ITEM 1A. RISK FACTORS
Any of the following risks could materially and adversely affect our business, financial condition, results of operations, liquidity or
prospects. The risks described below are not the only risks facing us. Please be aware that additional risks and uncertainties not currently known to us or that we currently deem to be immaterial
could also materially and adversely affect our business operations.
Risks Affecting Our Business
Increasing competition, including product substitution, continues to cause access line losses, which has adversely affected and could continue to adversely affect our
operating results and financial condition.
We compete in a rapidly evolving and highly competitive market, and we expect competition to continue to intensify. We are facing
greater competition from a variety of sources, including cable companies, wireless providers, broadband companies, resellers and sales agents and facilities-based providers using their own networks as
well as those leasing parts of our network. In addition, regulatory developments over the past several years have generally increased competitive pressures on our business. Due to some of these and
other factors, we continue to lose access lines.
Some
of our current and potential competitors (i) offer a more comprehensive range of communications products and services, (ii) have market presence, engineering and
technical capabilities, and financial and other resources greater than ours, (iii) own larger and more diverse networks, (iv) conduct operations or raise capital at a lower cost than us,
(v) are subject to less regulation, (vi) offer greater online content or (vii) have substantially stronger brand names. Consequently, these competitors may be better equipped to
provide more attractive offerings, to charge lower prices for their products and services, to develop and expand their communications and network infrastructures more quickly, to adapt more swiftly to
new or emerging technologies and changes in customer requirements, and to devote greater resources to the marketing and sale of their products and services.
Competition
could adversely impact us in several ways, including (i) the loss of customers and market share, (ii) the possibility of customers reducing their usage of our
services or shifting to less profitable
services, (iii) reduced traffic on our networks, (iv) our need to expend substantial time or money on new capital improvement projects, (v) our need to lower prices or increase
marketing expenses to remain competitive and (vi) our inability to diversify by successfully offering new products or services.
We
are continually taking steps to respond to these competitive pressures, but these efforts may not be successful. Our operating results and financial condition would be adversely
affected if these initiatives are unsuccessful or insufficient and if we otherwise are unable to sufficiently stem or offset our continuing access line losses and our revenue declines significantly
without corresponding cost reductions. If this occurred, our ability to service debt and pay other obligations would also be adversely affected.
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Rapid changes in technology and markets could require substantial expenditure of financial and other resources in excess of contemplated levels, and any inability to respond
to those changes could reduce our market share and adversely affect our operating results and financial condition.
The communications industry is experiencing significant technological changes, many of which are reducing demand for our traditional
voice services or are enabling our current customers to reduce or bypass use of our networks. Similarly, the information technology services industry is experiencing rapid changes in technologies.
Further technological change could require us to expend capital or other resources in excess of currently contemplated levels or to forgo the development or provision of products or services that
others can provide more efficiently. If we are not able to develop new products and services to keep pace with technological advances, or if those products and services are not widely accepted by
customers, our ability to compete could be adversely affected and our market share could decline. Any inability to effectively respond to changes in technology and markets could also adversely affect
our operating results and financial condition, as well as our ability to service debt and pay other obligations.
Our legacy services continue to generate declining revenues, and our efforts to offset these declines may not be successful.
The telephone industry has experienced a decline in access lines and network access revenues, which, coupled with the other changes
resulting from competitive, technological and regulatory developments, continue to place downward pressure on the revenues we generate from our legacy services.
We
have taken a variety of steps to counter these declines, including:
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an increased focus on selling a broader range of strategic services, including broadband, video (including resold
satellite video services) and wireless voice services provided by Verizon Wireless;
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an increased focus on serving a broader range of business, governmental and wholesale customers; and
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greater use of service bundles.
However,
some of these strategic services generate lower profit margins than our traditional services, and some can be expected to experience slowing growth as increasing numbers of our
existing or potential customers subscribe to these newer products. Moreover, we cannot assure you that the revenues generated from our new offerings will offset revenue losses associated from reduced
sales of our legacy products. Similarly, we cannot assure you that our new service offerings will be as successful as anticipated. In addition, our reliance on services provided by others could
constrain our flexibility, as described further below.
Unfavorable general economic conditions could negatively impact our operating results and financial condition.
Unfavorable general economic conditions, including the unstable economy and the current credit market environment, could negatively
affect our business. Worldwide economic growth has been sluggish since 2008, and many experts believe that a confluence of factors in the United States, Europe, Asia and developing countries may
result in a prolonged period of economic downturn, slow growth or economic uncertainty. While it is difficult to predict the ultimate impact of these general economic conditions, these conditions
could adversely affect the affordability of and consumer demand for some of our products and services and could cause customers to shift to lower priced products and services or to delay or forgo
purchases of our products and services. Any one or more of these circumstances could cause our revenues to continue declining. Also, our customers may encounter financial hardships
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or
may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to us. In addition, as discussed below, unstable economic and credit markets may
preclude us from refinancing maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at all. For these reasons, among others, if
the current economic conditions persist or decline, this could adversely affect our operating results and financial condition, as well as our ability to raise capital.
We could be harmed by security breaches, damages or other significant disruptions or failures of our networks, IT infrastructure or related systems, or of those we operate
for certain of our customers.
To be successful, we will need to continue providing our customers with a high capacity, reliable and secure network. We face the risk,
as does any company, of a security breach, whether through cyber attack, malware, computer viruses, sabotage, or other significant disruption of our IT infrastructure and related systems (including
our billing systems). As a communications and IT company, we face an added risk of a security breach or other significant disruption of our public networks or IT infrastructure and related systems
that we develop, install, operate and maintain for certain of our business and governmental customers. Moreover, as a communications and IT company, we face a heightened risk of a security breach or
disruption from unauthorized access to our and our customers' proprietary or classified information on our public networks or internal systems or the systems that we operate and maintain for certain
of our customers.
Although
we make significant efforts to maintain the security and integrity of these types of information and systems, there can be no assurance that our security efforts and measures
will be effective or that attempted security breaches or disruptions would not be successful or damaging, especially in light of the growing sophistication of cyber attacks and intrusions. We may be
unable to anticipate all potential types of attacks or intrusions or to implement adequate security barriers or other preventative measures.
Additional
risks to our network and infrastructure include:
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power losses or physical damage, whether caused by fire, adverse weather conditions, terrorism or otherwise;
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capacity limitations;
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software and hardware defects or malfunctions;
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programming, processing and other human error; and
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other disruptions that are beyond our control.
Network
disruptions, security breaches and other significant failures of the above-described systems could:
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disrupt the proper functioning of these networks and systems and therefore our operations or those of certain of our
customers;
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result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary,
confidential, sensitive or otherwise valuable information of ours, our customers or our customers' end users, including trade secrets, which others could use for competitive, disruptive, destructive
or otherwise harmful purposes and outcomes;
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require significant management attention or financial resources to remedy the damages that result or to change our
systems;
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subject us to claims for contract breach, damages, credits, fines, penalties, termination or other remedies, particularly
with respect to service standards set by state regulatory commissions; or
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result in a loss of business, damage our reputation among our customers and the public generally, subject us to additional
regulatory scrutiny or expose us to litigation.
Likewise,
our ability to expand and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new
service offering initiatives. Our inability to expand or upgrade our technology infrastructure could have adverse consequences, which could include the delayed implementation of new service offerings,
increased acquisition integration costs, service or billing interruptions, and the diversion of development resources.
Any
or all of the foregoing developments could have a negative impact on our results of operations, financial condition and cash flows.
We may need to defend ourselves against claims that we infringe upon others' intellectual property rights, or we may need to seek third-party licenses to expand our product
offerings.
From time to time, we receive notices from third parties or are named in lawsuits filed by third parties claiming we have infringed or
are infringing upon their intellectual property rights. We may receive similar notices or be involved in similar lawsuits in the future. Responding to these claims may require us to expend significant
time and money defending our use of affected technology, may require us to enter into licensing agreements requiring royalty payments that we would not otherwise have to pay or may require us to pay
damages. If we are required to take one or more of these actions, our profit margins may decline. In addition, in responding to these claims, we may be required to stop selling or redesign one or more
of our products or services, which could significantly and adversely affect the way we conduct business.
Similarly,
from time to time, we may need to obtain the right to use certain patents or other intellectual property from third parties to be able to offer new products and services. If
we cannot license or otherwise obtain rights to use any required technology from a third party on reasonable terms, our ability to offer new products and services may be restricted, made more costly
or delayed.
Our reseller and sales agency arrangements expose us to a number of risks, one or more of which may adversely affect our business and operating results.
We rely on reseller and sales agency arrangements with other companies to provide some of the services that we sell to our customers,
including video services and wireless products and services. If we fail to extend or renegotiate these arrangements as they expire from time to time or if these other companies fail to fulfill their
contractual obligations to us or our customers, we may have difficulty finding alternative arrangements and our customers may experience disruptions to their services. In addition, as a reseller or
sales agent, we do not control the availability, retail price, design, function, quality, reliability, customer service or branding of these products and services, nor do we directly control all of
the marketing and promotion of these products and services. To the extent that these other companies make decisions that negatively impact our ability to market and sell their products and services,
our business plans and goals and our reputation could be negatively impacted. If these reseller and sales agency arrangements are unsuccessful due to one or more of these risks, our business and
operating results may be adversely affected.
Consolidation among other participants in the telecommunications industry may allow our competitors to compete more effectively against us, which could adversely affect our
operating results and financial condition.
The telecommunications industry has experienced substantial consolidation over the last couple of decades, and some of our competitors
have combined with other telecommunications providers, resulting in competitors that are larger, have more financial and business resources, and have broader service offerings. Further consolidation
could increase competitive pressures, and could adversely affect
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our
operating results and financial condition, as well as our ability to service debt and pay other obligations.
We have a significant amount of goodwill and other intangible assets on our balance sheet. If our goodwill or other intangible assets become impaired, we may be required to
record a significant charge to earnings and reduce our stockholder's equity.
Under generally accepted accounting principles, intangible assets are reviewed for impairment on an annual basis or more frequently
whenever events or circumstances indicate that its carrying value may not be recoverable. If our intangible assets are determined to be impaired in the future, we may be required to record a
significant, non-cash charge to earnings during the period in which the impairment is determined.
We rely on a limited number of key suppliers, vendors, landlords and other third parties to operate our business.
We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure. Our local
exchange carrier networks consist of central office and remote sites, all with advanced digital switches. If any of these suppliers experience interruptions or other problems delivering or servicing
these network components on a timely basis, our operations could suffer significantly. To the extent that proprietary technology of a supplier is an integral component of our network, we may have
limited flexibility to purchase key network components from alternative suppliers. In addition, we rely on a limited number of software vendors to support our business management systems. In the event
it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement supplies, services, space or utilities on economically attractive terms, on a timely
basis, or at all, which could increase costs or cause disruptions in our services.
Portions of our property, plant and equipment are located on property owned by third parties.
Over the past few years, certain utilities, cooperatives and municipalities in certain of the states in which we operate have requested
significant rate increases for attaching our plant to their facilities. To the extent that these entities are successful in increasing the amount we pay for these attachments, our future operating
costs will increase.
In
addition, we rely on rights-of-way, colocation agreements and other authorizations granted by governmental bodies and other third parties to locate our cable,
conduit and other network equipment on their respective properties. If any of these authorizations terminate or lapse, our operations could be adversely affected.
We depend on key members of our senior management team.
Our success depends largely on the skills, experience and performance of a limited number of senior officers. Competition for senior
management in our industry is intense and we may have difficulty retaining our current senior officers or attracting new ones in the event of terminations or resignations. For a discussion of similar
retention concerns relating to our recent mergers, please see the risks described below under the heading "Risks Relating to Our Recent Acquisitions."
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Risks Relating to our Recent Acquisition
We may be unable to integrate successfully into Legacy CenturyLink its recently-acquired operations and realize the anticipated benefits of the recent acquisitions.
CenturyLink's indirect acquisition of us involved the combination of two companies which previously operated as independent public
companies. We have devoted, and will continue to devote, significant management attention and resources to integrating the business practices and operations of Legacy CenturyLink and Qwest. We may
encounter difficulties in the integration process, including the following:
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the inability to successfully combine our businesses in a manner that permits the combined company to achieve the cost
savings and operating synergies anticipated to result from the acquisition, either due to technological challenges, personnel shortages, strikes or otherwise, any of which would result in the
anticipated benefits of the acquisition not being realized partly or wholly in the time frame currently anticipated or at all;
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lost sales as a result of customers of either of the two companies deciding not to do business with the combined company;
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the complexities associated with managing the combined businesses out of several different locations and integrating
personnel from multiple companies, while at the same time attempting to provide consistent, high quality products and services under a unified culture;
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the additional complexities of combining two companies with different histories, regulatory restrictions, sales forces,
marketing strategies, product markets and customer bases;
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the failure to retain key employees, some of whom could be critical to integrating the companies;
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potential unknown liabilities and unforeseen increased expenses or regulatory conditions associated with the acquisition;
and
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performance shortfalls at one or both of the two companies as a result of the diversion of management's attention caused
by integrating the companies' operations.
For
all these reasons, you should be aware that it is possible that the integration process could result in the distraction of our management, the disruption of our ongoing business or
inconsistencies in our products, services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors and employees
or to achieve the anticipated benefits of the acquisition, or could otherwise adversely affect our business and financial results.
QCII cannot assure you whether, when or in what amounts they will be able to use their net operating losses.
At December 31, 2011, QCII had approximately $6.3 billion of federal net operating losses, or NOLs. These NOLs can be
used to offset their future federal taxable income.
CenturyLink's
acquisition of QCII caused an "ownership change" under federal tax laws relating to the use of NOLs. As a result, these laws could limit CenturyLink's ability to use QCII's
NOLs and certain other deferred tax attributes to reduce future federal taxable income. QCII currently expects to use substantially all of their NOLs and certain other deferred tax attributes.
However, if QCII is unable to realize these benefits, its and CenturyLink's future income tax payments would be higher than expected, which would adversely affect its financial results and liquidity.
As a wholly owned subsidiary of these companies, our financial results and liquidity could be similarly affected.
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Risks Relating to Legal and Regulatory Matters
Any adverse outcome of the KPNQwest litigation, or other material litigation of CenturyLink could have a material adverse impact on our financial condition and operating
results, on the trading price of our debt securities and on our ability to access the capital markets.
As described in Item 1 of Part I of CenturyLink's and QCII's Quarterly Reports on Form 10-Q for the
quarter ended September 30, 2012, CenturyLink and QCII are involved in several legal proceedings that, if resolved against them, could have a material adverse effect on their business and
financial condition. As a wholly owned subsidiary of CenturyLink and QCII, our business and financial condition could be similarly affected. These matters include certain KPNQwest matters, which
present material and significant risks to QCII and us. In the aggregate, the plaintiffs in the KPNQwest matters seek billions of euros (equating to billions of dollars) in damages. QCII continues to
defend against these matters vigorously and is currently unable to provide any estimate as to the timing of their resolution.
We
can give no assurance as to the impacts on QCII's and our financial results or financial condition that may ultimately result from these matters. The ultimate outcomes of these
matters are still uncertain, and substantial settlements or judgments in these matters could have a significant impact on QCII and us. The magnitude of such settlements or judgments resulting from
these matters could materially and adversely affect QCII's financial condition and ability to meet its debt obligations, potentially impacting its credit ratings, its ability to access capital markets
and its compliance with debt covenants. In addition, the magnitude of any such settlements or judgments may cause QCII to draw down significantly on its cash balances, which might force it to obtain
additional financing or explore other methods to generate cash. Such methods could include issuing additional debt securities or selling assets. As a wholly owned subsidiary of QCII, our business
operations and financial condition could be similarly affected.
There
are other material proceedings pending against CenturyLink and QCII, as described in Item 1 of Part I of CenturyLink's and QCII's Quarterly Reports on
Form 10-Q for the quarter ended September 30, 2012. Depending on their outcome, any of these matters could have a material adverse effect on our financial position or
operating results. We can give you no assurances as to the impact of these matters on our operating results or financial condition.
We operate in a highly regulated industry and are therefore exposed to restrictions on our manner of doing business and a variety of claims relating to such regulation.
General.
We are subject to significant regulation by the Federal Communications Commission ("FCC"), which regulates interstate
communications, and
state utility commissions, which regulate intrastate communications. Generally, we must obtain and maintain certificates of authority from the FCC and regulatory bodies in most states where we offer
regulated services, and we are subject to numerous, and often quite detailed, requirements and interpretations under federal, state and local laws, rules and regulations. Accordingly, we cannot ensure
that we are always considered to be in compliance with all these requirements at any single point in time. The agencies responsible for the enforcement of these laws, rules and regulations may
initiate inquiries or actions based on customer complaints or on their own initiative.
Regulation
of the telecommunications industry is changing rapidly, and the regulatory environment varies substantially from jurisdiction to jurisdiction. Notwithstanding a recent
movement towards alternative regulation, a substantial portion of our local voice services revenue remains subject to FCC and state utility commission pricing regulation, which periodically exposes us
to pricing or earnings disputes and could expose us to unanticipated price declines. Interexchange carriers have filed complaints in various forums requesting reductions in our access rates. In
addition, several long distance providers are disputing amounts owed to us for carrying VoIP traffic, or traffic they claim to
be VoIP traffic, and are refusing to pay such amounts. There can be no assurance that future regulatory, judicial or legislative activities will not have a material adverse effect on our operations,
or
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that
regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations.
Risks associated with recent changes in federal regulation.
On October 27, 2011, the FCC adopted the Connect America and
Intercarrier
Compensation Reform order ("CAF order") intended to reform the existing regulatory regime to recognize ongoing shifts to new technologies, including VoIP, and gradually re-direct universal
service funding to foster nationwide broadband coverage. This initial ruling provides for a multi-year transition over the next decade as intercarrier compensation charges are reduced,
universal service funding is explicitly targeted to broadband deployment, and subscriber line charges paid by end user customers are gradually increased. These changes will substantially increase the
pace of reductions in the amount of switched access revenues we receive with respect to some of our various services, while creating opportunities for increases in federal USF and retail revenue
streams. The ultimate effect of this order on communications companies is largely dependent on future FCC proceedings designed to implement the order, the most significant of which are scheduled to be
determined in 2012 and 2013. Several judicial challenges to the CAF order are pending and additional future challenges are possible, any of which could alter or delay the FCC's proposed changes. In
addition, based on the outcome of the FCC proceedings, various state commissions may consider changes to their universal service funds or intrastate access rates. For these reasons, we cannot predict
the ultimate impact of these proceedings at this time.
Under
other pending proceedings, the FCC may implement changes in the regulation or pricing of special access services, any of which could adversely affect our operations or financial
results.
Risks posed by costs of regulatory compliance.
Regulations continue to create significant compliance costs for us. Challenges to our
tariffs by
regulators or third parties or delays in obtaining certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and, if successful, such challenges
could adversely affect the rates that we are able to charge our customers. Our business also may be impacted by legislation and regulation imposing new or greater obligations related to regulations or
laws related to broadband deployment, bolstering homeland security, increasing disaster recovery requirements, minimizing environmental impacts, enhancing privacy, or addressing other issues that
impact our business, including the Communications Assistance for Law Enforcement Act (which requires communications carriers to ensure that their equipment, facilities,
and services are able to facilitate authorized electronic surveillance), and laws governing local number portability and customer proprietary network information requirements. We expect our compliance
costs to increase if future laws or regulations continue to increase our obligations to assist other governmental agencies.
Risks posed by other regulations.
All of our operations are also subject to a variety of environmental, safety, health and other
governmental
regulations. We monitor our compliance with federal, state and local regulations governing the management, discharge and disposal of hazardous and environmentally sensitive materials. Although we
believe that we are in compliance with these regulations, our management, discharge or disposal of hazardous and environmentally sensitive materials might expose us to claims or actions that could
have a material adverse effect on our business, financial condition and operating results.
Regulatory changes in the communications industry could adversely affect our business by facilitating greater competition against us.
For over 15 years, Congress and the FCC have taken several steps that have resulted in increased competition among communications
service providers. Many of the FCC's regulations remain subject to judicial review and additional rulemakings, thus making it difficult to determine the ultimate impact of these changes on us and our
competitors.
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We may be liable for the material that content providers distribute over our network.
The law relating to the liability of private network operators for information carried on, stored or disseminated through their
networks is still unsettled. As such, we could be exposed to legal claims relating to content disseminated on our networks. Claims could challenge the accuracy of materials on our network, or could
involve matters such as defamation, invasion of privacy or copyright infringement. If we need to take costly measures to reduce our exposure to these risks, or are required to defend ourselves against
such claims, our financial results could be negatively affected.
We are subject to significant regulations that limit our flexibility.
As a diversified full service incumbent local exchange carrier ("ILEC"), we have traditionally been subject to significant regulation
that does not apply to many of our competitors. This regulation imposes substantial compliance costs on us and restricts our ability to change rates, to compete and to respond rapidly to changing
industry conditions. As our business becomes increasingly competitive, regulatory disparities between us and our competitors could impede our ability to compete.
We are subject to franchising requirements that could impede our expansion opportunities.
We may be required to obtain from municipal authorities operating franchises to install or expand facilities. Some of these franchises
may require us to pay franchise fees. These franchising requirements generally apply to our fiber transport and competitive local exchange carrier ("CLEC") operations. These requirements could delay
us in expanding our operations or increase the costs of providing these services.
We are exposed to risks arising out of recent legislation affecting U.S. public companies.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and
the Dodd-Frank Wall Street Reform and Consumer Protection Act, and related regulations implemented by the SEC, the New York Stock Exchange and the Public Company Accounting Oversight
Board, are increasing legal and financial compliance costs and making some activities more time consuming. Any future failure to successfully or timely complete annual assessments of our internal
controls required by Section 404 of the Sarbanes-Oxley Act could subject us to sanctions or investigation by regulatory authorities. Any such action could adversely affect our financial results
or investors' confidence in us.
For
a more thorough discussion of the regulatory issues that may affect our business, see Item 1 of our Annual Report on Form 10-K for the year ended
December 31, 2011.
Risks Affecting our Liquidity
CenturyLink's and our high debt levels pose risks to our viability and may make us more vulnerable to adverse economic and competitive conditions, as well as other adverse
developments.
Our ultimate parent, CenturyLink, and we continue to carry significant debt. As of September 30, 2012, our consolidated debt was
approximately $7.7 billion, which was included in CenturyLink's consolidated debt of approximately $20.7 billion as of that date. Approximately $2.7 billion of CenturyLink's debt
securities, which includes approximately $1.4 billion of our debt securities, come due over the next thirty-six months. While we currently believe CenturyLink and we will have the
financial resources to meet or refinance our obligations when they come due, we cannot fully anticipate our future financial condition or that of CenturyLink, the credit markets or the economy
generally. We may have unexpected expenses and liabilities, and we may have limited access to financing.
We
expect to periodically require financing to meet our debt obligations as they come due. Due to the unstable economy and the current credit market environment, we may not be able to
refinance maturing debt at terms that are as favorable as those from which we previously benefited, at terms that
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are
acceptable to us or at all. We may also need to obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets) if revenues and
cash provided by operations decline, if economic conditions weaken, if competitive pressures increase, if CenturyLink or QCII are required to contribute a material amount of cash to their collective
pension plans, if CenturyLink or QCII are required to begin to pay other post-retirement benefits significantly earlier than is anticipated, if CenturyLink or QCII become subject to
significant judgments or settlements in one or more of the matters discussed in Item 1 of Part I in CenturyLink's and QCII's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2012. We can give no assurance that this additional financing will be available on terms that are acceptable to us or at all. If we are able to obtain additional
financing, our credit ratings could be adversely affected, which could further raise our borrowing costs and further limit our future access to capital and our ability to satisfy our debt obligations.
Our
significant levels of debt can adversely affect us in several other respects, including (i) exposing us to the risk of credit rating downgrades, which would raise our
borrowing costs, (ii) hindering our flexibility to plan for or react to changing market, industry or economic conditions, (iii) limiting our ability to access the capital markets,
(iv) limiting the amount of free cash flow available for future operations, acquisitions, dividends, or other uses, (v) making us more vulnerable to economic or industry downturns,
including interest rate increases, and (vi) placing us at a competitive disadvantage compared to less leveraged competitors.
Certain
of CenturyLink's and QCII's debt instruments have cross payment default or cross acceleration provisions. When present, these provisions could have a wider impact on liquidity
than might otherwise arise from a default or acceleration of a single debt instrument. Any such event could adversely affect our ability to conduct business or access the capital markets and could
adversely impact our credit ratings. See "Liquidity and Capital Resources" in Item 2 of Part I of this report for additional information about CenturyLink's credit facility.
We may be unable to significantly reduce the substantial capital requirements or operating expenses necessary to continue to operate our business, which may in turn affect
our operating results.
The industry in which we operate is capital intensive, and we anticipate that our capital requirements will continue to be significant
in the coming years. Although we have reduced our operating expenses over the past few years, we may be unable to further significantly reduce these costs, even if revenues in some areas of our
business are decreasing. While we believe that our planned level of capital expenditures will meet both our maintenance and our core growth requirements going forward, this may not be the case if
circumstances underlying our expectations change.
Adverse changes in the value of assets or obligations associated with QCII's qualified pension plan could negatively impact QCII's liquidity, which may in turn affect our
business and liquidity.
Substantially all of our employees participate in a qualified pension plan sponsored by QCII.
The
funded status of QCII's qualified pension plan is the difference between the value of plan assets and the benefit obligation. The accounting unfunded status of QCII's qualified
pension plan was $627 million as of December 31, 2011. Adverse changes in interest rates or market conditions, among other assumptions and factors, could cause a significant increase in
QCII's benefit obligation or a significant decrease in the value of plan assets. These adverse changes could require QCII to contribute
a material amount of cash to its pension plan or could accelerate the timing of required cash payments. The amounts contributed by us through QCII are not segregated or restricted and may be used to
provide benefits to employees of QCII's other subsidiaries. QCII determines our cash contribution and, historically, has only required us to pay our portion of its required pension contribution.
Current funding laws and regulations require a company with a plan shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Based on
current laws and
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circumstances,
QCII will not be required to make a cash contribution to this plan in 2012 and based on current funding laws and regulations, it is unlikely QCII will be required to make a cash
contribution in 2013. The amount of required contributions to our plan in 2013 and beyond will depend on earnings on plan investments, prevailing interest and discount rates, demographic experience,
changes in plan benefits and changes in funding laws and regulations. Any future material cash contributions could have a negative impact on QCII's liquidity by reducing its cash flows, which in turn
could affect our liquidity.
Our debt agreements and the debt agreements of CenturyLink and its other subsidiaries allow us to incur significantly more debt, which could exacerbate the other risks
described in this report.
The terms of our debt instruments and the debt instruments of CenturyLink and its other subsidiaries permit additional indebtedness.
Additional debt may be necessary for many reasons, including to adequately respond to competition, to comply with regulatory requirements related to our service obligations or for financial reasons
alone. Incremental borrowings on terms that impose additional financial risks could exacerbate the other risks described in this report.
CenturyLink and QC plan to access the public debt markets, and we cannot assure you that these markets will remain free of disruptions.
CenturyLink has a significant amount of indebtedness that it intends to refinance over the next several years, principally it expects
through the issuance of debt securities of CenturyLink, QC or both. CenturyLink's ability to arrange additional financing will depend on, among other factors, the financial position and performance of
CenturyLink and QC, as well as prevailing market conditions and other factors beyond its control. Prevailing market conditions could be adversely affected by the ongoing disruptions in the European
sovereign debt markets, the failure of the United States to reduce its deficit in amounts deemed to be sufficient, possible further downgrades in the credit ratings of the U.S. debt, contractions or
limited growth in the economy or other similar adverse
economic developments in the U.S. or abroad. As a result, CenturyLink cannot assure you that it will be able to obtain additional financing on terms acceptable to us or at all. Any such failure to
obtain additional financing could jeopardize its and our ability to repay, refinance or reduce debt obligations.
Other Risks
If we fail to extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, or if our unionized employees were to engage
in a strike or other work stoppage, our business and operating results could be materially harmed.
As of September 30, 2012, we had approximately 21,500 employees, of which approximately 13,000 or 60%, were members of either
the International Brotherhood of Electrical Workers ("IBEW") or the Communications Workers of America ("CWA") and are subject to collective bargaining agreements that expired October 6, 2012.
We are currently negotiating the terms of new agreements. In the meantime, the predecessor agreements have been extended and the applicable unions have agreed to provide us with at least
twenty-four hour advance notice before terminating those predecessor agreements.
We
may be unable to reach new agreements, and union employees may engage in strikes, work slowdowns or other labor actions, which could materially disrupt our ability to provide services
and result in increased cost to us. In addition, new labor agreements may impose significant new costs on us, which could impair our financial condition or results of operations in the future. To the
extent they contain benefit provisions, these agreements also limit our flexibility to change benefits in response to industry or competitive changes. In particular, the post-employment
benefits provided under these agreements could cause us to incur costs not faced by many of our competitors, which could ultimately hinder our competitive position.
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We regularly transfer our cash to CenturyLink, which exposes us to certain risks.
Under our cash management arrangement with CenturyLink, we regularly transfer our cash to CenturyLink, which we recognize on our
balance sheet as advances to affiliates. Although CenturyLink periodically repays these advances to fund our cash requirements throughout the year, at any given point in time CenturyLink may owe us a
substantial sum under this arrangement. Accordingly, developments that adversely impact CenturyLink could adversely impact our ability to collect these advances.
If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies, the accuracy of our financial statements and
related disclosures could be affected.
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles
requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies,
which are described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011, describe those significant accounting policies and methods used
in the preparation of our consolidated financial statements that are considered "critical" because they require judgments, assumptions and estimates that materially impact our consolidated financial
statements and related disclosures. As a result, if future events or assumptions differ significantly from the judgments, assumptions and estimates in our critical accounting policies, these events or
assumptions could have a material impact on our consolidated financial statements and related disclosures.
Tax audits or changes in tax laws could adversely affect us.
We were included in the consolidated federal income tax return of QCII for the periods before the April 1, 2011 closing of
CenturyLink's acquisition of QCII, and we are included in the consolidated federal income tax return of CenturyLink for periods on or after that date. As such, we could be severally liable for tax
examinations and adjustments attributable to other members of the QCII or CenturyLink affiliated groups, as applicable. As significant taxpayers, QCII is and CenturyLink are subject to frequent and
regular audits by the Internal Revenue Service as well as state and local tax authorities. These audits could subject us to tax liabilities if adverse positions are taken by these tax authorities.
Tax
sharing agreements have been executed between QCII and previous affiliates, and QCII believes the liabilities, if any, arising from adjustments to previously filed returns would be
borne by the
affiliated group member determined to have a deficiency under the terms and conditions of such agreements and applicable tax law. We have not generally provided for liabilities attributable to former
affiliated companies or for claims they have asserted or may assert against us.
We
believe that we have adequately provided for tax contingencies. However, QCII's tax audits and examinations may result in tax liabilities that differ materially from those that we
have recognized in our consolidated financial statements. Because the ultimate outcomes of all of these matters are uncertain, we can give no assurance as to whether an adverse result from one or more
of them will have a material effect on our financial results.
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