Financial Statements of Guarantors

3 Months Ended

Mar. 31, 2012

Financial Statements of Guarantors

Financial Statements of Guarantors

(12) Financial Statements of Guarantors

        QCII and two of its subsidiaries, Qwest Capital Funding, Inc ("QCF") and QSC, guarantee the payment of certain of each other's registered debt securities. As of the successor date of March 31, 2012, each series of QCII's outstanding notes totaling approximately $1.9 billion in aggregate principal amount is guaranteed on a senior unsecured basis by QCF and QSC (the "QCII Guaranteed Notes"). These notes are guaranteed through their respective maturity dates, the latest of which is in April 2018. In addition, each series of QCF's outstanding notes totaling approximately $1 billion in aggregate principal amount is guaranteed on a senior unsecured basis by QCII (the "QCF Guaranteed Notes"). These notes are guaranteed through their respective maturity dates, the latest of which is in February 2031. The guarantees described above are full and unconditional and joint and several. A significant amount of QCII's and QSC's income and cash flow are generated by their subsidiaries. As a result, the funds necessary to meet their debt service or guarantee obligations are provided in large part by distributions or advances from their subsidiaries.

        The following information sets forth our condensed consolidating statements of operations, balance sheets and statements of cash flows for the periods indicated. The information for QCII is presented on a stand-alone basis, information for QSC and QCF is presented on a combined basis and information for all of our other non-guarantor subsidiaries is presented on a combined basis. Each entity's investments in its subsidiaries, if any, are presented under the equity method. The consolidating statements of operations and balance sheets include the effects of consolidating adjustments to our subsidiaries' tax provisions and the related income tax assets and liabilities in the QSC and QCII results. Both QSC and QCF are 100% owned by QCII, and QCF is a finance subsidiary of QCII. Other than as already described in this note, the accounting principles used to determine the amounts reported in this note are the same as those used in our consolidated financial statements.

        CenturyLink periodically restructures the internal capital structure of its subsidiaries, including QCII and its subsidiaries, based on the needs of its business.

Allocations among Affiliates

        We allocate the costs of shared services among our affiliates. These services include marketing and advertising, information technology, product and technical services as well as general support services. The allocation of these costs is based on estimated market values or fully distributed cost ("FDC"). Most of our affiliate services are priced by applying an FDC methodology. FDC rates are determined using salary rates, which include payroll taxes, employee benefits, facilities and overhead costs. Whenever possible, costs are directly assigned to the affiliate that uses the service. If costs cannot be directly assigned, they are allocated among all affiliates based on cost usage measures; or if no cost usage measure is available, these costs are allocated based on a general allocator. From time to time, we adjust the basis for allocating the costs of a shared service among our affiliates. Such changes in allocation methodologies are generally billed prospectively.

        Under our tax allocation policy, we treat our subsidiaries as if they were separate taxpayers. The policy requires that each subsidiary pay its tax liabilities in cash based on that subsidiary's separate return taxable income. To the extent a subsidiary has taxable losses, the subsidiary does not pay any amount and therefore retains the benefit of the losses. Subsidiaries are also included in the combined state tax returns we file and the same payment and allocation policy applies.

        Eligible employees of our subsidiaries participate in the QCII pension and non-qualified pension plan and may become eligible to participate in our post-retirement health care and life insurance, and other post-employment benefit plans. The amounts contributed by our subsidiaries are not segregated or restricted to pay amounts due to their employees and may be used to provide benefits to our other employees or employees of other subsidiaries. We allocate the cost of pension, non-qualified pension, and post-retirement health care and life insurance benefits and the associated obligations and assets to our subsidiaries and determine the subsidiaries' required contributions. The allocation is based upon demographics of each subsidiary's employees compared to all participants. In determining the allocated amounts, we make numerous assumptions. Changes in any of our assumptions could have a material impact on the expense allocated to our subsidiaries.

        During the first quarter of 2012, as we transitioned certain legacy systems to the historical systems of our parent, CenturyLink, CenturyLink changed certain cash management process under which we now operate. Therefore, we now present the balances related to these transactions on a net basis with our other affiliate transactions.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
SUCCESSOR
(UNAUDITED)

	QCII(1)			QSC(2) & QCF(3)			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—			—			2,725			—			2,725
Operating revenues—affiliates		—			2			114			(2	)		114
Total operating revenues		—			2			2,839			(2	)		2,839
OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—			—			1,175			—			1,175
Selling, general and administrative		2			2			480			—			484
Operating expenses—affiliates		—			—			151			(2	)		149
Depreciation and amortization		18			—			723			—			741
Total operating expenses		20			2			2,529			(2	)		2,549
OPERATING (LOSS) INCOME		(20	)		—			310			—			290
OTHER INCOME (EXPENSE)
Interest expense		(39	)		(18	)		(113	)		—			(170	)
Interest expense—affiliates		(1	)		(26	)		(3	)		26			(4	)
Interest income—affiliates		—			26			—			(26	)		—
Income from equity investments in subsidiaries		126			45			—			(171	)		—
Other income		8			—			1			—			9
Total other income (expense)		94			27			(115	)		(171	)		(165	)
INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE		74			27			195			(171	)		125
Income tax (benefit) expense		(3	)		(99	)		150			—			48
NET INCOME	$	77			126			45			(171	)		77
COMPREHENSIVE INCOME	$	77			126			45			(171	)		77

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes.

(3)

QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2011
PREDECESSOR
(UNAUDITED)

	QCII(1)			QSC(2) & QCF(3)			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
OPERATING REVENUES:
Operating revenues	$	—			—			2,846			—			2,846
Operating revenues—affiliates		—			2			9			(11	)		—
Total operating revenues		—			2			2,855			(11	)		2,846
OPERATING EXPENSES:
Cost of services and products (exclusive of depreciation and amortization)		—			—			1,178			—			1,178
Selling, general and administrative		3			2			551			—			556
Operating expenses—affiliates		—			—			11			(11	)		—
Depreciation and amortization		—			—			533			—			533
Total operating expenses		3			2			2,273			(11	)		2,267
OPERATING (LOSS) INCOME		(3	)		—			582			—			579
OTHER INCOME (EXPENSE)
Interest expense		(56	)		(19	)		(152	)		—			(227	)
Interest expense—affiliates		(1	)		(26	)		(1	)		28			—
Interest income—affiliates		—			28			—			(28	)		—
Income from equity investments in subsidiaries		272			226			—			(498	)		—
Other income (expense)		—			(1	)		6			—			5
Total other income (expense)		215			208			(147	)		(498	)		(222	)
INCOME BEFORE INCOME TAX EXPENSE(BENEFIT)		212			208			435			(498	)		357
Income tax expense (benefit)		1			(64	)		209			—			146
NET INCOME	$	211			272			226			(498	)		211
COMPREHENSIVE INCOME	$	218			272			226			(498	)		218

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes.

(3)

QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATING BALANCE SHEETS
MARCH 31, 2012
SUCCESSOR
(UNAUDITED)

	QCII(1)		QSC(2) & QCF(3)		Subsidiary Non- Guarantors		Eliminations			QCII Consolidated
	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—		39		10		—			49
Accounts receivable, less allowance		43		—		1,141		—			1,184
Accounts receivable—affiliates, net		—		552		666		(1,218	)		—
Notes receivable—affiliates		—		1,413		—		(1,413	)		—
Advances to affiliates		—		—		—		—			—
Deferred income taxes, net		—		420		119		—			539
Other		24		1		302		—			327
Total current assets		67		2,425		2,238		(2,631	)		2,099
Net property, plant and equipment		—		—		9,305		—			9,305
Goodwill		—		—		10,123		—			10,123
Customer relationships, net		—		—		6,545		—			6,545
Other intangible assets, net		108		—		1,399		—			1,507
Investments in subsidiaries		14,944		14,163		—		(29,107	)		—
Deferred income taxes, net		1,100		1,095		—		(2,195	)		—
Prepaid pension, post-retirement and other post-employment benefits—affiliate		2,818		76		905		(3,799	)		—
Other		38		7		283		—			328
TOTAL ASSETS	$	19,075		17,766		30,798		(37,732	)		29,907
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	—		—		488		—			488
Current debt—affiliates		—		1,413		—		(1,413	)		—
Accounts payable		2		3		646		—			651
Accounts payable—affiliates		948		—		195		(908	)		235
Dividends payable—affiliates		200		—		310		(310	)		200
Accrued expenses and other liabilities		295		17		845		—			1,157
Advance billings and customers deposits		—		—		411		—			411
Total current liabilities		1,445		1,433		2,895		(2,631	)		3,142
LONG-TERM DEBT		1,953		1,009		7,970		—			10,932
DEFERRED CREDITS AND OTHER LIABILITIES
Benefit plan obligations, net		3,168		—		—		—			3,168
Pension, post-retirement and other post-employment benefits obligations and other—affiliates		1,032		348		2,419		(3,799	)		—
Deferred income taxes		—		—		2,869		(2,195	)		674
Other		162		32		482		—			676
Total deferred credits and other liabilities		4,362		380		5,770		(5,994	)		4,518
Stockholder's equity		11,315		14,944		14,163		(29,107	)		11,315
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	19,075		17,766		30,798		(37,732	)		29,907

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes.

(3)

QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2011
SUCCESSOR
(UNAUDITED)

	QCII(1)		QSC(2) & QCF(3)		Subsidiary Non- Guarantors		Eliminations			QCII Consolidated
	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—		40		8		—			48
Accounts receivable, less allowance		15		2		1,184		—			1,201
Accounts receivable—affiliates, net		211		336		36		(583	)		—
Advances to affiliates		184		1,694		400		(1,536	)		742
Deferred income taxes, net		—		438		121		—			559
Other		—		19		259		(13	)		265
Total current assets		410		2,529		2,008		(2,132	)		2,815
Net property, plant and equipment		—		—		9,461		—			9,461
Goodwill		—		—		10,123		—			10,123
Customer relationships, net		—		—		6,788		—			6,788
Other intangible assets, net		126		—		1,461		—			1,587
Investments in subsidiaries		14,856		13,999		—		(28,855	)		—
Deferred income taxes, net		1,102		1,390		117		(2,609	)		—
Prepaid pension, post-retirement and other post-employment benefits—affiliate		2,851		76		955		(3,882	)		—
Other		36		7		338		—			381
TOTAL ASSETS	$	19,381		18,001		31,251		(37,478	)		31,155
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	—		—		117		—			117
Current debt—affiliates		122		1,413		—		(1,535	)		—
Accounts payable		4		19		950		—			973
Accounts payable—affiliates		360		42		23		(31	)		394
Dividends payable—affiliates		200		—		310		(310	)		200
Accrued expenses and other liabilities		272		40		700		(1	)		1,011
Accrued expenses and other—affiliates		1		62		192		(255	)		—
Advance billings and customers deposits		—		—		400		—			400
Total current liabilities		959		1,576		2,692		(2,132	)		3,095
LONG-TERM DEBT		2,767		1,009		8,403		—			12,179
DEFERRED CREDITS AND OTHER LIABILITIES
Benefit plan obligations, net		3,198		—		—		—			3,198
Pension, post-retirement and other post-employment benefits obligations and other—affiliates		1,031		344		2,507		(3,882	)		—
Deferred income taxes		—		223		3,016		(2,609	)		630
Other		150		31		596		—			777
Total deferred credits and other liabilities		4,379		598		6,119		(6,491	)		4,605
Stockholder's equity		11,276		14,818		14,037		(28,855	)		11,276
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	19,381		18,001		31,251		(37,478	)		31,155

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes.

(3)

QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
SUCCESSOR
(UNAUDITED)

	QCII(1)			QSC(2) & QCF(3)			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Net cash (used in) provided by operating activities	$	(386	)		(137	)		1,013			(13	)		477
INVESTING ACTIVITIES
Payments for property, plant and equipment and capitalized software		—			—			(426	)		—			(426	)
Changes in advances to affiliates		184			136			(545	)		967			742
Other, net		—			—			—			—			—
Net cash provided by (used in) investing activities		184			136			(971	)		967			316
FINANCING ACTIVITIES
Payments of long-term debt		(800	)		—			(40	)		—			(840	)
Changes in advances from affiliates		1,002			—			—			(954	)		48
Net cash provided by (used in) financing activities		202			—			(40	)		(954	)		(792	)
Net (decrease) increase in cash and cash equivalents		—			(1	)		2			—			1
Cash and cash equivalents at beginning of period		—			40			8			—			48
Cash and cash equivalents at end of the period	$	—			39			10			—			49

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes.

(3)

QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011
PREDECESSOR
(UNAUDITED)

	QCII(1)			QSC(2) & QCF(3)			Subsidiary Non- Guarantors			Eliminations			QCII Consolidated
	(Dollars in millions)
Net cash provided by (used in) operating activities	$	7			(62	)		828			4			777
INVESTING ACTIVITIES
Payments for property, plant and equipment and capitalized software		—			—			(410	)		—			(410	)
Changes in interest in investments managed by QSC		—			(3	)		3			—			—
Cash infusion to subsidiaries		—			(191	)		—			191			—
Changes in advances to affiliates		—			180			1			(181	)		—
Dividends received from subsidiaries		—			590			—			(590	)		—
Other, net		—			—			2			—			2
Net cash provided by (used in) investing activities		—			576			(404	)		(580	)		(408	)
FINANCING ACTIVITIES
Payments of long-term debt		—			(179	)		(24	)		—			(203	)
Net proceeds from (repayments of) short-term affiliate debt		119			(300	)		—			181			—
Dividends paid		(141	)		—			—			—			(141	)
Cash infusion from parent		—			—			191			(191	)		—
Dividends paid to parent		—			—			(590	)		590			—
Other, net		15			—			16			(4	)		27
Net cash used in financing activities		(7	)		(479	)		(407	)		576			(317	)
Net increase in cash and cash equivalents		—			35			17			—			52
Cash and cash equivalents at beginning of period		—			148			224			—			372
Cash and cash equivalents at end of the period	$	—			183			241			—			424

(1)

QCII is the issuer of the QCII Guaranteed Notes and is a guarantor of the QCF Guaranteed Notes.

(2)

QSC is a guarantor of the QCII Guaranteed Notes.

(3)

QCF is the issuer of the QCF Guaranteed Notes and is a guarantor of the QCII Guaranteed Notes.