Document and Entity Information

9 Months Ended

Sep. 30, 2013

Nov. 13, 2013

Document and Entity Information

Entity Registrant Name

QWEST CORP

Entity Central Index Key

0000068622

Current Fiscal Year End Date

--12-31

Entity Filer Category

Non-accelerated Filer

Entity Current Reporting Status

Yes

Document Type

10-Q

Document Period End Date

Sep. 30, 2013

Document Fiscal Year Focus

2013

Document Fiscal Period Focus

Q3

Amendment Flag

false

Entity Common Stock, Shares Outstanding

1

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)

In Millions, unless otherwise specified

3 Months Ended

9 Months Ended

Sep. 30, 2013

Sep. 30, 2012

Sep. 30, 2013

Sep. 30, 2012

OPERATING REVENUES

Operating revenues

$ 1,699

$ 1,749

$ 5,125

$ 5,298

Operating revenues-affiliates

489

434

1,421

1,340

Total operating revenues

2,188

2,183

6,546

6,638

OPERATING EXPENSES

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

715

737

2,050

2,174

Selling, general and administrative

262

249

801

899

Operating expenses-affiliates

183

169

530

474

Depreciation and amortization

535

569

1,594

1,711

Total operating expenses

1,695

1,724

4,975

5,258

OPERATING INCOME

493

459

1,571

1,380

OTHER INCOME (EXPENSE)

Interest expense

(116)

(109)

(336)

(334)

Interest expense-affiliate

(20)

(4)

(48)

(8)

Net loss on early retirement of debt

0

(1)

0

(47)

Other income (expense)

0

1

(1)

Total other income (expense)

(136)

(114)

(383)

(390)

INCOME BEFORE INCOME TAX EXPENSE

357

345

1,188

990

Income tax expense

139

133

460

382

NET INCOME

$ 218

$ 212

$ 728

$ 608

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)

In Millions, unless otherwise specified

3 Months Ended

9 Months Ended

Sep. 30, 2013

Sep. 30, 2012

Sep. 30, 2013

Sep. 30, 2012

Statement of Other Comprehensive Income [Abstract]

NET INCOME

$ 218

$ 212

$ 728

$ 608

OTHER COMPREHENSIVE INCOME:

COMPREHENSIVE INCOME

$ 218

$ 212

$ 728

$ 608

CONSOLIDATED BALANCE SHEETS (USD $)

In Millions, unless otherwise specified

Sep. 30, 2013

Dec. 31, 2012

CURRENT ASSETS

Cash and cash equivalents

$ 13

$ 8

Accounts receivable, less allowance of $42 and $46

740

709

Advances to affiliates

712

593

Deferred income taxes, net

145

149

Other

123

114

Total current assets

1,733

1,573

NET PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment

10,042

9,242

Accumulated depreciation

(2,788)

(2,011)

Net property, plant and equipment

7,254

7,231

GOODWILL AND OTHER ASSETS

Goodwill

9,369

Customer relationships, less accumulated amortization of $1,843 and $1,320

3,856

4,379

Other intangible assets, less accumulated amortization of $910 and $704

1,061

1,212

Other

214

181

Total goodwill and other assets

14,500

15,141

TOTAL ASSETS

23,487

23,945

CURRENT LIABILITIES

Current maturities of long-term debt

42

804

Accounts payable

475

456

Note payable-affiliate

741

701

Accrued expenses and other liabilities

Salaries and benefits

229

253

Income and other taxes

218

215

Interest

121

83

Other

41

19

Advance billings and customer deposits

328

301

Total current liabilities

2,195

2,832

LONG-TERM DEBT

7,540

6,821

DEFERRED CREDITS AND OTHER LIABILITIES

Deferred revenue

143

130

Deferred income taxes, net

2,443

2,629

Affiliates obligations, net

1,314

1,442

Other

100

117

Total deferred credits and other liabilities

4,000

4,318

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDER'S EQUITY

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

10,050

Accumulated deficit

(298)

(76)

Total stockholder's equity

9,752

9,974

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

$ 23,487

$ 23,945

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)

In Millions, except Share data, unless otherwise specified

Sep. 30, 2013

Dec. 31, 2012

Statement of Financial Position [Abstract]

Accounts receivable, allowance (in dollars)

$ 42

$ 46

Customer relationships, accumulated amortization

1,843

1,320

Other intangible assets, accumulated amortization

$ 910

$ 704

Common stock, share outstanding (in shares)

1

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)

In Millions, unless otherwise specified

9 Months Ended

Sep. 30, 2013

Sep. 30, 2012

OPERATING ACTIVITIES

Net income

$ 728

$ 608

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

Depreciation and amortization

1,594

1,711

Deferred income taxes

(180)

(123)

Provision for uncollectible accounts

46

59

Long-term debt premium amortization

(40)

(50)

Net loss on early retirement of debt

0

47

Changes in current assets and current liabilities:

Accounts receivable

(77)

Accounts payable

17

(53)

Accrued income and other taxes

3

5

Other current assets and other current liabilities, net

68

59

Changes in other noncurrent assets and liabilities, net

(6)

(11)

Changes in other noncurrent assets and liabilities-affiliates

(130)

(101)

Other, net

9

5

Net cash provided by operating activities

2,032

2,079

INVESTING ACTIVITIES

Payments for property, plant and equipment and capitalized software

(956)

(896)

Changes in advances to affiliates

(119)

(533)

Proceeds from sale of property

0

133

Net cash used in investing activities

(1,075)

(1,296)

FINANCING ACTIVITIES

Net proceeds from issuance of long-term debt

752

896

Payments of long-term debt

(794)

(1,419)

Early retirement of debt costs

0

(178)

Dividends paid to Qwest Services Corporation

(950)

(700)

Changes in notes payable-affiliates

40

685

Changes in advances from affiliates

0

(61)

Net cash provided by financing activities

(952)

(777)

Net increase in cash and cash equivalents

5

6

Cash and cash equivalents at beginning of period

8

3

Cash and cash equivalents at end of period

13

9

Supplemental cash flow information:

Income taxes (paid), net

(636)

(359)

Interest (paid) (net of capitalized interest of $12 and $14)

$ (344)

$ (355)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) (USD $)

In Millions, unless otherwise specified

9 Months Ended

Sep. 30, 2013

Sep. 30, 2012

Statement of Cash Flows [Abstract]

Interest (paid), capitalized interest

$ 12

$ 14

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (USD $)

In Millions, unless otherwise specified

Total

COMMON STOCK

(ACCUMULATED DEFICIT) RETAINED EARNINGS

Balance at beginning of period at Dec. 31, 2011

$ 9,950

$ (85)

Increase (Decrease) in Stockholder's Equity

Tax benefit of pension deduction

119

Net income

608

Dividends declared to Qwest Services Corporation

(390)

Balance at end of period at Sep. 30, 2012

10,202

10,069

133

Balance at beginning of period at Dec. 31, 2012

9,974

10,050

(76)

Increase (Decrease) in Stockholder's Equity

Tax benefit of pension deduction

0

Net income

728

Dividends declared to Qwest Services Corporation

(950)

Balance at end of period at Sep. 30, 2013

$ 9,752

$ 10,050

$ (298)

Basis of Presentation

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 are an indirect subsidiary of Qwest Communications International Inc. ("QCII"), which was acquired by CenturyLink, Inc. ("CenturyLink") on April 1, 2011.

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 consolidated balance sheet as of December 31, 2012, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations for the first nine months of the year are not necessarily indicative of the consolidated results of operations that might be expected for the entire year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.

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.

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 September 30, 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 nine months ended September 30, 2012 presented herein, being as follows (in millions):



	As Reported			Error Correction		Restated
Net cash provided by operating activities	$	2,713		(634	)	2,079
Net cash used in investing activities	(1,784		)	488		(1,296	)
Net cash used in financing activities	(923		)	146		(777	)

Goodwill

We test our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is September 30, at which date we test our one reporting unit, Qwest.

We compare Qwest’s estimated fair value to the carrying value of equity. If the estimated fair value of Qwest is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the Qwest is less than the carrying value, a second calculation is required in which the implied fair value of goodwill is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than its carrying value of goodwill, goodwill must be written down to its implied fair value.

At September 30, 2013, as a result of changes in our forecasted cash flows since our previous quantitative assessment, we did not have a baseline valuation upon which to perform a qualitative assessment. Therefore, we are in the process of completing our goodwill impairment testing by considering both a market approach and a discounted cash flow method. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows beyond the cash flows from the discrete projection period.

Our ultimate parent, CenturyLink, has not completed its goodwill impairment test as of September 30, 2013, and as a result, we also have not completed our impairment test; however, based on our analysis performed thus far, we do not anticipate an impairment of our goodwill. We expect to complete our impairment analysis prior to reporting our financial results for the fourth quarter of 2013.

Long-Term Debt and Revolving Promissory Note

Long-term debt, including unamortized discounts and premiums, is as follows:



	Interest Rates	Maturities	September 30, 2013			December 31, 2012
			(Dollars in millions)
Senior notes	6.125% - 8.375%	2014 - 2053	$	7,411		7,386
Capital lease and other obligations	Various	Various	85			112
Unamortized premiums, net			86			127
Total long-term debt			7,582			7,625
Less current maturities			(42		)	(804	)
Long-term debt, excluding current maturities			$	7,540		6,821

New Issuance

On May 23, 2013, QC issued $775 million aggregate principal amount of 6.125% Notes due 2053, including $25 million principal amount that was sold pursuant to an over-allotment option granted to the underwriters for the offering, in exchange for net proceeds, after deducting underwriting discounts and expenses, of approximately $752 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after June 1, 2018 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.

Repayment

On June 17, 2013, QC paid at maturity the $750 million principal amount of its floating rate Notes.

Revolving Promissory Note

QC has a revolving promissory note with an affiliate of our ultimate parent, CenturyLink, Inc. ("CenturyLink") that provides us with a funding commitment with an aggregate principal amount available of $1.0 billion through June 30, 2022, of which $741 million was outstanding as of September 30, 2013. As of September 30, 2013, the weighted average interest rate under this note was 6.783%. This revolving promissory note and accrued interest thereon is reflected on our consolidated balance sheets as a current liability under note payable—affiliate.

Covenants

As of September 30, 2013, we believe we were in compliance with the provisions and covenants of our debt agreements.

Fair Value Disclosure

Our financial instruments consist of cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable, note payable—affiliate and long-term debt, excluding capital lease obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable, and note payable—affiliate 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 Financial Accounting Standards Board ("FASB").

We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.

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 1		Observable inputs such as quoted market prices in active markets.
Level 2		Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3		Unobservable inputs in which little or no market data exists.

The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease obligations, as well as the input level used to determine the fair values:



		September 30, 2013			December 31, 2012
	Input Level	Carrying Amount		Fair Value	Carrying Amount	Fair Value
		(Dollars in millions)
Liabilities—Long-term debt, excluding capital lease obligations	2	$	7,497	7,450	7,513	8,019

Products and Services Revenues

We are an integrated communications company engaged primarily in providing an array of communications services, including local voice, network access, private line (including special access), broadband, Ethernet, data, wireless and video services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services. We categorize our products and services revenues into the following three categories:


•	Strategic services, which include primarily private line (including special access), broadband, Ethernet, video (including resold satellite video services) and Verizon Wireless services;


•	Legacy services, which include primarily local voice, 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 as well as network support and technical services.

Our operating revenues for our products and services consisted of the following categories:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2013		2012	2013	2012
	(Dollars in millions)
Strategic services	$	835	819	2,495	2,442
Legacy services	797		860	2,427	2,634
Affiliates and other services	556		504	1,624	1,562
Total operating revenues	$	2,188	2,183	6,546	6,638

We do not have any single external customer that provides more than 10% of our total revenue. Substantially all of our revenue comes from customers located in the United States.

Affiliates and other services revenues include revenues from universal service funds which allow us to recover a portion of our costs under federal and state cost recovery mechanisms and certain surcharges to our customers, including billings for our required contributions to several USF programs.

The table below presents the aggregate USF surcharges recognized on a gross basis:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2013		2012	2013	2012
	(Dollars in millions)
USF and surcharges included in operating revenues and expenses	$	39	42	116	129

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. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we have one reportable segment.

Commitments and Contingencies

CenturyLink and Qwest Communications International Inc. ("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 an indirect 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 and QCII's quarterly and annual reports filed with the SEC. Because we are not a party to any of these matters, we have not accrued any liabilities for these matters.

From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to rate making, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third party tort actions. The outcome of these other proceedings is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and insurance coverage, will have a material adverse effect on our financial position, results of operations or cash flows.

Labor Union Contracts

Approximately 12,000 or 53% of our employees are members of various bargaining units represented by the Communications Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW") and are subject to collective bargaining agreements that expired October 6, 2012. Since the expirations, we have been negotiating the terms of new agreements. Recently, we reached conditional agreements with CWA District 7 and IBEW Local 206 for a four-year collective bargaining agreement covering approximately 12,000 of our employees. After rejecting the initial agreements, the CWA and IBEW members approved the second agreements and they became effective on October 25, 2013. The new agreements will expire on October 7, 2017.

Dividends

During the nine months ended September 30, 2013, we paid dividends to Qwest Services Corporation ("QSC") of $950 million, all of which were declared during the nine months ended September 30, 2013. Dividends paid are reflected on our consolidated statements of cash flows as financing activities.

Basis of Presentation (Tables)

Schedule of correcting error

Correcting this error only affected our consolidated statement of cash flows, with the impact for the nine months ended September 30, 2012 presented herein, being as follows (in millions):



	As Reported			Error Correction		Restated
Net cash provided by operating activities	$	2,713		(634	)	2,079
Net cash used in investing activities	(1,784		)	488		(1,296	)
Net cash used in financing activities	(923		)	146		(777	)

Long-Term Debt and Revolving Promissory Note (Tables)

Schedule of long-term debt, including unamortized discounts and premiums

Long-term debt, including unamortized discounts and premiums, is as follows:



	Interest Rates	Maturities	September 30, 2013			December 31, 2012
			(Dollars in millions)
Senior notes	6.125% - 8.375%	2014 - 2053	$	7,411		7,386
Capital lease and other obligations	Various	Various	85			112
Unamortized premiums, net			86			127
Total long-term debt			7,582			7,625
Less current maturities			(42		)	(804	)
Long-term debt, excluding current maturities			$	7,540		6,821

Fair Value Disclosure (Tables)

Schedule of the three input levels in the hierarchy of fair value measurements

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 1		Observable inputs such as quoted market prices in active markets.
Level 2		Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3		Unobservable inputs in which little or no market data exists.

Schedule of carrying amounts and estimated fair values of long-term debt, excluding capital lease obligations, and input level to determine fair values

The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease obligations, as well as the input level used to determine the fair values:



		September 30, 2013			December 31, 2012
	Input Level	Carrying Amount		Fair Value	Carrying Amount	Fair Value
		(Dollars in millions)
Liabilities—Long-term debt, excluding capital lease obligations	2	$	7,497	7,450	7,513	8,019

Products and Services Revenues (Tables)

Schedule of operating revenues by products and services

Our operating revenues for our products and services consisted of the following categories:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2013		2012	2013	2012
	(Dollars in millions)
Strategic services	$	835	819	2,495	2,442
Legacy services	797		860	2,427	2,634
Affiliates and other services	556		504	1,624	1,562
Total operating revenues	$	2,188	2,183	6,546	6,638

Schedule of aggregate USF surcharges recognized on a gross basis

The table below presents the aggregate USF surcharges recognized on a gross basis:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2013		2012	2013	2012
	(Dollars in millions)
USF and surcharges included in operating revenues and expenses	$	39	42	116	129

Basis of Presentation (Details) (USD $)

In Millions, unless otherwise specified

9 Months Ended

Sep. 30, 2013

state

Sep. 30, 2012

Number of states in which service is provided (states)

14

Net cash provided by operating activities

$ 2,032

$ 2,079

Net cash used in investing activities

(1,075)

(1,296)

Net cash used in financing activities

(952)

(777)

Correction of presentation of certain transactions with affiliates in consolidated statements of cash flows |
As Reported

Net cash provided by operating activities

2,713

Net cash used in investing activities

(1,784)

Net cash used in financing activities

(923)

Correction of presentation of certain transactions with affiliates in consolidated statements of cash flows |
Error Correction

Net cash provided by operating activities

(634)

Net cash used in investing activities

488

Net cash used in financing activities

$ 146

Long-Term Debt and Revolving Promissory Note (Details) (USD $)

9 Months Ended

0 Months Ended

Sep. 30, 2013

Dec. 31, 2012

Sep. 30, 2013

Senior notes

Dec. 31, 2012

Senior notes

Sep. 30, 2013

Senior notes

Minimum

Sep. 30, 2013

Senior notes

Maximum

Sep. 30, 2013

Capital lease and other obligations

Dec. 31, 2012

Capital lease and other obligations

May 23, 2013

6.125% Notes due 2053

Qwest Corporation

Jun. 17, 2013

Floating rate notes due 2013

Qwest Corporation

Sep. 30, 2013

Revolving promissory note

CenturyLink, Inc. affiliate

Long-term debt

Interest rate (as a percent)

6.125%

8.375%

6.125%

Unamortized premiums, net

$ 86,000,000

$ 127,000,000

Total long-term debt

7,582,000,000

7,625,000,000

7,411,000,000

7,386,000,000

85,000,000

112,000,000

Less current maturities

(42,000,000)

(804,000,000)

Long-term debt, excluding current maturities

7,540,000,000

6,821,000,000

Principal amount of notes issued

775,000,000

Principal amount of debt that was sold pursuant to an over-allotment option granted to the underwriters

25,000,000

Net proceeds from issuance of debt

752,000,000

Redemption price as a percentage of principal amount of notes plus accrued interest (as a percent)

100.00%

Principal amount of notes repaid

750,000,000

Maximum borrowing capacity

1,000,000,000.0

Amount outstanding

$ 741,000,000

Weighted average interest rate (as a percent)

6.783%

Fair Value Disclosure (Details) (Input Level 2, Fair Value, USD $)

In Millions, unless otherwise specified

Sep. 30, 2013

Dec. 31, 2012

Carrying Amount

Liabilities

Liabilities—Long-term debt, excluding capital lease obligations

$ 7,497

$ 7,513

Fair Value

Liabilities

Liabilities—Long-term debt, excluding capital lease obligations

$ 7,450

$ 8,019

Products and Services Revenues (Details) (USD $)

In Millions, unless otherwise specified

3 Months Ended

9 Months Ended

Sep. 30, 2013

Sep. 30, 2012

Sep. 30, 2013

segment