News Column

QWEST CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 15, 2014

Unless the context requires otherwise, references in this report to "QC" refer to Qwest Corporation, and references to "Qwest," "we," "us" and "our" refer to Qwest Corporation and its consolidated subsidiaries. All references to "Notes" in this Item 2 refer to the Notes to Consolidated Financial Statements included in Item 1 of Part I of this report. Certain statements in this report constitute forward-looking statements. See the last paragraph of this Item 2 and "Risk Factors" in Item 1A of Part II of this report for a discussion of certain factors that could cause our actual results to differ from our anticipated results or otherwise impact our business, financial condition, results of operations, liquidity or prospects. Overview Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our Annual Report on Form 10-K for the year ended December 31, 2013, and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations for the first three months of the year are not necessarily indicative of the results of operations that might be expected for the entire year. We are 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, broadband, private line (including special access), network access, Ethernet, information technology, 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 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. Our operations are integrated into and reported as part of the consolidated segment data of our ultimate parent company, CenturyLink, Inc. ("CenturyLink"). CenturyLink's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission ("SEC"). Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we believe we have one reportable segment. We categorize our products, services and revenues among the following three categories: Strategic services, which include primarily broadband, private line (including special access), Ethernet, video (including resold satellite video services) 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 Universal Service Fund ("USF") revenues and surcharges and services we provide to our non-consolidated affiliates. We provide to our affiliates telecommunication services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services, network support and technical services.



As of March 31, 2014, we served approximately 3.5 million broadband subscribers. We also operated approximately 7.6 million access lines, which are telephone lines reaching from the customers' premises to a connection with the public switched telephone network. Our methodology for counting our broadband subscribers and access lines includes only those access lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. It also excludes unbundled loops and includes stand-alone broadband subscribers. We count access lines when we install the service. Our methodology for counting our broadband subscribers and access lines may not be comparable to those of other companies.

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Our analysis presented below is organized to provide the information we believe will be useful for understanding material trends affecting our business. Business Trends Our financial results were impacted by several significant trends, including those described below. Strategic services. We continue to see shifts in the makeup of our total revenues as customers move to strategic services, such as broadband and video services, from legacy services. Revenues from our strategic services represented 39% and 38% of our total revenues for the three months ended March 31, 2014 and 2013, respectively. Although we are experiencing price compression due to competition, we expect these percentages to continue to grow. We continue to focus on increasing subscribers of our broadband services, particularly among consumer and small business customers. We believe that continually increasing connection speeds is important to remaining competitive in our industry. As a result, we continue to invest in our broadband network, which allows for the delivery of higher speed broadband services to a greater number of customers. We compete in a maturing broadband market in which most consumers already have broadband services and growth rates in new subscribers have slowed. Moreover, as described further in "Risk Factors" in Item 1A of Part II of this report, demand for our broadband services could be adversely affected by competitors providing services at higher broadband speed than ours or using advanced wireless data technologies. Another trend impacting our strategic services is the deployment of fiber-based special access services provided to wireless carriers, which in many cases replaces existing copper-based special access services. We believe the growth in fiber-based special access services provided to wireless carriers for backhaul will partially offset the decline in copper-based special access services provided to wireless carriers as they migrate to Ethernet services, although the timing and magnitude of this technological migration is uncertain; Legacy services. Revenues from our legacy services represented 35% and 38% of our total revenues for the three months ended March 31, 2014 and 2013, respectively. We expect these percentages to continue to decline at a slower pace than in the past. 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 replacing traditional voice telecommunications service with substitute services, including (i) cable and wireless voice services and (ii) electronic mail, texting and social networking services. We expect that these factors will continue to negatively impact our business. As a result of the expected loss of revenues associated with access lines, we continue to offer service bundling and other product promotions to help mitigate this trend, as described below; 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 we believe our bundled service offerings can help retain customers, they also tend to lower our profit margins; 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 controlling parent companies, Qwest Communications International Inc. ("QCII") and CenturyLink, are required to recognize in their consolidated financial statements certain income and expenses relating to their pension and post-retirement health care and life insurance benefits plans. These income and 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 QCII's and CenturyLink's assumptions can cause significant changes in the net periodic pension and post-retirement benefits income and expenses we recognize. QCII and CenturyLink allocate the income and expenses of these plans to us and certain of their other affiliates. The allocation of income and expenses to us is based upon the demographics of our employees and retirees; and Disciplined capital expenditures. Our capital expenditures continue to be focused on our strategic services such as broadband and the deployment of "fiber to the tower", which is a type of telecommunications network consisting of fiber-optic cables that run from a wireless carrier's mobile telephone switching office to cellular towers to enable the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional copper-based telecommunications network. 12



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While these trends are important to understanding and evaluating our financial results, the other transactions, additional events, uncertainties and trends discussed in "Risk Factors" in Item 1A of Part II of this report may also materially impact our business operations and financial results. Results of Operations The following table summarizes the results of our consolidated operations for the three months ended March 31, 2014 and 2013:

Three Months Ended March 31, 2014 2013 (Dollars in millions) Operating revenues $ 2,211 2,159 Operating expenses 1,669 1,606 Operating income 542 553



Other income (expense), net (129 ) (123 ) Income tax expense

160 166 Net income $ 253 264



The following table summarizes certain of our selected operational metrics as of the following dates:

March 31, Increase/ 2014 2013 (2) (Decrease) % Change (in thousands)



Broadband subscribers (1) 3,483 3,368 115 3 % Access lines (1) 7,586 7,958 (372 ) (5 )% Employees

22.8 22.6 0.2 1 %



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(1) Broadband subscribers are customers that purchase high-speed Internet connection service through their existing telephone lines and fiber-optic cables, and access lines are lines reaching from the customers' premises to a connection with the public network. (2) The prior year numbers have been adjusted to include the operational metrics of our wholly owned subsidiary, El Paso County Telephone Company, which had been previously excluded. The increase (in thousands) related to including El Paso County Telephone Company's broadband subscribers and access lines, in the table above, is approximately 1 and 4, respectively.



Operating Revenues The following table summarizes our operating revenues under the following revenue categorization for the three months ended March 31, 2014 and 2013:

Three Months Ended March 31, Increase/ 2014 2013 (Decrease) % Change (Dollars in millions) Strategic services $ 856 829 27 3 % Legacy services 767 825 (58 ) (7 )% Affiliates and other services 588 505 83 16 % Total operating revenues $ 2,211 2,159 52 2 %



Strategic Services Strategic services revenues increased by $27 million, or 3%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The increase was principally due to increases in the number of broadband subscribers, volume increases in our Ethernet services as well as price increases for various services. The increase was partially offset by a decline in our private line services revenues.

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Legacy Services Legacy services revenues decreased by $58 million, or 7%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The decline in revenues is a result of lower local services revenues due to access line loss and reduced access services usage related to customer migration, competitive pressures and product substitution. Affiliates and Other Services Affiliates and other services revenues increased by $83 million, or 16%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to increases in volume and in the rates we charge for support services we provided to affiliates. Operating Expenses The following table summarizes our operating expenses for the three months ended March 31, 2014 and 2013: Three Months Ended March 31, Increase/ 2014 2013 (Decrease) % Change (Dollars in millions) Cost of services and products (exclusive of depreciation and amortization) $ 698 645 53 8 % Selling, general and administrative 285 269 16 6 % Operating expenses-affiliates 188 162 26 16 % Depreciation and amortization 498 530 (32 ) (6 )% Total operating expenses $ 1,669 1,606 63 4 % Cost of Services and Products (exclusive of depreciation and amortization) 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 and utilities expenses; equipment sales expenses (such as modem expenses); costs for USF (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things and to which we are often required to contribute); litigation expenses associated with our operations; and other expenses directly related to our network. Cost of services and products (exclusive of depreciation and amortization) increased by $53 million or 8%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to increases in access expense, network expense, real estate and power costs, and allocated corporate costs from affiliates. These increases were offset partially by decreases in miscellaneous employee expenses. Selling, General and Administrative Selling, general and administrative expenses are expenses incurred in selling products and services to our customers, corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; property and other operating taxes and fees; external commissions; litigation expenses associated with general matters; bad debt expense; and other selling, general and administrative expenses. Selling, general and administrative expenses increased by $16 million, or 6%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to increases in employee related expenses, external commissions, professional fees and property and other taxes. These increases were partially offset by decreases in bad debt expense and marketing and advertising expenses. Operating Expenses-Affiliates Since CenturyLink's acquisition of us, we have incurred affiliates expenses related to our use of telecommunication services, marketing and employee related support services provided by CenturyLink and its subsidiaries. 14



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Operating expenses-affiliates increased for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to an increase in the rates we are charged for support services and higher levels of services provided to us by affiliates as a result of the continuing integration with CenturyLink. Depreciation and Amortization The following table provides detail regarding depreciation and amortization expense for the three months ended March 31, 2014 and 2013: Three Months Ended March 31, Increase/ 2014 2013 (Decrease) % Change (Dollars in millions) Depreciation $ 255 270 (15 ) (6 )% Amortization 243 260 (17 ) (7 )% Total depreciation and amortization $ 498 530 (32 ) (6 )% Depreciation expense decreased by $15 million, or 6%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. This decrease in depreciation expense is primarily due to depreciation rate changes which was partially offset by changes in our estimates of the remaining economic lives of certain switch and circuit network equipment. The rate changes were the result of our plant aging and becoming fully depreciated or retired at a faster rate than the addition of new plant. We expect that the impact of the depreciation rate changes will be increasingly offset over the remaining nine months of 2014 as we upgrade or build additional plant. For more information about the changes in our estimates of the remaining economic lives, see Note 1-Basis of Presentation to our consolidated financial statements in Item 1 of this report. Amortization expense decreased by $17 million, or 7%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The decrease in amortization expense is primarily due to the use of accelerated amortization for a portion of the customer relationship assets. In addition, amortization of capitalized software was lower due to our software investments becoming fully amortized faster than new software was acquired. Other Consolidated Results The following table summarizes our total other income (expense) and income tax expense for the three months ended March 31, 2014 and 2013: Three Months Ended March 31, Increase/ 2014 2013 (Decrease) % Change (Dollars in millions) Interest expense $ (116 ) (108 ) 8 7 % Interest expense-affiliate (13 ) (16 ) (3 ) (19 )% Other income - 1 1 (100 )% Total other income (expense) $ (129 ) (123 ) 6 5 % Income tax expense $ 160 166 (6 ) (4 )% Interest Expense Interest expense increased by $8 million, or 7%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to a higher weighted average coupon rate on our outstanding debt and a reduction in the amortization of debt premiums. See Note 2-Long-Term Debt and Revolving Promissory Note to our consolidated financial statements in Item 1 of this report and Liquidity and Capital Resources below for additional information about our debt. Interest Expense-Affiliate Affiliate interest expense decreased by $3 million, or 19%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. 15



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Income Tax Expense Income tax expense for the three months ended March 31, 2014, was $160 million, or an effective tax rate of 38.7%, compared to $166 million, or an effective tax rate of 38.6%, for the three months ended March 31, 2013. Liquidity and Capital Resources Overview We are an indirectly 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 advances and 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. Under these arrangements, the majority of our cash balance is advanced on a daily basis to CenturyLink. From time to time we may declare and pay dividends to our stockholder, Qwest Service Corporation ("QSC"), in excess of our earnings to the extent permitted by applicable law using cash repaid to us under these advances, which has the net effect of reducing the amount of these advances. Our debt covenants do not currently limit the amount of dividends we can pay to QSC. Given our cash management arrangement with our ultimate parent, CenturyLink, and the resulting amounts due to us from CenturyLink, a significant component of our liquidity is dependent upon CenturyLink's ability to repay its obligation to us. At March 31, 2014, we had a working capital deficit of $0.8 billion, reflecting current liabilities of $2.8 billion and current assets of $2.0 billion, compared to a working capital deficit of $0.9 billion as of December 31, 2013. 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 and paying cash dividends to QSC, it is likely that we will continue to operate with a working capital deficit in the future. We anticipate that our future liquidity needs will be met through (i) cash provided by our operating activities, (ii) amounts due to us from CenturyLink and (iii) capital contributions or advances from CenturyLink if and to the extent CenturyLink has available funds that it is willing and able to contribute or advance. 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 impact on revenue growth, productivity expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Our capital expenditures continue to be focused on our strategic services primarily our broadband services. In particular, we expect to continue to focus on expanding our fiber infrastructure, including installations of "fiber to the tower," which is a type of telecommunications network consisting of fiber-optic cables that run from a wireless carrier's mobile telephone switching office to cellular towers to enable the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional copper-based telecommunications network and on software development. For more information on capital spending, see Items 1 and 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. Debt and Other Financing Arrangements We have $600 million 7.5% senior notes that mature on October 1, 2014. Subject to market conditions, we expect to continue to issue debt securities from time to time in the future to refinance a substantial portion of our maturing debt. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned to us by the credit rating agencies, among other factors. As of the date of this report, the credit ratings for our senior unsecured debt were as follows: Agency Rating Standard & Poor's BBB- Moody's Investors Service, Inc. Baa3 Fitch Ratings BBB- 16



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Our credit ratings are reviewed and adjusted from time to time by the rating agencies, and future downgrades could impact CenturyLink's and our access to debt capital or further raise CenturyLink's and our borrowing costs. Any such future downgrades of CenturyLink's senior unsecured debt ratings could, under certain circumstances, incrementally increase the cost of CenturyLink's borrowing under its revolving credit facility, which could indirectly impact us. See "Risk Factors-Risks Affecting our Liquidity and Capital Resources" in Item 1A of Part II of this report. Revolving Promissory Note We are currently indebted to an affiliate of CenturyLink under a revolving promissory note that provides us with a funding commitment of up to $1.0 billion aggregate principal amount through June 30, 2022, of which $754 million was outstanding as of March 31, 2014. The revolving promissory note is due on demand and ranked equally to our outstanding Senior Notes. Interest is accrued on the outstanding balance using a weighted average per annum interest rate of CenturyLink's outstanding borrowings for the interest period. For the three months ended March 31, 2014, the weighted average interest rate was 6.619%. As of March 31, 2014 and 2013, this revolving promissory note is reflected on our consolidated balance sheets as a current liability under note payable-affiliate. As of March 31, 2014, $13 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet. Dividends We periodically pay dividends to our direct parent company. See Note 6-Dividends and the discussion above under the heading "Overview". Pension and Post-retirement Benefit Obligations CenturyLink and QCII are subject to material obligations under their existing defined benefit pension and post-retirement benefit plans. The accounting unfunded status or benefit obligations as of December 31, 2013 of CenturyLink's qualified and non qualified defined benefit pension plans and post-retirement benefit plans were $1.055 billion and $3.153 billion, respectively. The accounting unfunded status or benefit obligations as of December 31, 2013 of QCII's qualified and non-qualified defined benefit pension plans was $179 million, which is included in the CenturyLink defined benefit pension plans' balance noted above. For additional information about QCII's and CenturyLink's pension and post-retirement benefit arrangements, see "Critical Accounting Policies and Estimates-Pensions and Post-Retirement Benefits" in Item 7 of CenturyLink's Annual Report on Form 10-K for the year ended December 31, 2013 and see Note 8-Employee Benefits to the consolidated financial statements in Item 8 of Part II of the same report. A substantial portion of our active and retired employees participate in the QCII pension plan and CenturyLink's post-retirement benefit plans. 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 our affiliates. Benefits paid by QCII's qualified pension plan are paid through a trust. Cash funding requirements can be significantly impacted by earnings on investments, discount rates, changes in plan benefits and funding laws and regulations. QCII was not required and did not make contributions to the trust in 2013 and QCII currently does not expect to make a plan contribution in 2014. Certain of CenturyLink's post-retirement health care and life insurance benefits plans are unfunded. Several trusts hold assets that are used to help cover the health care costs of certain retirees. As of December 31, 2013, the fair value of the trust assets was $535 million; however, a portion of these assets is comprised of investments with restricted liquidity. CenturyLink 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 three years. Thereafter, covered benefits will be paid either directly by CenturyLink or from the trust as the remaining assets become liquid. This projected three year period could be substantially shorter or longer depending on changes in healthcare cost trends, actual returns on plan assets, the timing of maturities of illiquid plan assets, the actual timing of reimbursement payments and future changes in benefits. QCII's estimated annual long-term rate of return on the pension plans trust assets is 7.5% and CenturyLink's estimated annual long-term rate of return on the post-retirement plans trust assets is 7.3% based on the assets currently held; however, actual returns could be substantially different. Future Contractual Obligations For information regarding our estimated future contractual obligations, see the MD&A discussion included in our Annual Report on Form 10-K for the year ended December 31, 2013. 17



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Historical Information The following table summarizes our consolidated cash flow activities for the three months ended March 31, 2014 and 2013:

Three Months Ended March 31, Increase / 2014 2013 (Decrease) (Dollars in millions) Cash Flows Provided By (Used In) Net cash provided by operating activities $ 816 750 66 Net cash used in investing activities (507 ) (439 ) 68 Net cash used in financing activities (314 ) (308 ) 6 Net cash provided by operating activities increased by $66 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to positive variances in the changes in accounts receivable, accounts payable and in other noncurrent assets and liabilities-affiliates, which were partially offset by a negative variance in net income adjusted for non-cash items. For additional information about our operating results, see "Results of Operations" above. Net cash used in investing activities increased by $68 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to an increase in the amount of funds advanced to our affiliate, which was partially offset by decreased payments for purchases of property, plant and equipment. Net cash used in financing activities increased by $6 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to a decrease in the change in note payable-affiliate. For additional information regarding our financing activities, see Note 2-Long-Term Debt and Revolving Promissory Note to our consolidated financial statements in Item 1 of this report. Certain Matters Related to CenturyLink's Indirect Acquisition of Us Since CenturyLink's 2011 indirect acquisition of us, we have been included in the consolidated federal income tax return of CenturyLink. CenturyLink is in the process of developing a post-acquisition intercompany agreement for allocation of consolidated income tax liabilities. Until that agreement is finalized, 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. In accounting for CenturyLink's indirect acquisition of us, we recorded our debt securities at their estimated fair values, which totaled $8.498 billion as of April 1, 2011. Our acquisition date fair value estimates were based primarily on quoted market prices in active markets and other observable inputs where quoted market prices were not available. The fair value of our debt securities exceeded their stated principal balances on the acquisition date by $530 million, which we recorded as a premium. The table below summarizes the portions of this premium recognized as a reduction to interest expense or extinguished during the periods indicated: Three Months From April 1, 2011 Ended March 31, through Total Since 2014 December 31, 2013 Acquisition (Dollars in millions) Amortized $ 12 254 266 Extinguished - 187 187 Total premiums recognized $ 12 441 453



The remaining premium of $77 million as of March 31, 2014 will reduce interest expense in future periods, unless otherwise extinguished.

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Other Matters CenturyLink is 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, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink's quarterly and annual reports filed with the SEC. Because we are not a party to any of the matters, we have not accrued any liabilities for these matters. 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 hedging or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the consolidated financial statements, (ii) disclosed in Note 16-Commitments and Contingencies to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2013, or (iii) discussed under the heading "Market Risk" below. Market Risk We are exposed to market 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. Management periodically reviews our exposure to interest rate fluctuations and periodically implements strategies to manage the exposure. From time to time, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates. As of March 31, 2014, 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. We do not believe that there were any material changes to market risks arising from changes in interest rates for the three months ended March 31, 2014, when compared to the disclosures provided in our Annual Report on Form 10-K for the year ended December 31, 2013. Other Information CenturyLink's and our website is www.centurylink.com. We routinely post important investor information in the "Investor Relations" section of our website at ir.centurylink.com. The information contained on, or that may be accessed through, our website is not part of this quarterly 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" section of our website (ir.centurylink.com) under the heading "SEC Filings." These reports are available on our website as soon as reasonably practicable after we electronically file them with the SEC. Certain of the industry and market data (such as the size of certain markets and our position within these markets) used throughout this report are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Some market data and statistical information are also based on our good faith estimates, which are derived from our review of internal surveys, as well as the independent sources listed above. This information may prove to be inaccurate because of the method by which we obtain some of the data for our estimates or because this information cannot always be verified with certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness. 19



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In addition to historical information, this MD&A includes certain forward-looking statements that are based upon our judgment and assumptions as of the date of this report concerning future developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions upon which they are based, are inherently speculative and are subject to a number of risks and uncertainties. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Factors that could affect actual results include but are not limited to: the timing, success and overall effects of competition from a wide variety of competitive providers; the risks inherent in rapid technological change, including product displacement; the effects of ongoing changes in the regulation of the communications industry (including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, access charges, universal service, broadband deployment, data protection and net neutrality); our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and product mix caused by CenturyLink's recent acquisitions; CenturyLink's ability to successfully integrate recently acquired operations into its operations, including the possibility that the anticipated benefits from these acquisitions cannot be fully realized in a timely manner or at all; CenturyLink's ability to effectively manage its expansion opportunities, including retaining and hiring key personnel; possible changes in the demand for, or pricing of, our products and services, including our ability to effectively respond to increased demand for high-speed broadband services; our ability to successfully introduce new product or service offerings on a timely and cost-effective basis; the adverse impact on our business and network from possible equipment failures, security breaches or similar attacks on our network; our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; our ability to use our net operating loss carryforwards in projected amounts; our continued access to credit markets on favorable terms; our ability to collect our receivables from financially troubled communications companies; our ability to maintain favorable relations with our key business partners, suppliers, vendors and landlords; any adverse developments in legal or regulatory proceedings involving us or our affiliates; changes in our operating plans, strategies or spending plans, including those caused by changes in our cash requirements, capital expenditure needs, debt obligations, pension funding payments, cash flows, or financial position, or other similar changes; the effects of adverse weather; other risks referenced in this report (including in "Risk Factors" in Item 1A of Part II of this report) or from time to time in other of our filings with the SEC; and the effects of more general factors such as changes in interest rates, in tax rates, in accounting policies or practices, in operating, medical, pension or administrative costs, in general market, labor or economic conditions, or in legislation, regulation or public policy. These and other uncertainties related to our business are described in greater detail in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013, as updated and supplemented by our subsequent SEC reports, including this report. You should be aware that new factors may emerge from time to time and it is not possible for us to identify all such factors nor can we predict the impact of each such factor on the business or the extent to which any one or more factors may cause actual results to differ from those reflected in any forward-looking statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We undertake no obligation to update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of this report, and is based upon, among other things, the existing regulatory and technological environment, industry and competitive conditions, and economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

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