Document and Entity Information

3 Months Ended

Mar. 31, 2014

May 14, 2014

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

Mar. 31, 2014

Document Fiscal Year Focus

2014

Document Fiscal Period Focus

Q1

Amendment Flag

false

Entity Common Stock, Shares Outstanding

1

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)

In Millions, unless otherwise specified

3 Months Ended

Mar. 31, 2014

Mar. 31, 2013

OPERATING REVENUES

Operating revenues

$ 1,690

$ 1,723

Operating revenues-affiliates

521

436

Total operating revenues

2,211

2,159

OPERATING EXPENSES

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

698

645

Selling, general and administrative

285

269

Operating expenses-affiliates

188

162

Depreciation and amortization

498

530

Total operating expenses

1,669

1,606

OPERATING INCOME

542

553

OTHER INCOME (EXPENSE)

Interest expense

(116)

(108)

Interest expense-affiliate

(13)

(16)

Other income

0

1

Total other income (expense)

(129)

(123)

INCOME BEFORE INCOME TAX EXPENSE

413

430

Income tax expense

160

166

NET INCOME

$ 253

$ 264

CONSOLIDATED BALANCE SHEETS (USD $)

In Millions, unless otherwise specified

Mar. 31, 2014

Dec. 31, 2013

CURRENT ASSETS

Cash and cash equivalents

$ 9

$ 14

Accounts receivable, less allowance of $39 and $43

688

738

Advances to affiliates

993

712

Deferred income taxes, net

159

161

Other

153

126

Total current assets

2,002

1,751

NET PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment

10,394

10,193

Accumulated depreciation

(3,254)

(2,985)

Net property, plant and equipment

7,140

7,208

GOODWILL AND OTHER ASSETS

Goodwill

9,354

Customer relationships, less accumulated amortization of $2,179 and $2,012

3,520

3,687

Other intangible assets, less accumulated amortization of $1,043 and $994

961

1,008

Other

207

210

Total goodwill and other assets

14,042

14,259

TOTAL ASSETS

23,184

23,218

CURRENT LIABILITIES

Current maturities of long-term debt

635

637

Accounts payable

506

440

Note payable-affiliate

754

Accrued expenses and other liabilities

Salaries and benefits

198

217

Income and other taxes

246

206

Other

180

126

Advance billings and customer deposits

323

320

Total current liabilities

2,842

2,700

LONG-TERM DEBT

6,898

6,921

DEFERRED CREDITS AND OTHER LIABILITIES

Deferred revenue

159

161

Deferred income taxes, net

2,384

2,473

Affiliates obligations, net

1,250

1,263

Other

85

87

Total deferred credits and other liabilities

3,878

3,984

COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDER'S EQUITY

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

10,050

Accumulated deficit

(484)

(437)

Total stockholder's equity

9,566

9,613

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

$ 23,184

$ 23,218

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)

In Millions, except Share data, unless otherwise specified

Mar. 31, 2014

Dec. 31, 2013

Statement of Financial Position [Abstract]

Accounts receivable, allowance (dollars)

$ 39

$ 43

Customer relationships, accumulated amortization

2,179

2,012

Other intangible assets, accumulated amortization

$ 1,043

$ 994

Common stock, share outstanding (in shares)

1

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)

In Millions, unless otherwise specified

3 Months Ended

Mar. 31, 2014

Mar. 31, 2013

OPERATING ACTIVITIES

Net income

$ 253

$ 264

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

Depreciation and amortization

498

530

Deferred income taxes

(87)

(49)

Provision for uncollectible accounts

11

13

Long-term debt premium amortization

(11)

(15)

Changes in current assets and current liabilities:

Accounts receivable

39

(29)

Accounts payable

64

49

Accrued income and other taxes

40

34

Other current assets and other current liabilities, net

8

(1)

Other current assets and other current liabilities - affiliate

(13)

0

Changes in other noncurrent assets and liabilities, net

(1)

(7)

Changes in affiliates obligations, net

(13)

(41)

Other, net

2

Net cash provided by operating activities

816

750

INVESTING ACTIVITIES

Payments for property, plant and equipment and capitalized software

(226)

(262)

Changes in advances to affiliates

(281)

(177)

Net cash used in investing activities

(507)

(439)

FINANCING ACTIVITIES

Payments of long-term debt

(14)

(24)

Dividends paid to Qwest Services Corporation

(300)

Changes in note payable-affiliate

0

16

Net cash used in financing activities

(314)

(308)

Net (decrease) increase in cash and cash equivalents

(5)

3

Cash and cash equivalents at beginning of period

14

8

Cash and cash equivalents at end of period

9

11

Supplemental cash flow information:

Income taxes (paid), net

(248)

(215)

Interest (paid) (net of capitalized interest of $4 and $4)

$ (92)

$ (87)

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

In Millions, unless otherwise specified

3 Months Ended

Mar. 31, 2014

Mar. 31, 2013

Statement of Cash Flows [Abstract]

Interest (paid), capitalized interest

$ 4

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (USD $)

In Millions, unless otherwise specified

Total

COMMON STOCK

ACCUMULATED DEFICIT

Balance at beginning of period at Dec. 31, 2012

$ 10,050

$ (76)

Net income

264

Increase (Decrease) in Stockholder's Equity

Dividends declared to Qwest Services Corporation

(300)

Balance at end of period at Mar. 31, 2013

9,938

10,050

(112)

Balance at beginning of period at Dec. 31, 2013

9,613

10,050

(437)

Net income

253

Increase (Decrease) in Stockholder's Equity

Dividends declared to Qwest Services Corporation

(300)

Balance at end of period at Mar. 31, 2014

$ 9,566

$ 10,050

$ (484)

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, 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 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, 2013, 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 three 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, 2013.

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.

Effective January 2014, we changed the estimates of the remaining economic lives of certain switch and circuit network equipment. These changes resulted in a net increase in depreciation expense of approximately $5 million during the first quarter of 2014 and are expected to result in a net increase in depreciation expense of approximately $20 million for the year ending December 31, 2014. This net increase in depreciation expense, net of tax, reduced consolidated net income by approximately $3 million for the three months ended March 31, 2014 and is expected to reduce consolidated net income by approximately $12 million for the year ending December 31, 2014.

Long-Term Debt and Revolving Promissory Note

As of the following dates indicated, our long-term debt, including unamortized discounts and premiums and note payable-affiliate, was as follows:



	Interest Rates	Maturities	March 31, 2014			December 31, 2013
			(Dollars in millions)
Senior notes	6.125% - 8.375%	2014 - 2053	$	7,411		7,411
Capital lease and other obligations	Various	Various	58			72
Unamortized premiums (discounts), net			64			75
Total long-term debt			7,533			7,558
Less current maturities			(635		)	(637	)
Long-term debt, excluding current maturities			$	6,898		6,921
Note payable-affiliate	6.619%	2022	$	754		754

Revolving Promissory Note

We are currently indebted to an affiliate of our ultimate parent company, CenturyLink, Inc. ("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. 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.

Covenants

As of March 31, 2014, 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 as of the following dates:



		March 31, 2014			December 31, 2013
	Input Level	Carrying Amount		Fair Value	Carrying Amount	Fair Value
		(Dollars in millions)
Liabilities-Long-term debt, excluding capital lease obligations	2	$	7,475	7,656	7,486	7,226

Products and Services Revenues

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

Our operating revenues for our products and services consisted of the following revenue categorization for the three months ended March 31, 2014 and 2013:



	Three Months Ended March 31,
	2014		2013
	(Dollars in millions)
Strategic services	$	856	829
Legacy services	767		825
Affiliates and other services	588		505
Total operating revenues	$	2,211	2,159

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.

USF surcharges and transaction taxes included in billings to our customers are reflected on a gross basis in our statements of operations (included in both operating revenues and expenses) and aggregated approximately $39 million and $40 million for the three months ended March 31, 2014 and 2013, respectively. The USF surcharges are included in affiliates and other services and transaction taxes are included in legacy revenues.

Our operations are integrated into and reported as part of the consolidated segment data 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 believe we have one reportable segment.

Commitments and Contingencies

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 any insurance coverage or indemnification rights, will have a material adverse effect on our financial position, results of operations or cash flows.

We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities. These cases have progressed to various stages and one or more may go to trial in the coming 24 months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared both to litigate the matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.

We are aware of disputes and litigation within the industry, including disputes involving us, regarding the proper charges to be applied between interexchange and local exchange carriers for certain calls between mobile and wireline devices that are routed through an interexchange carrier. Some carriers are refusing to pay these access charges and some are seeking refunds of past charges paid. As a local exchange carrier, we assess the charges in question. The outcome of these disputes is currently not predictable. If we are required to stop assessing these charges or to pay refunds of any such charges, our financial results could be negatively affected.

CenturyLink and its affiliates 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 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.

Dividends

During the three months ended March 31, 2014, we declared and paid dividends to our direct parent company, Qwest Services Corporation ("QSC"), of $300 million. Dividends paid are reflected on our consolidated statements of cash flows as financing activities.

Other Financial Information

Other Current Assets

The following table presents details of our other current assets in our consolidated balance sheets as of the following dates:



	March 31, 2014		December 31, 2013
	(Dollars in millions)
Prepaid expenses	$	66	47
Other	87		79
Total other current assets	$	153	126

Selected Current Liabilities

Current liabilities reflected in our consolidated balance sheets include accounts payable as of the following dates:

Included in accounts payable at March 31, 2014 and December 31, 2013 were $13 million and $11 million, respectively, associated with capital expenditures.

Long-Term Debt and Revolving Promissory Note (Tables)

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

As of the following dates indicated, our long-term debt, including unamortized discounts and premiums and note payable-affiliate, was as follows:



	Interest Rates	Maturities	March 31, 2014			December 31, 2013
			(Dollars in millions)
Senior notes	6.125% - 8.375%	2014 - 2053	$	7,411		7,411
Capital lease and other obligations	Various	Various	58			72
Unamortized premiums (discounts), net			64			75
Total long-term debt			7,533			7,558
Less current maturities			(635		)	(637	)
Long-term debt, excluding current maturities			$	6,898		6,921
Note payable-affiliate	6.619%	2022	$	754		754

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 as of the following dates:



		March 31, 2014			December 31, 2013
	Input Level	Carrying Amount		Fair Value	Carrying Amount	Fair Value
		(Dollars in millions)
Liabilities-Long-term debt, excluding capital lease obligations	2	$	7,475	7,656	7,486	7,226

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 revenue categorization for the three months ended March 31, 2014 and 2013:



	Three Months Ended March 31,
	2014		2013
	(Dollars in millions)
Strategic services	$	856	829
Legacy services	767		825
Affiliates and other services	588		505
Total operating revenues	$	2,211	2,159

Other Financial Information (Tables)

Schedule of other current assets reflected on the entity's balance sheet

The following table presents details of our other current assets in our consolidated balance sheets as of the following dates:



	March 31, 2014		December 31, 2013
	(Dollars in millions)
Prepaid expenses	$	66	47
Other	87		79
Total other current assets	$	153	126

Schedule of accounts payable

Current liabilities reflected in our consolidated balance sheets include accounts payable as of the following dates:

Basis of Presentation (Details) (USD $)

In Millions, unless otherwise specified

3 Months Ended

12 Months Ended

Mar. 31, 2014

state

Mar. 31, 2013

Mar. 31, 2014

Change in Estimates of Economic Lives of Property, Plant and Equipment [Member]

Dec. 31, 2014

Forecast

Change in Estimates of Economic Lives of Property, Plant and Equipment [Member]

Change in Accounting Estimate [Line Items]

Number of states in which entity operates (states)

14

Depreciation

$ 5

$ 20

Net Income

$ (253)

$ (264)

$ 3

$ 12

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

Mar. 31, 2014

Dec. 31, 2013

Long-term debt

Unamortized premiums (discounts), net

$ 64,000,000

$ 75,000,000

Total long-term debt

7,533,000,000

7,558,000,000

Less current maturities

(635,000,000)

(637,000,000)

Long-term debt, excluding current maturities

6,898,000,000

6,921,000,000

Senior notes

Long-term debt

7,411,000,000

Senior notes |
Minimum

Long-term debt

Interest rate (as a percent)

6.125%

Senior notes |
Maximum

Long-term debt

Interest rate (as a percent)

8.375%

Capital lease and other obligations

Long-term debt

58,000,000

72,000,000

Revolving promissory note |
CenturyLink, Inc. affiliate

Long-term debt

Maximum borrowing capacity

1,000,000,000

Weighted average interest rate (as a percent)

6.619%

Note payable-affiliate

754,000,000

Accrued interest payable on related party note payable

$ 13,000,000

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

In Millions, unless otherwise specified

Mar. 31, 2014

Dec. 31, 2013

Carrying Amount

Liabilities

Liabilities-Long-term debt, excluding capital lease obligations

$ 7,475

$ 7,486

Fair Value

Liabilities

Liabilities-Long-term debt, excluding capital lease obligations

$ 7,656

$ 7,226

Products and Services Revenues (Details) (USD $)

In Millions, unless otherwise specified

3 Months Ended

Mar. 31, 2014

segment

March 31, 2014

December 31, 2013

(Dollars in millions)

Accounts payable