint to assert additional claims. In 2009, the court dismissed or granted summary judgment to QCII on all of the plaintiffs’ claims. The plaintiffs have appealed the court’s decision to the Tenth Circuit Court of Appeals.

QCII continues to evaluate the method it uses to assess the amount of USF payments that must be made on certain products, and during the year ended December 31, 2010 QCII recorded an adjustment to its liability of $15 million related to previous years’ USF payments. This ongoing evaluation may result in further adjustments to QCII’s previous years’ USF payments and charges to customers.

QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Note 18:(15) Quarterly Financial Data (Unaudited) (Continued)

 

   Quarterly Financial Data 
   First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Total 
   (Dollars in millions) 

2010

          

Operating revenue

  $2,347    $2,313    $2,311    $2,300    $9,271  

Operating income

   661     649     616     557     2,483  

Income tax expense

   253     187     181     170     791  

Net income

   252     304     286     240     1,082  

2009

          

Operating revenue

  $2,507    $2,463    $2,402    $2,359    $9,731  

Operating income

   693     675     620     574     2,562  

Income tax expense

   209     186     180     149     724  

Net income

   340     305     293     259     1,197  

 
 Quarterly Financial Data 
 
 Predecessor 
 
 First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 Total 
 
 (Dollars in millions)
 

2010

                

Operating revenues

 $2,347  2,313  2,311  2,300  9,271 

Operating income

  661  649  616  557  2,483 

Income tax expense

  253  187  181  170  791 

Net income

  252  304  286  240  1,082 

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.

Fourth Quarter 2010

Net income for the fourth quarter of 2010 was affected by an increase in stock-based compensation expense of $63 million due to QCII’sQCII's decision to accelerate the vesting of certain restricted stock and performance share awards issued under its Equity Incentive Plan in order to preserve certain economic benefits to its stockholders that otherwise would have been lost in connection with QCII’s pending merger with CenturyLink.CenturyLink's indirect acquisition of us.

Income tax expense for the fourth quarter of 2010 was affected by the tax treatment of the expenses incurred when QCII accelerated the vesting of certain stock-based compensation.

First Quarter 2010

Income tax expense for the first quarter of 2010 increased by $55 million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Among other things, these laws disallow, beginning in 2013, federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program.

Note 19:(16) Commitments and Contingencies

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

Capital Leases

        We lease certain facilities and equipment under various capital lease arrangements. Depreciation of assets under capital leases is included in depreciation and amortization expense. Payments on capital leases are included in repayments of long-term debt, including current maturities in the consolidated statements of cash flows.


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(16) Commitments and Contingencies (Continued)

        The table below summarizes our capital lease activity:

 
 Successor  
 Predecessor 
 
 Nine Months
Ended
December 31,
2011
  
 Three Months
Ended
March 31,
2011
 Year Ended
December 31,
2010
 Year Ended
December 31,
2009
 
 
 (Dollars in millions)
 

Assets acquired through capital leases

 $2    16  116  61 

Depreciation expense

  41    11  28  20 

Cash payments towards capital leases

  35    11  25  24 


 
 Successor  
 Predecessor 
 
 December 31,
2011
  
 December 31,
2010
 
 
 (Dollars in millions)
 

Assets included in property, plant and equipment

 $192    223 

Accumulated depreciation

  41    51 

        The future minimum payments under capital leases as of December 31, 2011 are included in our consolidated balance sheet as follows:

 
 Future Minimum
Payments
 
 
 (Dollars in millions)
 

Capital lease obligations:

    

2012

 $49 

2013

  45 

2014

  35 

2015

  21 

2016

  2 

2017 and thereafter

  7 
    

Total minimum payments

  159 

Less: amount representing interest and executory costs

  (20)
    

Present value of minimum payments

  139 

Less: current portion

  (41)
    

Long-term portion

 $98 
    

Operating Leases

        We lease various equipment, office facilities, retail outlets, switching facilities and other network sites. These leases, with few exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initial non-cancelable term plus any term under renewal options


Table of Contents


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(16) Commitments and Contingencies (Continued)

that are reasonably assured. For the successor nine months ended December 31, 2011, our gross rental expense was $125 million and was $58 million, $200 million and $206 million for the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009, respectively. We also received sublease rental income for the same periods of $10 million, $4 million, $15 million, and $18 million, respectively.

        The future minimum payments under operating leases as of December 31, 2011 are as follows:

 
 Future Minimum
Payments
 
 
 (Dollars in millions)
 

Operating leases:

    

2012

 $50 

2013

  33 

2014

  27 

2015

  22 

2016

  18 

2017 and thereafter

  36 
    

Total future minimum payments(1)

 $186 
    

(1)
Minimum payments have not been reduced by minimum sublease rentals of $36 million due in the future under non-cancelable subleases.

Purchase Obligations

        We have several commitments primarily for marketing activities and support services from a variety of vendors to be used in the ordinary course of business totaling $245 million as of the successor date of December 31, 2011. Of this amount, we expect to purchase $70 million in 2012, $80 million in 2013 through 2014, $60 million in 2015 through 2016 and $35 million in 2017 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

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as

 
 Successor  
 Predecessor 
 
 December 31,
2011
  
 December 31,
2010
 
 
 (Dollars in millions)
 

Prepaid expenses

 $57    68 

Deferred activation and installation charges

  18    91 

Other

  23    22 
        

Total other current assets

 $98    181 
        

Table of December 31, 2010 and 2009 consisted of the following:Contents

   December 31, 
       2010           2009     
   (Dollars in millions) 

Prepaid expenses and other current assets:

    

Deferred activation and installation charges

  $91    $99  

Prepaid expenses and other

   106     146  
          

Total prepaid expenses and other current assets

  $197    $245  
          


QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

For the Years Ended December 31, 2010, 2009 and 2008

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of December 31, 2010 and 2009 consisted of the following:

   December 31, 
       2010           2009     
   (Dollars in millions) 

Accrued expenses and other current liabilities:

    

Accrued interest

  $126    $143  

Employee compensation

   298     283  

Accrued property and other taxes

   203     211  

DIRECTV payable

   147     128  

Other

   135     176  
          

Total accrued expenses and other current liabilities

  $909    $941  
          

Note 20:(18) Labor Union Contracts

We are a party to collective bargaining agreements with our labor unions, the Communications Workers of America and the International Brotherhood of Electrical Workers. We believe that relations with our employees continue to be generally good. Our current four-year collective bargaining agreements expire on October 6, 2012. As of the successor date of December 31, 2010,2011, employees covered under these collective bargaining agreements totaled approximately 14,200,13,000, or 54%53% of all our employees.


Table of Contents

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, our, or any system of disclosure controls and procedures can provide only reasonable assurance regarding management’smanagement's control objectives.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the “Exchange Act”"Exchange Act") as of December 31, 2010.2011. On the basis of this review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are designed and are effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred in the fourth quarter of 20102011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’sManagement's Report on Internal Control Over Financial Reporting

This section of this Annual Report on Form 10-K will not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed filed under these Acts.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.2011.

ITEM 9B.    OTHER INFORMATION

None.


Table of Contents


PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

We have omitted this information pursuant to General Instruction I(2).

ITEM 11.    EXECUTIVE COMPENSATION

We have omitted this information pursuant to General Instruction I(2).

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

We have omitted this information pursuant to General Instruction I(2).

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

We have omitted this information pursuant to General Instruction I(2).

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Pre-Approval Policies and Procedures

The Audit Committee of theCenturyLink's Board of Directors of QCII is responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm. Under the Audit Committee’sCommittee's charter, the Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered public accounting firm. The approval may be given as part of the Audit Committee’sCommittee's approval of the scope of the engagement of our independent registered public accounting firm or on an individual basis. The pre-approval of non-audit services may be delegated to one or more of the Audit Committee’sCommittee's members, but the decision must be reported to the full Audit Committee. Our independent registered public accounting firm may not be retained to perform the non-audit services specified in Section 10A(g) of the Exchange Act.

Fees Paid to the Independent Registered Public Accounting Firm

QCII first engaged KPMG LLP to be our independent registered public accounting firm in May 2002. The aggregate fees billed or allocated to us for each of the years ended December 31, 20102011 and 2009,2010 for professional accounting services, including KPMG’sKPMG's audit of our annual consolidated financial statements, are set forth in the table below.

 
 Year Ended
December 31, 2011
 Year Ended
December 31, 2010
 
 
 (Dollars in thousands)
 

Audit fees

 $3,281  2,555 

Audit-related fees

  137  104 
      

Total fees

 $3,418  2,659 
      

        

       2010           2009     
   (Dollars in thousands) 

Audit fees

  $2,555    $2,815  

Audit-related fees

   104     74  
          

Total fees

  $2,659    $2,889  
          

KPMG did not provide to us any professional services for tax compliance, tax advice or tax planning in 20102011 or 2009.

2010.

For purposes of the preceding table, the professional fees are classified as follows:

Audit fees—These are fees billed for the year shown for professional services performed for the audit of the consolidated financial statements included in our Form 10-K filing for that year, the review of condensed consolidated financial statements included in our Form 10-Q filings made during that


Table of Contents

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.

Audit-related fees—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. Audit-related fees for each year shown include amounts that have been billed through the date of this filing.

The Audit Committee approved in advance all of the services performed by KPMG described above.


Table of Contents


PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this report:

     Page 

(1)

 

Report of Independent Registered Public Accounting Firm

   48  
 

Financial Statements covered by the Report of Independent Registered Public Accounting Firm:

  
 

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008

   49  
 

Consolidated Balance Sheets as of December 31, 2010 and 2009

   50  
 

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

   51  
 

Consolidated Statements of Stockholder’s (Deficit) Equity and Comprehensive Income for the years ended December 31, 2010, 2009 and 2008

   52  
 

Notes to the Consolidated Financial Statements for the years ended December 31, 2010, 2009 and 2008

   53  

 
  
 Page

(1)

 

Report of Independent Registered Public Accounting Firm

 48

 

Financial Statements covered by the Report of Independent Registered Public Accounting Firm:

 49

 

Consolidated Statements of Operations for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009

 49

 

Consolidated Statements of Comprehensive Income for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009

 50

 

Consolidated Balance Sheets as of the successor date of December 31, 2011 and the predecessor date of December 31, 2010

 51

 

Consolidated Statements of Cash Flows for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009

 52

 

Consolidated Statements of Stockholder's Equity (Deficit) for the successor nine months ended December 31, 2011, the predecessor three months ended March 31, 2011 and the predecessor years ended December 31, 2010 and 2009

 53

 

Notes to the Consolidated Financial Statements

 54

(a)(3) and (b) Exhibits required by Item 601 of Regulation S-K:

Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.

Exhibit
Number

Description
 

Description

(3.1) Restated Articles of Incorporation of Qwest Corporation (incorporated by reference to Qwest Corporation’sCorporation's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 001-03040).


(3.2)

 


Articles of Amendment to the Articles of Incorporation of Qwest Corporation (incorporated by reference to Qwest Corporation’sCorporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 001-03040).



(3.3)

 


Amended and Restated Bylaws of Qwest Corporation (incorporated by reference to Qwest Corporation’sCorporation's Annual Report on Form 10-K for the year ended December 31, 2002, File
No. 001-03040).



(4.1)

 


Indenture, dated as of April 15, 1990, by and between Mountain States Telephone and Telegraph Company and The First National Bank of Chicago (incorporated by reference to Qwest Corporation’sCorporation's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-03040).



(4.2)

 


First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. and The First National Bank of Chicago (incorporated by reference to Qwest Corporation’sCorporation's Annual Report on Form 10-K for the year ended December 31, 2002, File
No. 001-03040).


Table of Contents

Exhibit
Number
Description
(4.3) 

Indenture, dated as of October 15, 1999, by and between U S West Communications, Inc. and Bank One Trust Company, N.A. (incorporated by reference to Qwest Corporation’sCorporation's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-03040).



(4.4)

 

Officer’s
Officer's Certificate of Qwest Corporation, dated as of March 12, 2002 (including forms of 87/8% notes due March 15, 2012) (incorporated by reference to Qwest Corporation’sCorporation's Form S-4, File No. 333-115119).



(4.5)

 


First Supplemental Indenture, dated as of August 19, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Communications International Inc.’s's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004,
File No. 001-15577).

Exhibit
Number

Description



(4.6)

 


Second Supplemental Indenture, dated as of November 23, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation’sCorporation's Current Report on Form 8-K filed November 23, 2004, File No. 001-03040).



(4.7)

 


Third Supplemental Indenture, dated as of June 17, 2005, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation’sCorporation's Current Report on Form 8-K filed June 23, 2005, File No. 001-03040).



(4.8)

 


Fourth Supplemental Indenture, dated August 8, 2006, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation’sCorporation's Current Report on Form 8-K filed August 8, 2006, File No. 001-03040).



(4.9)

 


Fifth Supplemental Indenture, dated May 16, 2007, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation’sCorporation's Current Report on Form 8-K filed May 18, 2007, File No. 001-03040).



(4.10)

 


Sixth Supplemental Indenture, dated April 13, 2009, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation’sCorporation's Current Report on Form 8-K filed April 13, 2009, File No. 001-03040).


(10.1)
(4.11)

 
Registration Rights Agreement,


Seventh Supplemental Indenture, dated April 13, 2009, amongJune 8, 2011, between Qwest Corporation and the initial purchasers listed thereinU.S. Bank National Association (incorporated by reference to Qwest Corporation’sCorporation's Form 8-A filed June 7, 2011, File No. 001-03040).



(4.12)


Eighth Supplemental Indenture, dated September 21, 2011, between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation's Form 8-A filed September 20, 2011, File No. 1-03040).



(4.13)


Ninth Supplemental Indenture, dated October 4, 2011, between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporation's Current Report on Form 8-K filed April 13, 2009,on October 4, 2011, File No. 001-03040)1-03040).


(10.2)
12

 
Aircraft Time Sharing Agreement, dated December 1, 2008, by and between Qwest Corporation and Edward A. Mueller (incorporated by reference to Qwest Communications International Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-15577).
(10.3)First Amendment to Aircraft Time Sharing Agreement, dated July 29, 2010, by and between Qwest Corporation and Edward A. Mueller (incorporated by reference to Qwest Communications International Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, File No. 001-15577).
 12


Calculation of Ratio of Earnings to Fixed Charges.


 23
31.1

 
Consent of Independent Registered Public Accounting Firm.
 24Power of Attorney.
 31.1


Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



31.2

 


Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32

 


Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.


Table of Contents

(  )Previously filed.
Exhibit
Number
Description
101

Financial statements from the Annual Report on Form 10-K of Qwest Corporation for the year ended December 31, 2011, formatted in XBRL: (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive (Loss) Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholder's Equity (Deficit) and (vi) the Notes to the Consolidated Financial Statements.


(    )    Previously filed.

In accordance with Item 601(b) (4) (iii) (A) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.


Table of Contents


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Denver, State of Colorado, on February 21, 2011.March 2, 2012.

QWEST CORPORATION,

A COLORADO CORPORATION

By:

 

QWEST CORPORATION,
A COLORADO CORPORATION




By:


/s/ R. WILLIAM JOHNSTON        DAVID D. COLE


R. William JohnstonDavid D. Cole

Senior Vice President, President—Controller and
Operations Support

(Chief Accounting Officer

(Principal Accounting Officer and


Duly Authorized Officer
)Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicatedand on the 21st day of February 2011.date indicated.

Signature

Title



/s/ GLEN F. POST, III

Glen F. Post, III
 

Title

/s/    EDWARD A. MUELLER        

Director and Chief Executive Officer

and President
(Principal Executive Officer)


Edward A. Mueller/s/ R. STEWART EWING, JR.

R. Stewart Ewing, Jr.

 


/ s/    JOSEPH J. EUTENEUER        

Director, Executive Vice President and
Chief Financial Officer


(Principal Financial Officer)

Joseph J. Euteneuer

*

Director

Teresa A. Taylor

*By:

/s /    JOSEPH J. EUTENEUER        

Joseph J. Euteneuer

/s/ STACEY W. GOFF

Stacey W. Goff

 

As Attorney-In-FactDirector

93