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QWEST CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 this quarterly 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, 2012, 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 indirect subsidiary of Qwest Communications International Inc. ("QCII"). 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 voice, network access, private line (including special access), broadband, Ethernet, 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 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 segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission ("SEC"). Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we have one reportable segment. We currently categorize our products, services and revenues among the following three categories: º • º Strategic services, which include primarily private line (including special access), broadband, video (including resold satellite video services) and Verizon Wireless services; º • º Legacy services, which include primarily local voice, integrated services digital network (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 º • º Affiliates and other services, which consist primarily of Universal Service Funds ("USF") revenues and surcharges and services we provide to our affiliates. We provide to our affiliates telecommunications services that we also provide to external customers. In addition, we provide to our affiliates: computer system development and support services, network support and technical services. 12 -------------------------------------------------------------------------------- Table of Contents As of March 31, 2013, we served approximately 3.4 million broadband subscribers. We also operated approximately 8.0 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 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 access lines may not be comparable to those of other companies. Our analysis presented below is organized to provide the information we believe will be useful for understanding the relevant trends affecting our business. Business Trends Our financial results have been impacted by several significant trends, including those described below. º • º Strategic services. We continue to see shifts in the makeup of our total revenues as customers move to strategic services, such as private line (including special access), broadband and video services, from legacy services, such as local and access services. Revenues from our strategic services represented 38% and 36% of our total revenues for the three months ended March 31, 2013 and March 31, 2012, respectively, and we expect that this percentage will continue to grow. We continue to focus on increasing subscribers of our broadband services, particularly among consumer and small business customers. We believe that continually increasing connection speeds is important to remaining competitive in our industry. As a result, we continue to invest in our broadband network, which allows for the delivery of higher speed broadband services than would otherwise generally be available through a more traditional telecommunications network made up of only copper wires. In addition to our broadband network, we continue to expand our product offerings, including Ethernet, and enhance our marketing efforts as we compete in a maturing market in which most consumers already have broadband services. We expect these efforts will improve our ability to compete and increase our broadband revenues. Another trend impacting our strategic services is the deployment of fiber-based special access services provided to wireless carriers, which in many cases replaces existing copper-based special access services. We believe the growth in fiber-based special access services provided to wireless carriers for backhaul will, ultimately, 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; º • º Legacy services. Revenues from our legacy services represented 38% and 40% of our total revenues for the three months ended March 31, 2013 and March 31, 2012, respectively, and we expect that this percentage will continue to decline. Our legacy services revenues have been, and we expect they will continue to be, adversely affected by access line losses. 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; º • º 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; 13 -------------------------------------------------------------------------------- Table of Contents º • º 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; and º • º 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 interest 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. Changes in QCII's assumptions can cause significant changes in the net periodic pension and post-retirement benefits expenses we recognize. 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, 2013 and 2012: Three Months Ended March 31, 2013 2012 (Dollars in millions) Operating revenues $ 2,159 2,260 Operating expenses 1,606 1,794 Operating income 553 466 Other income (expense) (123) (112) Income tax expense 166 136 Net income $ 264 218 Employees (as of March 31) 21,095 24,300 The following table summarizes certain of our selected operational metrics: Three Months Ended March 31, Increase/ 2013 2012 (Decrease) % Change (in thousands) Broadband subscribers 3,367 3,134 233 7% Access lines 7,954 8,413 (459) (5)% During the second quarter of 2012, we updated our methodology for counting broadband subscribers to better align with the methodology used by our ultimate parent company, CenturyLink. We have restated our previously reported amounts to reflect this change. For additional information on our counting methodologies, see "Overview" above. 14 -------------------------------------------------------------------------------- Table of Contents Operating Revenues The following table summarizes our operating revenues: Three Months Ended March 31, Increase/ 2013 2012 (Decrease) % Change (Dollars in millions) Strategic services $ 829 812 17 2% Legacy services 825 900 (75) (8)% Affiliates and other services 505 548 (43) (8)% Total operating revenues $ 2,159 2,260 (101) (4)% Strategic Services Strategic services revenues increased primarily due to volume increases in the number of broadband subscribers as well as volume increases in our Ethernet services. These increases were partially offset by declines in our private line services revenues. Legacy Services Legacy services revenues decreased as a result of lower local services revenues due to access line loss and reduced access services usage related to competitive pressures and product substitution. Legacy services revenues also decreased due to lower traditional WAN services caused by customer migration, product substitution and increased competition. Affiliates and Other Services Affiliates and other services revenues decreased primarily due to less demand for support services and lower USF revenues. Operating Expenses The following table summarizes our operating expenses: Three Months Ended March 31, Increase/ 2013 2012 (Decrease) % Change (Dollars in millions) Cost of services and products (exclusive of depreciation and amortization) $ 645 743 (98) (13)% Selling, general and administrative 269 339 (70) (21)% Operating expenses-affiliates 162 144 18 13% Depreciation and amortization 530 568 (38) (7)% Total operating expenses $ 1,606 1,794 (188) (10)% 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 include third-party telecommunications expenses we incur 15 -------------------------------------------------------------------------------- Table of Contents 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 reflect our contributions to certain 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 other expenses directly related to our network operations. Cost of services and products (exclusive of depreciation and amortization) expenses decreased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to decreased salaries and wages costs associated with the reduction in headcount, reduction in severance payments and decreases in employee benefit costs. The decrease was partially offset by an increase in network 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; taxes (such as property and other taxes) and fees; external commissions; bad debt expense; and other expenses. Selling, general and administrative expenses decreased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to decreased salaries and wages, employee benefit costs, professional fees and lower bad debt expense. 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. Operating expenses-affiliates increased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to higher levels of services provided to us by affiliates. Depreciation and Amortization The following table provides detail regarding depreciation and amortization expense: Three Months Ended March 31, Increase/ 2013 2012 (Decrease) % Change (Dollars in millions) Depreciation $ 270 294 (24) (8)% Amortization 260 274 (14) (5)% Total depreciation and amortization $ 530 568 (38) (7)% Depreciation and amortization expense decreased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to depreciation and amortization rate changes of certain telecommunications equipment and capitalized software. The rate changes are the result of our aged investment in plant and capitalized software becoming fully depreciated or retired at a faster rate than the acquisition of new plant and software. 16 -------------------------------------------------------------------------------- Table of Contents Other Consolidated Results The following table summarizes other income (expense) and income tax expense: Three Months Ended March 31, Increase/ 2013 2012 (Decrease) % Change (Dollars in millions) Interest expense $ (108) (113) (5) (4)% Interest expense-affiliate (16) - 16 nm% Other income 1 1 - nm% Total other income (expense) $ (123) (112) 11 10% Income tax expense $ 166 136 30 22% -------------------------------------------------------------------------------- nm-Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful. Interest Expense Interest expense decreased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to a lower weighted average interest rate on the outstanding debt resulting from several debt financing transactions in the past fifteen months. The decrease was partially offset by a decrease in the amortization of debt premiums which resulted from the accounting for CenturyLink's indirect acquisition of us. See Note 2-Long-Term Debt and Revolving Promissory Note and "Liquidity and Capital Resources" below for additional information about our debt. Interest Expense-Affiliates Affiliate interest expense increased for the three months ended March 31, 2013 primarily due to increased loan balances that we owe to one of our affiliates under an intercompany promissory note. Income Tax Expense The effective tax rate for the three months ended March 31, 2013 was 38.6% compared to 38.4% for the comparative prior year period. 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 promissory notes, 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 promissory notes vary from time to time. Under these arrangements, the majority of our cash balance is transferred on a daily basis to CenturyLink as advances to affiliates. 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 17 -------------------------------------------------------------------------------- Table of Contents amount of these advances. 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. At March 31, 2013, we had a working capital deficit of $1.1 billion, reflecting current liabilities of $2.9 billion and current assets of $1.8 billion, compared to a working capital deficit of $1.3 billion as of December 31, 2012. 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 our future liquidity needs will be met through (i) our cash provided by operating activities, (ii) amounts due to us from CenturyLink and (iii) capital contributions or advances from CenturyLink. Revolving Promissory Note We have a revolving promissory note with an affiliate of CenturyLink that provides us with a funding commitment with an aggregate principle amount available of $1.0 billion through June 30, 2022, of which $707 million was outstanding as of March 31, 2013. As of March 31, 2013, the weighted average interest rate under this note was 6.553%. This revolving promissory note and accrued interest thereon is reflected on our consolidated balance sheets under Note payable-affiliates. Debt and Other Financing Arrangements Approximately $750 million of our floating rate notes will mature on June 15, 2013. Subject to market conditions, we expect to continue to issue debt securities, from time to time, to refinance our maturing debt. The availability, interest rate and other terms of any new borrowings will depend on the credit ratings assigned us by the three major credit rating agencies, among other factors. Following CenturyLink's announcement on February 13, 2013 of changes in its capital allocation plans, two credit agencies downgraded CenturyLink's debt credit ratings. As of the date of this report, the credit ratings for the senior unsecured debt of QC were as follows: Agency Qwest Corporation Standard & Poor's BBB- Moody's Investors Service, Inc. Baa3 Fitch Ratings BBB- Although we do not expect the downgrade of one of our ratings to have a material impact on our access to the capital markets, the recent downgrades of CenturyLink's ratings could, under certain circumstances, limit its access to the capital markets. Additional downgrades of our senior unsecured debt credit ratings would likely raise our borrowing costs and could, under certain circumstances, limit our access to the capital markets. Similarly, additional downgrades of CenturyLink's senior unsecured debt ratings could, under certain circumstances, increase the cost of CenturyLink's borrowing under the Credit Facility, which could indirectly impact us. See "Risk Factors-Risks Affecting our Liquidity and Capital Resources" in Item 1A of this report. 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, 2012. 18 -------------------------------------------------------------------------------- Table of Contents Capital Expenditures We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand our service offerings. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted revenue growth, operating, productivity, expense or service impacts) and our expected return on investment. The amount of capital investment is influenced by, among other things, demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Our capital expenditures continue to be focused on our strategic services, such as video and broadband services. CenturyLink, our ultimate parent, has accepted approximately $35 million of the $90 million available to it from Phase 1 of the Federal Communications Commission's ("FCC") Connect America Fund ("CAF") established by Congress to help telecommunications carriers defray the cost of providing broadband access to remote customers. Of the $35 million, we received approximately $30 million and intend to use the funds to deploy broadband service for up to 39,000 homes in unserved rural areas principally in Colorado, Minnesota, New Mexico and Washington. CenturyLink has determined that restrictions on the use of these funds have made acceptance of additional CAF funds uneconomical. CenturyLink has, however, filed with the FCC a waiver application, which, if granted, would allow us to deploy broadband services with CAF funds to approximately 56,000 more homes in high-cost unserved areas in our markets. We received approximately $28 million in CAF funds during 2012 and received the remaining $3 million in January 2013. The FCC is expected to offer a new round of Phase 2 CAF funding later this year. Pension and Post-retirement Benefit Obligations QCII is subject to material obligations under its existing defined benefit pension and other post-retirement benefit plans. As of the most recent re-measurement date, December 31, 2012, the recognized liabilities for the accounting unfunded status of pension and post-retirement benefit obligations were $948 million and $2.866 billion, respectively. See Note 8-Employee Benefits to the consolidated financial statements in Item 8 of QCII's Annual Report Form 10-K for additional information about QCII's pension and other post-retirement benefit arrangements. A substantial portion of our employees participate in the QCII pension plan. Historically, QCII has only required us to pay our portion of its pension contribution. Our contributions are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of QCII's affiliates. Benefits paid by QCII's qualified pension plan are paid through a trust. Cash funding requirements can be significantly impacted by a variety of factors, including earnings on investments, interest rates, changes in plan benefits and funding laws and regulations. QCII currently does not expect to make a plan contribution in 2013 and 2014. Certain of QCII's post-retirement health care and life insurance benefits plans are unfunded. A trust holds assets that are used to help cover the health care costs of certain retirees. As of December 31, 2012, the fair value of the trust assets was $572 million; however, a portion of these assets is comprised of investments with restricted liquidity. QCII estimates that the more liquid assets in the trust will be adequate to provide continuing reimbursements for covered post-retirement health care costs for approximately four years, based on current circumstances. 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 changes in projected 19 -------------------------------------------------------------------------------- Table of Contents health care costs, returns on plan assets, the timing of maturities of illiquid plan assets and future changes in benefits. QCII's estimated annual long-term rate of return on the pension and post-retirement plans trust assets is 7.5% based on the currently held assets; however, actual returns could vary widely in any given year. Historical Information The following table summarizes our cash flow activities: Three Months Ended March 31, Increase/ 2013 2012 (Decrease) (Dollars in millions) Net cash provided by operating activities $ 750 703 47 Net cash used in investing activities (439) (619) (180) Net cash used in financing activities (308) (87) 221 Net cash provided by operating activities increased primarily due to decreased payments on our accounts payable partially offset by changes in other current assets and liabilities. For additional information about our operating results, see "Results of Operations" above. Net cash used in investing activities decreased in the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to an increase in our advances to affiliates resulting from the majority of our cash balance being transferred on a daily basis to CenturyLink and less payments for property, plant and equipment. Net cash used in financing activities increased in the three months ended March 31, 2013 primarily due to an increase in the dividends paid to QSC compared to the three months ended March 31, 2012. Out-of-Period Adjustment In conjunction with finalizing our 2012 Annual Report on Form 10-K, we discovered that certain transactions with affiliates had been presented incorrectly in our consolidated statement of cash flows for the period ended March 31, 2012. We considered both quantitative and qualitative factors in reaching the conclusion that the correction of the error was immaterial to our previously issued consolidated financial statements. Correcting this error only affected our consolidated statement of cash flows, with the impact for the three months ended March 31, 2012 presented herein, being as follows (in millions): As Reported Error Correction Restated Net cash provided by operating activities $ 1,029 (326) 703 Net cash used in investing activities (1,006) 387 (619) Net cash used in financing activities (26) (61) (87) Certain Matters Related to CenturyLink's Indirect Acquisition of Us Effective after CenturyLink's indirect acquisition of us, we are 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 this agreement is finalized, we will continue to account for income tax expense on a separate return basis. We are also included in certain combined state tax returns filed by CenturyLink and the same accounting applies. 20 -------------------------------------------------------------------------------- Table of Contents 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: April 1, 2011 Three Months Ended thru Total Since March 31, 2013 December 31, 2012 Acquisition (Dollars in millions) Amortized $ 15 201 216 Extinguished(1) - 187 187 Total premiums recognized $ 15 388 403 -------------------------------------------------------------------------------- º (1) º See "Debt and Other Financing Arrangements" for more information. The remaining premium of $127 million as of March 31, 2013 will reduce interest expense in future periods, unless otherwise extinguished. 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. 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 to the consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2012, 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. 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, 2013, we had no such instruments outstanding. There were no material changes to market risks arising from changes in interest rates for the three months ended March 31, 2013, when compared to the disclosures provided in our Annual Report on Form 10-K for the year ended December 31, 2012. 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 21 -------------------------------------------------------------------------------- Table of Contents 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. In addition to historical information, this MD&A includes certain forward-looking statements that are based on current expectations only, and are subject to a number of risks, uncertainties and assumptions, many of which are beyond our control. Actual events and results 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. 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; 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 and net neutrality); our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages, 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, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; CenturyLink's and QCII's ability to use net operating loss carryovers in projected amounts; 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; our continued access to credit markets on favorable terms; our ability to collect our receivables from financially troubled communications companies; any adverse developments in legal or regulatory proceedings involving us or our affiliates; unanticipated increases or other changes in our future cash requirements, whether caused by unanticipated increases in capital expenditures, increases in CenturyLink or QCII's pension funding requirements or otherwise; 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 our Annual Report on Form 10-K for the year ended December 31, 2012, 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. You are further cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to update any of our forward-looking statements for any reason. 22 -------------------------------------------------------------------------------- Table of Contents |