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Level 3 Communications : PARENT, LLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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11/09/2017 | 04:49pm CET
The following discussion should be read in conjunction with our Consolidated
Financial Statements (including the notes thereto), included elsewhere herein
and our Form 10-K for the year ended December 31, 2016, filed with the
Securities and Exchange Commission.

This document contains forward looking statements and information that are based
on the beliefs of management as well as assumptions made by and information
currently available to us. When used in this document, the words "anticipate",
"believe", "plan", "estimate" and "expect" and similar expressions, as they
relate to us or our management, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this document. For a more detailed description of these risks and
factors, please see our Form 10-K for the year ended December 31, 2016, filed
with the Securities and Exchange Commission and Item 1A in Part II of this
Form 10-Q.

Executive Summary

Overview

We are a facilities-based provider of a broad range of communications services.
Revenue for communications services is generally recognized on a monthly basis
as these services are provided. For contracts involving private line, wavelength
and dark fiber services, we may receive upfront payments for services to be
delivered for a period of generally up to 25 years. In these situations, we
defer the revenue and amortize it on a straight-line basis to earnings over the
term of the contract.

On October 31, 2016, we entered into an agreement and plan of merger (the
"Merger Agreement") with CenturyLink, Inc., a Louisiana corporation
("CenturyLink"), Wildcat Merger Sub 1 LLC, a Delaware limited liability company
and an indirect wholly owned subsidiary of CenturyLink ("Merger Sub 1"), and WWG
Merger Sub LLC, a Delaware limited liability company and an indirect wholly
owned subsidiary of CenturyLink ("Merger Sub 2"), pursuant to which, effective
November 1, 2017, we were acquired by CenturyLink in a cash and stock
transaction, including the assumption of our debt (the "CenturyLink Merger").

Upon the November 1, 2017 consummation of the CenturyLink Merger, our operations
were integrated into and in the future will be reported as part of the segments
of CenturyLink. CenturyLink's CODM has become our CODM and will review our
separate financial information on an aggregate basis only in connection with our
quarterly and annual reports we file with the SEC. Consequently, in future
reports, we will no longer provide Level 3 only segment information.

Total Revenue consists of:

• Core Network Services revenue from Internet Protocol ("IP") and data

       services; transport and fiber; local and enterprise voice services;
       colocation and data center services; and security services.




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•      Wholesale Voice Services revenue from sales of long distance voice
       services to wholesale customers.



Core Network Services revenue represents higher profit services and Wholesale
Voice Services revenue represents lower profit services. Core Network Services
revenue requires different levels of investment and focus and provides different
contributions to our operating results than Wholesale Voice Services revenue.
Management believes that growth in revenue from our Core Network Services is
critical to the long-term success of our business. We also believe we must
continue to effectively manage the profitability of the Wholesale Voice Services
revenue. We believe performance in our communications business is best gauged by
analyzing revenue changes in Core Network Services.

Core Network Services

IP and data services primarily include our Internet services, Virtual Private
Network ("VPN"), Content Delivery Network ("CDN"), media delivery, Vyvx
broadcast and Managed Services. Our IP and high speed IP service is high quality
and is offered in a variety of capacities. Our VPN service permits businesses of
any size to replace multiple networks with a single, cost-effective solution
that greatly simplifies the converged transmission of voice, video, and data.
This convergence to a single platform can be obtained without sacrificing the
quality of service or security levels of traditional ATM and frame relay
offerings. VPN service also permits customers to prioritize network application
traffic so that high priority applications, such as voice and video, are not
compromised in performance by the flow of low priority applications such as
email.

Growth in transport (such as private line and wavelengths) and fiber revenue is
largely dependent on increased demand for bandwidth services and available
capital of companies requiring communications capacity for their own use or in
providing capacity as a service provider to their customers. These expenditures
may be in the form of monthly payments or, in the case of private line,
wavelength or dark fiber services, either monthly payments or upfront payments.
We are focused on providing end-to-end transport and fiber services to our
customers to directly connect customer locations with a private network.

Voice services comprise a broad range of local and enterprise voice services
using Voice over Internet Protocol ("VoIP") and traditional circuit-switch based
technologies, including VoIP enhanced local service, SIP Trunking, local inbound
service, Primary Rate Interface service, long distance service and toll-free
service. Our voice services also include our comprehensive suite of audio, Web
and video collaboration services.

Colocation and data center services allow customers to place their network
equipment and servers in suitable environments maintained by us with high-speed
links providing on-net access to more than 60 countries. These services are
secure, redundant and flexible to fit the varying needs of our customers.
Services, which vary by location, include hosting network equipment used to
transport high speed data and voice over our global network; providing managed
IT services, installation, maintenance, storage and monitoring of enterprise
services; and providing comprehensive IT outsource solutions.

Security Services can be used to enable customers to address the growing threat
of cyber-attack and allow customers to create a secure network, safeguard brand
value, enable business continuity, and avoid complexity and cost. Our Security
Services include: Secure Access which provides secure and encrypted connectivity
for mobile users or remote offices; Cloud and Premises based Managed Firewall
and Unified Threat Management Services including Intrusion Prevention and
Detection service and Web Content filtering; network-based Distributed Denial of
Service (DDoS) Mitigation, which protects against Internet based DDoS attacks;
and Security Consulting services for Governance, Risk Management and Compliance.
Security Services are sold stand-alone or in conjunction with Data Services.


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We believe a source of future incremental demand for our Core Network Services
will be from customers that are seeking to distribute their feature rich content
or video over the Internet. Revenue growth in this area is dependent on the
continued increase in demand from customers and the pricing environment. An
increase in the reliability and security of information transmitted over the
Internet and declines in the cost to transmit data have resulted in increased
utilization of e-commerce or Web-based services by businesses. Although the
pricing for data services is currently relatively stable, the IP market is
generally characterized by price compression and high unit growth rates
depending upon the type of service. We have continued to experience price
compression in the high-speed IP and voice services markets.

The following provides a discussion of our Core Network Services revenue in terms of the enterprise and wholesale channels.

• The enterprise channel includes large, multi-national enterprises

requiring large amounts of bandwidth to support their business operations,

such as financial services companies, healthcare companies, content

providers, and portal and search engine companies. It also includes medium

sized enterprises, regional service providers, as well as government

markets, the U.S. federal government, the systems integrators supporting

the U.S. federal government, U.S. state and local governments, academic

       consortia, and certain academic institutions.


• The wholesale channel includes revenue from incumbent and alternative

       carriers in each of the regions, global carriers, wireless carriers, cable
       companies, satellite companies and voice service providers.



We believe the alignment of Core Network Services around channels should allow
us to drive growth while enabling us to better focus on the needs of our
customers. Each of these channels is supported by dedicated employees in sales.
Each of these channels is also supported by non-dedicated, centralized service
delivery and management, product management and development, corporate
marketing, global network services, engineering, information technology, and
corporate functions, including legal, finance, strategy, and human resources.

Wholesale Voice Services

We offer wholesale voice services that target large and existing markets. The
revenue potential for wholesale voice services is large; however, pricing is
expected to continue to decline over time as a result of the new low-cost IP and
optical-based technologies. In addition, the market for wholesale voice services
is being targeted by many competitors, several of which are larger and have more
financial resources than us.

For a detailed description of our broad range of communications services, please
see Item 1. "Business - Our Service Offerings" of our Form 10-K for the year
ended December 31, 2016, filed with the Securities and Exchange Commission.

Seasonality and Fluctuations

We continue to expect business fluctuations to affect sequential quarterly
trends in revenue, costs, and cash flow. This includes the timing, as well as
any seasonality of sales and service installations, usage, rate changes, and
repricing for contract renewals. Historically, our revenue and expense in the
first quarter has been affected by the slowing of our customers' purchasing
activities during the holidays and the resetting of payroll taxes in the new
year. We conduct a portion of our business in currencies other than the U.S.
dollar, the currency in which our Consolidated Financial Statements are
reported. Accordingly, our operating results could also be adversely affected by
foreign currency exchange rate volatility relative to the U.S. dollar. Our
historical experience with quarterly fluctuations may not necessarily be
indicative of future results.

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Because revenue subject to billing disputes where collection is uncertain is not
recognized until the dispute is resolved, the timing of dispute resolutions and
settlements may positively or negatively affect our revenue in a particular
quarter. The timing of disconnection may also affect our results in a particular
quarter, with disconnection early in the quarter generally having a greater
effect. The timing of capital and other expenditures may affect our costs or
cash flow. The convergence of any of these or other factors such as fluctuations
in usage, increases or decreases in certain taxes and fees or pricing declines
upon contract renewals in a particular quarter may result in our revenue growing
more or less than previous trends, may affect our profitability and other
financial results and may not be indicative of future financial performance. We
also establish appropriate reserves for disputes of incorrect network access
cost billings from our suppliers of network services, which may include disputes
for circuits that are not disconnected by the supplier on a timely basis,
charges from suppliers for circuits that were not timely installed, and
incorrect rate or other inadequate information needed to determine the
appropriate billing from the supplier. The network access cost reserves for
disputed supplier billings are based on an analysis of our historical experience
in resolving disputes with our suppliers and regulatory analysis regarding
certain specific supplier billing matters. The timing and ultimate outcome of
the dispute resolution process could differ from our initial estimates and these
differences could be material.

Critical Accounting Policies

Income Taxes

We recognize deferred tax assets and liabilities for our United States and
non-U.S. operations, for operating loss and other credit carry forwards and the
expected tax consequences of temporary differences between the tax basis of
assets and liabilities and their reported amounts using enacted tax rates in
effect for the year the differences are expected to reverse. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible.

The evaluation of deferred tax assets requires judgment in assessing the likely
future tax consequences of events that have been recognized in our financial
statements or tax returns, and future profitability by tax jurisdiction. We
provide a valuation allowance to reduce our U.S. federal, state and non-U.S.
deferred tax assets to the amount that is more likely than not to be realized.

Given the current level of pre-tax income of Level 3 and the CenturyLink
consolidated group, and assuming we maintain into the future this current level
of pre-tax income at a minimum, we expect to generate income before taxes in the
United States in future periods at a level that would fully utilize our U.S.
federal and the majority of our state net operating loss carryforward balances.
We continue to maintain a valuation allowance of approximately $0.9 billion as
of September 30, 2017, against net deferred tax assets, primarily in non-U.S.
and certain of our state jurisdictions where we do not currently believe the
realization of our deferred tax assets is more likely than not.

We evaluate our deferred tax assets quarterly to determine whether adjustments
to the valuation allowance are appropriate in light of changes in facts or
circumstances, such as changes in expected future pre-tax earnings, tax law,
interactions with taxing authorities and developments in case law. In making
this evaluation, we rely on our recent history of pre-tax earnings. Our material
assumptions are our forecasts of future pre-tax earnings and the nature and
timing of future deductions and income represented by the deferred tax assets
and liabilities, all of which involve the exercise of significant judgment.
We had a valuation allowance on many of our non-U.S. jurisdictions as of
September 30, 2017. We monitor our cumulative loss position in these non-U.S.
jurisdictions and other evidence each quarter to determine the appropriateness
of our valuation allowance.

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With respect to certain foreign subsidiaries deemed branches for U.S. income tax
purposes, we had historically established deferred tax liabilities for foreign
branches with an overall cumulative translation gain, but had not established
deferred tax assets for those with an overall translation loss as we had no
plans to trigger realization of the losses in the foreseeable future. On
December 7, 2016, the Internal Revenue Service issued new regulations under
Internal Revenue Code Section 987 addressing the taxation of foreign currency
translation gains and losses arising from foreign branches. The new regulations
require a "fresh start" recalculation of the unrealized gains and losses as of
the adoption date. The regulations provide that the tax bases of specified
assets, such as fixed assets, will be translated at historic foreign exchange
rates. As a result, the deferred taxes related to such foreign currency
translation are expected to reverse through the operations of the branch thereby
allowing the recognition of deferred tax assets arising from translation losses
as well. On October 2, 2017, the U.S. Treasury Department and the U.S. Internal
Revenue Service announced plans to further amend the regulations and to allow
companies to delay the applicability date of those regulations, which will be
effective for us starting on January 1, 2019. We are assessing the potential
future effect of these changes on our deferred taxes.

Although we believe our estimates are reasonable, the ultimate determination of
the appropriate amount of valuation allowance, as well as the effect of recently
issued tax regulations addressing the complex area of foreign currency
translation involves significant judgment.

Refer to Item 7 of our Form 10-K for the year ended December 31, 2016 for a description of our other critical accounting policies.

Results of Operations for the Three and Nine Months Ended September 30, 2017 vs. 2016

                                Three Months Ended September 30,                   Nine Months Ended September 30,
(dollars in millions)        2017              2016          Change %           2017              2016          Change %
Revenue                 $     2,059       $     2,033             1  %     $     6,168       $     6,140             -  %
Network access costs            678               675             -  %           2,044             2,045             -  %
Network related
expenses                        345               337             2  %           1,018             1,014             -  %
Depreciation and
amortization                    333               319             4  %             983               930             6  %
Selling, general and
administrative
expenses                        348               348             -  %           1,078             1,061             2  %
Total Costs and
Expenses                      1,704             1,679             1  %           5,123             5,050             1  %
Operating Income                355               354             -  %           1,045             1,090            (4 )%
Other Income
(Expense):
Interest income                   6                 1      NM                       11                 3            NM
Interest expense               (134 )            (139 )          (4 )%            (400 )            (414 )          (3 )%
Loss on modification
and extinguishment of
debt                              -                 -            NM                (44 )             (40 )          10  %
Other, net                        6                 1            NM                  9               (14 )          NM
Total Other Expense            (122 )            (137 )         (11 )%            (424 )            (465 )          (9 )%
Income Before Income
Taxes                           233               217             7  %             621               625            (1 )%
Income Tax Expense              (76 )             (74 )           3  %            (215 )            (198 )           9  %
Net Income              $       157       $       143            10  %     $       406       $       427            (5 )%



___________________
NM - Not meaningful



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Discussion of all significant variances:

Revenue by Channel:

                              Three Months Ended September 30,                 Nine Months Ended September 30,
(dollars in millions)        2017          2016(1)        Change %           2017          2016(1)        Change %
Core Network Services
Revenue:
North America -
Wholesale Channel       $        404     $      412           (2 )%     $      1,222     $    1,289           (5 )%
North America -
Enterprise Channel             1,193          1,161            3  %            3,576          3,490            2  %
EMEA - Wholesale
Channel                           57             58           (2 )%              167            183           (9 )%
EMEA - Enterprise
Channel                          127            122            4  %              368            378           (3 )%
Latin America -
Wholesale Channel                 35             37           (5 )%              107            113           (5 )%
Latin America -
Enterprise Channel               147            139            6  %              434            378           15  %
Total Core Network
Services Revenue               1,963          1,929            2  %            5,874          5,831            1  %
Wholesale Voice
Services                          96            104           (8 )%              294            309           (5 )%
Total Revenue           $      2,059     $    2,033            1  %     $      6,168     $    6,140            -  %

(1) The 2016 results have been adjusted to reflect changes made to customer assignments between the wholesale and enterprise channels as of the beginning of 2017.


Revenue by Service Offering:
                              Three Months Ended September 30,                 Nine Months Ended September 30,
(dollars in millions)        2017          2016(1)        Change %           2017          2016(1)        Change %
Core Network Services
Revenue:
Colocation and
Datacenter Services     $        147     $      147            -  %     $        439     $      458           (4 )%
Transport and Fiber              577            576            -  %            1,748          1,730            1  %
IP and Data Services             943            910            4  %            2,807          2,743            2  %
Voice Services (Local
and Enterprise)                  296            296            -  %              880            900           (2 )%
Total Core Network
Services Revenue               1,963          1,929            2  %            5,874          5,831            1  %
Wholesale Voice
Services                          96            104           (8 )%              294            309           (5 )%
Total Revenue           $      2,059     $    2,033            1  %     $      6,168     $    6,140            -  %

(1) The 2016 results have been adjusted to reflect changes made to customer assignments between the wholesale and enterprise channels as of the beginning of 2017.

Revenue increased $26 million and $28 million in the three and nine months ended
September 30, 2017, respectively, compared to the same periods of 2016. Core
Network Services revenue increased $34 million in the three months ended
September 30, 2017, compared to the same period in 2016, consisting of a $45
million increase in enterprise channel revenue, partially offset by a $11
million decrease in wholesale channel revenue. Core Network Services increased
$43 million in the nine months ended September 30, 2017, compared to the same
period in 2016, consisting of an $132 million

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increase in enterprise channel revenue, partially offset by a $89 million decrease in wholesale channel revenue.

Enterprise channel revenue increased $32 million and $86 million in North
America in the three and nine months ended September 30, 2017, respectively,
compared to the same periods in 2016, primarily due to continued growth in VPN,
professional, IP and data, and transport services driven by growth in our large,
multinational, enterprise customers, partially offset by a decline in voice and
colocation and datacenter services. Enterprise channel revenue increased $8
million in Latin America in the three months ended September 30, 2017, compared
to the same period in 2016 primarily due to growth in IP and data services.
Enterprise channel revenue increased $56 million in Latin America in the nine
months ended September 30, 2017, compared to the same period in 2016, primarily
due to growth in IP, transport, colocation and datacenter, and voice services,
as well as the effect of the weakening of the U.S. dollar against Latin American
currencies, primarily in Brazil, in 2017 compared to the exchange rates in 2016.
Enterprise channel revenue in EMEA increased $5 million in the three months
ended September 30, 2017, compared to the same period in 2016, primarily due to
growth in IP and data and VPN services. Enterprise channel revenue in EMEA
decreased $10 million in the nine months ended September 30, 2017, compared to
the same period of 2016, primarily due to the effect of the stronger U.S. dollar
against European currencies and a decline in voice services, partially offset by
growth in IP and data and VPN services.

North America wholesale channel revenue decreased $8 million in the three months
ended September 30, 2017 compared to the same period in 2016, primarily due to
declines in transport services, partially offset by growth in voice services.
North America wholesale channel revenue decreased $67 million in the nine months
ended September 30, 2017, compared to the same period in 2016, primarily due to
declines in transport, colocation and datacenter, and IP services. EMEA
wholesale channel revenue remained essentially flat in the three months ended
September 30, 2017, compared to the same period in 2016, while it decreased $16
million in the nine months ended September 30, 2017, compared to the same period
in 2016, primarily due to the effect of the stronger U.S. dollar against
European currencies and declines in transport and IP services. Wholesale channel
revenue in Latin America remained essentially flat in the three months ended
September 30, 2017 compared to the same period in 2016, while it decreased $6
million in the nine months ended September 30, 2017, compared to the same period
in 2016, primarily due to a decline in IP services. Wholesale channel revenue
continued to be affected by industry consolidation across all regions.

From a service and product offering perspective, we continued to grow our IP and
data services by $33 million in the three months ended September 30, 2017,
compared to the same period of 2016, driven primarily by an increase in VPN, CDN
and IP services. IP and data services also continued to grow by $64 million in
the nine months ended September 30, 2017, compared to the same period of 2016,
driven primarily by an increase in VPN and CDN services. Transport and Fiber
revenue remained essentially flat for the three months ended September 30, 2017,
compared to the same period in 2016, while it increased $18 million for the nine
months ended September 30, 2017, compared to the same period in 2016, due
primarily to growth in wavelengths, professional services, and dark fiber,
partially offset by a decrease in private line. Colocation and Datacenter
services remained essentially flat in the three months ended September 30, 2017,
compared to the same period in 2016, while it decreased $19 million in the nine
months ended September 30, 2017, compared to the same period of 2016, primarily
due to a decrease in colocation resulting from higher dispute settlements in the
second quarter of 2016, partially offset by growth in data center and managed
security. Voice Services remained essentially flat in the three months ended
September 30, 2017, compared to the same period in 2016, while it declined $20
million in the nine months ended September 30, 2017, compared to the same period
of 2016, due to competitive pressures.

Wholesale Voice Services revenue decreased by a total of $8 million and $15 million, in the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016,

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primarily due to competitive pressures caused by industry consolidation and our
focus on maintaining or growing Wholesale Voice Services profitability.
Network Access Costs include leased capacity, right-of-way costs, access
charges, satellite transponder lease costs and other third-party costs directly
attributable to providing access to customer locations from our network, but
excludes Network Related Expenses, and depreciation and amortization. Network
Access Costs do not include any employee expenses or impairment expenses; these
expenses are allocated to Network Related Expenses or Selling, General and
Administrative Expenses.

Network Access Costs as a percentage of total revenue was essentially flat at 33% for both the three and nine months ended September 30, 2017 and 2016.

Network Related Expenses include certain expenses associated with the delivery
of services to customers and the operation and maintenance of our network, such
as facility rent, utilities, maintenance and other costs, each related to the
operation of our communications network, as well as salaries, wages and related
benefits (including non-cash stock-based compensation expenses) associated with
personnel who are responsible for the delivery of services, operation and
maintenance of our communications network, and accretion expense on asset
retirement obligations, but excludes depreciation and amortization.

Network Related Expenses increased to $345 million in the three months ended
September 30, 2017 from $337 million in the same period in 2016 primarily due to
an increase in employee related expenses associated with CenturyLink integration
of $5 million and facilities and network expenses of $3 million. Network Related
Expenses increased to $1.018 billion in the nine months ended September 30, 2017
from $1.014 billion in the same period in 2016 primarily due to an increase in
employee related expenses associated with CenturyLink integration of $14
million, partially offset by a decrease in facilities and network based expenses
of $7 million and other employee related expenses of $3 million.

Depreciation and Amortization increased 4% to $333 million in the three months
ended September 30, 2017 from $319 million in the same period of 2016. This
increase is primarily attributable to $13 million of depreciation and
amortization associated with additional capital expenditures and $1 million of
foreign currency exchange rate changes in EMEA and LATAM.
Depreciation and amortization increased 6% to $983 million in the nine months
ended September 30, 2017 from $930 million in the same period of 2016. This
increase is primarily attributable to $55 million of depreciation and
amortization associated with additional capital expenditures, partially offset
by $2 million of foreign currency exchange rate changes in EMEA and LATAM.

  Selling, General and Administrative Expenses ("SG&A Expenses") includes the
salaries, wages, and related benefits (including non-cash stock-based
compensation expenses) and the related costs of corporate and sales personnel,
travel, insurance, non-network related rent, advertising and other
administrative expenses.
SG&A Expenses remained essentially flat at $348 million in the three months
ended September 30, 2017, compared to $348 million in the same period of 2016,
primarily due to CenturyLink integration related expenses of $26 million, offset
by decreases in non-cash stock-based compensation of $9 million, employee
related and other expenses of $9 million, and professional fees of $8 million.
SG&A Expenses increased 2% to $1.078 billion in the nine months ended
September 30, 2017, compared to $1.061 billion in the same period of 2016,
primarily due to CenturyLink integration related expenses of $60 million,
partially offset by decreases in employee related and other expenses of $26
million, professional fees of $16 million, and non-cash stock-based compensation
of $1 million.

Non-cash stock-based compensation expense, which is included in both SG&A and Network Related Expenses, is related to performance restricted stock units ("PRSUs"), restricted stock units,

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shares issued for our matching contribution to our 401(k) plan, and outperform
stock appreciation rights ("OSO"). Non-cash stock-based compensation expense for
the three months ended September 30, 2017 and 2016 was $33 million and $43
million, respectively. Non-cash stock-based compensation expense for the nine
months ended September 30, 2017 and 2016 was $120 million and $121 million,
respectively. The decrease for the three and nine months ended September 30,
2017, compared to the same periods of 2016, was primarily related to a decrease
in expense resulting from PRSU and RSU awards vesting in the second and third
quarters of 2017, respectively, outperform appreciation right awards reaching
full amortization by the third quarter of 2016, partially offset by additional
grants of restricted stock units in March of 2017. Approximately $28 million and
$37 million of non-cash stock-based compensation expense was recorded in SG&A
Expenses during the three months ended September 30, 2017 and 2016,
respectively, and approximately $103 million and $104 million of non-cash
stock-based compensation expense was recorded in SG&A Expenses during the nine
months ended September 30, 2017 and 2016, respectively. Approximately $5 million
and $6 million of non-cash stock-based compensation expense was recorded in
Network Related Expenses during the three months ended September 30, 2017 and
2016, respectively, and approximately $17 million of non-cash stock-based
compensation was recorded in Network Related Expenses during the nine months
ended September 30, 2017 and 2016, respectively.

Adjusted EBITDA, as defined by us, is net income from the Consolidated
Statements of Income before (1) income tax benefit (expense), (2) total other
income (expense), (3) non-cash impairment charges included within selling,
general and administrative expenses and network related expenses, (4)
depreciation and amortization expense and (5) non-cash stock-based compensation
expense included within selling, general and administrative expenses and network
related expenses and (6) discontinued operations.

Adjusted EBITDA is not a measurement under GAAP and may not be used in the same
way by other companies. We believe that Adjusted EBITDA is an important part of
our internal reporting and is a key measure used by us to evaluate our
profitability and operating performance and to make resource allocation
decisions. We believe such measurement is especially important in a
capital-intensive industry such as telecommunications. We also use Adjusted
EBITDA to compare our performance to that of our competitors and to eliminate
certain non-cash and non-operating items in order to consistently measure from
period to period our ability to fund capital expenditures, fund growth, service
debt and determine bonuses.

Adjusted EBITDA excludes non-cash impairment charges and non-cash stock-based
compensation expense because of the non-cash nature of these items. Adjusted
EBITDA also excludes interest income, interest expense and income tax benefit
(expense) because these items are associated with our capitalization and tax
structures. Adjusted EBITDA also excludes depreciation and amortization expense
because these non-cash expenses reflect the effect of capital investments which
we believe are better evaluated through cash flow measures. Adjusted EBITDA
excludes net other income (expense) because these items are not related to our
primary operations.

There are limitations to using non-GAAP financial measures such as Adjusted
EBITDA, including the difficulty associated with comparing companies that use
similar performance measures whose calculations may differ from our
calculations. Additionally, this financial measure does not include certain
significant items such as interest income, interest expense, income tax benefit
(expense), depreciation and amortization expense, non-cash impairment charges,
non-cash stock-based compensation expense and net other income (expense).
Adjusted EBITDA should not be considered a substitute for other measures of
financial performance reported in accordance with GAAP.


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The following information provides a reconciliation of Net Income to Adjusted EBITDA as defined by us along with Adjusted EBITDA by reportable segment:

                                           Three Months Ended September 30,            Nine Months Ended September 30,
(dollars in millions)                         2017                  2016                 2017                   2016
Net Income                              $         157         $         143       $           406         $           427
Income Tax Expense                                 76                    74                   215                     198
Total Other Expense                               122                   137                   424                     465
Depreciation and Amortization                     333                   319                   983                     930
Non-Cash Stock Compensation                        33                    43                   120                     121
Adjusted EBITDA                         $         721         $         716       $         2,148         $         2,141

North America                           $         817         $         784       $         2,441         $         2,415
EMEA                                               64                    56                   189                     162
Latin America                                      78                    80                   235                     218
Unallocated Corporate Expenses                   (238 )                (204 )                (717 )                  (654 )
Adjusted EBITDA                         $         721         $         716       $         2,148         $         2,141



Adjusted EBITDA was $721 million in the three months ended September 30, 2017,
compared to $716 million in the same period of 2016, and $2.148 billion in the
nine months ended September 30, 2017, compared to $2.141 billion in the same
period of 2016. The increase in Adjusted EBITDA is primarily attributable to an
increase in revenue, partially offset by a slight increase in network access
costs and increased SG&A expenses primarily attributable to integration expenses
related to the CenturyLink Merger. See Note 9 - Segment Information in the notes
to unaudited Consolidated Financial Statements for additional information on
Adjusted EBITDA by region.

Adjusted EBITDA increased $33 million and $26 million in the North America
region in the three and nine months ended September 30, 2017, respectively,
compared to the same period of 2016. The increase in the three months ended
September 30, 2017 was primarily due to increased Core Network Services revenue
of $24 million and decreased operating expenses of $17 million, which consisted
primarily of reduced employee related expenses, partially offset by a decrease
in Wholesale Voice Services revenue of $8 million. The increase in the nine
months ended September 30, 2017 was primarily due to increased Core Network
Services revenue of $19 million and decreased operating expenses of $27 million,
which primarily consisted of reduced employee related expenses, partially offset
by decreased Wholesale Voice Services revenue of $13 million and an increase in
network access costs of $11 million.

Adjusted EBITDA increased $8 million and $27 million in the EMEA region in the
three and nine months ended September 30, 2017, respectively, compared to the
same periods of 2016. The increase in the three months ended September 30, 2017
was primarily due to a decrease in network access costs of $4 million and an
increase in Core Network Services revenue of $4 million. The increase in the
nine months ended September 30, 2017 was primarily due to a decrease in network
access costs of $31 million and decreased operating expenses of $25 million,
partially offset by a decline in Core Network Services revenue of $26 million.

Adjusted EBITDA decreased $2 million and increased $17 million in the Latin American region in the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The decrease in the three months ended September 30, 2017 was primarily due to increased

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network access costs of $6 million and operating expenses of $4 million, partially offset by increased Core Network Services revenue of $6 million. The increase in the nine months ended September 30, 2017 was primarily due to increased Core Network Services revenue of $50 million, partially offset by increased network access costs of $18 million and operating expenses of $18 million.

Interest Expense decreased 4% to $134 million in the three months ended
September 30, 2017 from $139 million in the same period of 2016 and 3% to $400
million in the nine months ended September 30, 2017 from $414 million in the
same period of 2016. Interest expense decreased primarily due to a lower
weighted average interest cost of debt of 4.6% at September 30, 2017 compared to
4.7% at September 30, 2016, primarily due to refinancing activities in 2017.

We expect annual interest expense in 2017 of approximately $540 million.

Loss on Modification and Extinguishment of Debt

In the first quarter of 2017, we recorded a charge of approximately $44 million
related to the February 2017 refinancing of all our outstanding $4.611 billion
senior secured term loans through the issuance of a new Tranche B 2024 Term Loan
in the principal amount of $4.611 billion. The term loans refinanced were our
Tranche B-III 2019 Term Loan, Tranche B 2020 Term Loan, and the Tranche B-II
2022 Term Loan. The new Tranche B 2024 Term Loan bears interest at LIBOR plus
2.25 percent, with a zero percent minimum LIBOR, and will mature on February 22,
2024.

Other, net is primarily comprised of gains and losses on the sale of non-operating assets, foreign currency gains and losses and other income and expense.

Other, net was $6 million of income in the three months ended September 30,
2017 compared to $1 million of income in the same period of 2016 and $9 million
of income in the nine months ended September 30, 2017 compared to $14 million of
expense in the same period of 2016. The change in Other, net in the three and
nine months ended September 30, 2017 and 2016 was primarily due to a change in
estimated non-income taxes and a foreign currency gain in 2017 compared to a
foreign currency loss in 2016, attributable to the appreciation of the U.S.
dollar and other currencies for certain intercompany balances denominated in the
local currency of foreign subsidiaries in EMEA that are not considered to be
long-term in nature, partially offset by a loss on disposal of assets.

Income Tax Expense was $76 million in the three months ended September 30, 2017
compared to $74 million in the same period of 2016 and $215 million in the nine
months ended September 30, 2017 compared to $198 million in the same period of
2016. Income tax expense in the three months ended September 30, 2017 consisted
of $59 million U.S. and $17 million foreign tax expense. Our effective tax rate
for the quarter is lower than the statutory rate primarily due to more pre-tax
income in jurisdictions that are carrying full valuation allowances, excess tax
benefits related to stock compensation, and U.S. state tax rate changes,
partially offset by limitations on certain deductions.

We incur tax expense attributable to income in the U.S. and in various
subsidiaries that are required to file state or foreign income tax returns on a
separate legal entity basis. We also recognize accrued interest and penalties in
income tax expense related to uncertain tax benefits. Our tax rate is volatile
and may move up or down with changes in, among other things, the amount and
source of income or loss, our ability to utilize foreign tax credits, changes in
tax laws, our deferred tax valuation allowance, and the movement of liabilities
established for uncertain tax positions as statutes of limitations expire or
positions are otherwise effectively settled.


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Financial Condition- For the Nine Months Ended September 30, 2017 and 2016

Cash flows from operating activities, investing activities and financing
activities for the nine months ended September 30, 2017 and 2016 are summarized
as follows:

                                                              Nine Months Ended September 30,
(dollars in millions)                                        2017             2016          Change
Net Cash Provided by Operating Activities               $     1,791       $     1,786     $      5
Net Cash Used in Investing Activities                        (1,013 )          (1,016 )          3
Net Cash Used in Financing Activities                          (348 )             (54 )       (294 )
Effect of Exchange Rates on Cash and Cash Equivalents             3                (1 )          4
Net Change in Cash and Cash Equivalents                 $       433       $       715     $   (282 )



Operating Activities

Cash provided by operating activities was $1.791 billion for the nine months
ended September 30, 2017 compared to cash provided by operating activities of
$1.786 billion in the same period of 2016. Cash provided by operating activities
is subject to variability period over period as a result of the timing of the
collection of receivables and payments related to interest expense, accounts
payable, and bonuses.

Investing Activities

Cash used in investing activities in the nine months ended September 30, 2017
was consistent with the same period of 2016. Capital expenditures totaled $1.018
billion in the nine months ended September 30, 2017 and $1.028 billion in the
same period of 2016.

Financing Activities

Financing activities used cash of $348 million in the nine months ended
September 30, 2017 for the repayment and refinancing of debt. In the nine months
ended September 30, 2016, financing activities used $54 million of cash. See
Note 6 - Long-Term Debt in the notes to the unaudited Consolidated Financial
Statements for more details regarding our debt transactions during the nine
months ended September 30, 2017 and 2016.

Effect of Exchange Rates on Cash and Cash Equivalents

The effect of exchange rates on cash and cash equivalents in the nine months ended September 30, 2017 was an increase in cash of $3 million.

Liquidity and Capital Resources

Upon the consummation of the CenturyLink Merger effective November 1, 2017, we
became an indirect wholly owned subsidiary of CenturyLink. As such, factors
relating to or affecting CenturyLink's liquidity and capital resources could
have material impacts on us, including impacts on our credit ratings, our access
to capital markets, and changes in the financial market's perception of us. In
addition, we believe that any future liquidity needs not met through our cash on
hand and operating cash flow will be met by CenturyLink.

CenturyLink has cash management arrangements between certain of its subsidiaries
that include lines of credit, affiliate obligations, capital contributions, and
dividends.


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We had $2.252 billion of cash and cash equivalents on hand at September 30,
2017. In connection with the closing of the Merger Agreement, we invested $1.825
billion in CenturyLink in exchange for an unsecured demand note that bears
interest at 3.5% per annum. The principal amount of such note is payable upon
demand by Level 3 Parent but no later than November 1, 2020, and is prepayable
by CenturyLink at any time. We also had $34 million of current and non-current
restricted cash and securities used to collateralize outstanding letters of
credit and certain performance and operating obligations and other deposits at
September 30, 2017.

Free Cash Flow is defined by us as net cash provided by (used in) operating
activities less capital expenditures as disclosed in the Consolidated Statements
of Cash Flows. Management believes that Free Cash Flow is a relevant metric to
provide to investors, as it is an indicator of our ability to generate cash to
service our debt. Free Cash Flow excludes cash used for acquisitions, debt
repayments, and the impact of exchange rate changes on cash and cash equivalents
balances.

There are material limitations to using Free Cash Flow to measure our
performance as it excludes certain material items such as principal payments on
and repurchases of long-term debt and cash used to fund acquisitions.
Comparisons of our Free Cash Flow to that of some of our competitors may be of
limited usefulness since we do not currently pay a significant amount of income
taxes due to net operating loss carryforwards, and therefore, generate higher
cash flow than a comparable business that does pay income taxes. Additionally,
this financial measure is subject to variability quarter over quarter as a
result of the timing of payments related to interest expense, accounts
receivable and accounts payable and capital expenditures. Free Cash Flow should
not be used as a substitute for net change in cash and cash equivalents on the
Consolidated Statements of Cash Flows.

The following information provides a reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow as defined by us:

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