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LEVEL 3 COMMUNICATIONS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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02/24/2017 | 10:37pm CET
The following discussion should be read in conjunction with our Consolidated
Financial Statements (including the notes thereto) included elsewhere herein and
the description of our business in Item 1, "Business".


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. At December 31, 2016, for contracts where upfront payments
were received for services to be delivered in the future, our weighted average
remaining contract period was approximately 12 years.

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, subject to
the satisfaction or waiver of the conditions set forth in the Merger Agreement,
we will be acquired by CenturyLink in a cash and stock transaction, including
the assumption of our debt (the "CenturyLink Merger").

As of September 30, 2015, we deconsolidated our Venezuelan subsidiary and began
accounting for our investment in that subsidiary using the cost method of
accounting in the fourth quarter of 2015. This change resulted in a one-time
charge of $171 million to adjust the Venezuelan subsidiary's assets and
liabilities to estimated fair value in the third quarter of 2015. Our financial
results do not include the operating results of our Venezuelan subsidiary
subsequent to September 30, 2015. Any dividends from our Venezuelan subsidiary
are recorded as other income upon receipt of the cash. Please see Note 1 to the
accompanying Consolidated Financial Statements and additional discussion in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations under "Venezuela Effects" in Results of Operations.

On October 31, 2014, we completed the acquisition of tw telecom inc. ("tw telecom") and tw telecom became our indirect, wholly owned subsidiary through a tax-free, stock and cash reorganization.


We pursue the strategies discussed in Item 1. Business, "Business Overview and
Strategy." In particular, with respect to strategic financial objectives, we
focus our attention on the following:

• growing revenue by increasing sales generated by our Core Network Services;



•      focusing on our Enterprise customers, as this customer group has the
       largest potential for growth;



•      continually improving the customer experience to increase customer
       retention and reduce customer churn;


• launching new products and services to meet customer needs, in particular

       for enterprise customers;




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• improving profitability by reducing network costs and operating expenses;



•      achieving and maintaining sustainable generation of positive cash flows
       from operations;


• continuing to show improvement in Adjusted EBITDA (as defined in this Item

       below) as a percentage of revenue;


• localizing certain decision-making and interaction with our mid-market

       enterprise customers, including leveraging our existing network assets;



•      concentrating our capital expenditures on those technologies and assets

that enable us to develop our Core Network Services;

• managing Wholesale Voice Services for profit contribution; and

• refinancing our future debt maturities.




Our management continues to review all existing lines of business and service
offerings to determine how they enhance our focus on the delivery of
communications services and meeting our financial objectives. To the extent that
certain lines of business or service offerings are not considered to be
compatible with the delivery of our services or with meeting our financial
objectives, we may exit those lines of business or stop offering those services
in part or in whole.

We have also been focused on improving our liquidity and financial condition,
and extending the maturity dates of certain debt. See Note 10 - Long-Term Debt
in the notes to the Consolidated Financial Statements.

We will continue to look for opportunities to improve our financial position and focus our resources on growing revenue and managing costs for the business.

Our management reporting structure reflects the way in which we allocate resources and assess performance. Our reportable segments consist of: 1) North America; 2) EMEA; and 3) Latin America.

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.


• 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.


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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.

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.


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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.

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.

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

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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 and Estimates


Our discussion and analysis of our financial condition and results of operations
are based upon our Consolidated Financial Statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
equity, revenue, expenses and related disclosures. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. We evaluate these estimates on an
ongoing basis. Actual results may differ from these estimates under different
assumptions or conditions.

While we have other accounting policies that involve estimates such as the allowance for doubtful accounts and unfavorable contracts recognized in acquisition accounting, management has identified the policies below, which require the most significant judgments and estimates to be made in the preparation of the Consolidated Financial Statements, as critical to our business operations and the understanding of our results of operations.

Revenue


Revenue is recognized monthly as the services are provided based on contractual
amounts expected to be collected. Communications services are provided either on
a usage basis, which can vary period to period, or at a contractually committed
amount.

For certain sale and long-term indefeasible right of use ("IRU") contracts
involving private line, wavelengths and dark fiber services, we may receive
upfront payments for services to be delivered for a period of 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.

Termination revenue is recognized when a customer disconnects service prior to
the end of the contract period and for which we had previously received
consideration and for which revenue recognition was deferred. Termination
revenue is also recognized when customers make termination penalty payments to
us to settle contractually committed purchase amounts that the customer no
longer expects to meet or when a customer renegotiates a contract with us under
which we are no longer obligated to provide product or services for
consideration previously received and for which revenue recognition has been
deferred. Termination revenue is reported in the same manner as the original
product or service provided.

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which
amended the existing accounting standards for revenue recognition and requires
an entity to recognize the amount of revenue it expects to be entitled to for
the transfer of promised goods or services to customers. The ASU and subsequent
amendments have been codified as ASC 606, Revenue from Contracts with Customers
("ASC 606"). In July 2015, the FASB deferred the effective date to annual
reporting periods beginning after December 15, 2017, and interim reporting
periods within those periods. Early adoption is permitted using the original
effective date of annual reporting periods beginning after December 15, 2016,
and interim reporting periods within those periods. The new guidance may be
applied retrospectively to each prior period presented or prospectively with the
cumulative effect recognized as of the date of initial adoption. We will not
adopt ASC 606 early.


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We are performing a comprehensive analysis of our revenue streams and
contractual arrangements to identify the effects of ASC 606 on our consolidated
financial statements and are developing new accounting and reporting policies,
business and internal control processes and procedures to facilitate adoption of
the standard. Because we currently have service contracts that contain a
significant financing component that are not currently separately accounted for,
we will be required to estimate and record incremental revenue and interest cost
associated with these contractual terms. In addition, we will be required to
capitalize, and subsequently amortize, commission costs associated with
obtaining or fulfilling our customer contracts, which we do not currently defer
and amortize. We will also have to comply with new revenue disclosure
requirements. We are continuing to review and evaluate underlying contract
information that will be used to support new accounting and disclosure
requirements under ASC 606 and evaluate other matters that may result from
adoption of the standard. We have not yet selected a transition method, as our
method of transition may be affected by the CenturyLink Merger, which we expect
will be completed in the third quarter of 2017, and subsequent integration
activities completed prior to the January 1, 2018 ASC 606 adoption date.

Revenue Reserves

We establish appropriate revenue reserves at the time services are rendered based on an analysis of historical credit activity to address, where significant, situations in which collection is not reasonably assured as a result of credit risk, potential billing disputes or other reasons. Our significant estimates are based on assumptions and other considerations, including payment history, credit ratings, customer financial performance and history of billing disputes.

Network Access Cost Reserves


We dispute incorrect billings from our suppliers of network services. The most
prevalent types of disputes 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.
Depending on the type and complexity of the issues involved, it may and often
does take several quarters to resolve the disputes. We establish appropriate
network access cost reserves for disputed supplier billings based on an analysis
of our historical experience in resolving disputes with our suppliers and
regulatory analysis regarding certain supplier billing matters. Judgment is
required in estimating the ultimate outcome of the dispute resolution process,
as well as any other amounts that may be incurred to conclude the negotiations
or settle any litigation. Actual results may differ from these estimates under
different assumptions or conditions and such differences could be material.

Valuation of Long-Lived Assets


We perform an assessment of our long-lived assets, including finite-lived
intangible assets, for impairment when events or changes in circumstances
indicate that the carrying value of assets or asset groupings may not be
recoverable. This review requires the identification of the lowest level of
identifiable cash flows for purposes of grouping assets subject to review. The
estimate of undiscounted cash flows includes long-term forecasts of revenue
growth and operating expenses. All of these items require significant judgment
and assumptions. An impairment loss may exist when the estimated undiscounted
cash flows attributable to the assets are less than their carrying amount. If an
asset is deemed to be impaired, the amount of the impairment loss recognized
represents the excess of the long-lived asset's carrying value as compared to
its estimated fair value, based on management's assumptions and projections.

We conducted a long-lived asset impairment analysis in the fourth quarter of
2016 and 2015 and in each case concluded that our long-lived assets, including
our finite-lived intangible assets, were not impaired. To the extent that future
changes in assumptions and estimates cause a change in estimates of future cash
flows that indicate the carrying amount of our long-lived assets, including
finite-lived intangible

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assets, may not be recoverable, we may incur impairment charges in the future to
write-down the carrying amount of our long-lived assets to their estimated fair
value.

Useful Lives of Long-Lived Assets


We perform internal reviews to evaluate the depreciable lives of our property,
plant and equipment annually or more frequently if new facts and circumstances
arise that may affect management's original estimates. Due to the rapid changes
in technology and the competitive environment, selecting the estimated economic
life of telecommunications property, plant, and equipment requires a significant
amount of judgment. Our internal reviews take into account input from our global
engineering and network services personnel, actual usage, the physical condition
of our property, plant, and equipment, industry data, and other relevant
factors.

Goodwill and Indefinite-Lived Intangible Assets


We perform an annual impairment assessment of our goodwill and intangible assets
with indefinite useful lives during the fourth quarter, or more frequently if we
determine that indicators of impairment exist. Our impairment review process
considers the fair value of each reporting unit relative to its carrying value.
We assess the fair value of each of our reporting units using an income approach
(also known as a discounted cash flow) and a market multiple approach. The
income approach utilizes cash flow projections discounted using an appropriate
Weighted Average Cost of Capital (WACC) rate for each reporting unit. The market
multiple approach uses a multiple of a company's Earnings Before Interest,
Taxes, and Depreciation and Amortization expenses (EBITDA).

If the fair value of the reporting unit exceeds its carrying value, goodwill is
not impaired and no further testing is performed. If the carrying value of the
reporting unit exceeds its fair value, then a second step must be performed, and
the implied fair value of the reporting unit's goodwill must be determined and
compared to the carrying value of the reporting unit's goodwill. If the carrying
value of a reporting unit's goodwill exceeds its implied fair value, then an
impairment loss equal to the difference will be recorded. In accordance with
applicable accounting guidance, prior to performing the two step evaluation, an
assessment of qualitative factors may be performed to determine whether it is
more likely than not that the fair value of a reporting unit exceeds the
carrying value. If it is determined that it is unlikely that the carrying value
exceeds the fair value, we are not required to complete the two step goodwill
impairment evaluation. The selection and assessment of qualitative factors used
to determine whether it is more likely than not that the fair value of a
reporting unit exceeds the carrying value involves significant judgment.

In 2016, our reporting units consisted of our three regional operating units in:
North America; Europe, the Middle East and Africa ("EMEA"); and Latin America.
Goodwill assigned to the North America, EMEA and Latin America reporting units
at December 31, 2016 totaled $7.729 billion and was $7.024 billion, $109 million
and $596 million, respectively. Goodwill assigned to the North America, EMEA and
Latin America reporting units at December 31, 2015 totaled $7.749 billion and
was $7.024 billion, $129 million and $596 million, respectively.

In 2016, we conducted our qualitative goodwill impairment analysis and
determined that it was more likely than not that the fair value of our reporting
units exceeded the carrying value and concluded that goodwill was not impaired.
As a result, we did not perform the two step goodwill impairment evaluation. In
2015, as a result of the deconsolidation of our Venezuelan subsidiary, we
completed an assessment of the Latin American and other reporting units'
goodwill as of September 30, 2015 and concluded there was no impairment in 2015.

To the extent that future changes in our assumptions and estimates cause a
change in the related fair value estimates that indicate the carrying amount of
our goodwill may exceed its fair value, we may incur impairment charges in the
future to write-down the carrying amount of our goodwill to its estimated fair
value.

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Our indefinite-lived intangible assets impairment review process compares the
estimated fair value of the indefinite-lived intangible assets to their
respective carrying values. If the fair value of the indefinite-lived intangible
assets exceeds their carrying values, then the indefinite-lived intangible
assets are not impaired. If the carrying value of the indefinite-lived
intangible assets exceeds their fair value, then an impairment loss equal to the
difference will be recorded. In accordance with applicable accounting standards,
an entity may assess qualitative factors to determine whether it is more likely
than not that the fair value exceeds the carrying value prior to performing the
evaluation. If it is determined that it is unlikely the carrying value exceeds
the fair value, then the entity is not required to perform the indefinite-lived
intangible assets impairment evaluation.

During the fourth quarter of 2016 and 2015, we conducted our indefinite-lived
intangible assets impairment analysis and concluded that there was no impairment
in 2016 and 2015.

Assessment of Loss Contingencies


We have legal, tax and other contingencies that could result in significant
losses upon the ultimate resolution of such contingencies. We have provided for
losses in situations where we have concluded that it is probable that a loss has
been incurred and the amount of the loss is reasonably estimable. Further, with
respect to loss contingencies, where it is probable that a liability has been
incurred and there is a range in the expected loss and no amount in the range is
more likely than any other amount, we accrue at the low end of the range. A
significant amount of judgment is involved in determining whether a loss is
probable and reasonably estimable due to the uncertainty involved in predicting
the likelihood of future events and estimating the financial impact of such
events. Accordingly, it is possible that upon the further development or
resolution of a contingent matter, a significant charge could be recorded in a
future period related to an existing contingent matter. For additional
information, see Note 15 - Commitments, Contingencies And Other Items in the
notes to the Consolidated Financial Statements.

Business Combinations


The accounting guidance for business combinations requires an acquiring entity
to recognize all of the assets acquired and liabilities assumed at the
acquisition date fair value. The allocation of the purchase price to the assets
acquired and liabilities assumed from an acquisition, and the related estimated
lives of depreciable and amortizable tangible and identifiable intangible
assets, require a significant amount of judgment and is considered a critical
estimate. Such allocation of certain aspects of the purchase price to items that
are more complex to value is performed by management, taking into consideration
information provided to management by an independent valuation firm.


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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 have
historically provided 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; however, in the fourth quarter 2015, we released the majority of
our valuation allowance against our U.S. federal and state deferred tax assets,
resulting in a non-cash benefit to income tax expense of approximately $3.3
billion, $3.1 billion of which was related to future taxable earnings.

Given our current level of pre-tax income, 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 December 31, 2016, 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
December 31, 2016. 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. In 2016 we had an $82 million income tax benefit
related to the release of deferred tax valuation allowances primarily in
Germany, Brazil, and Mexico. The determinations to release the foreign valuation
allowances were driven by our projection of future profitability for each legal
entity due to the recapitalization of our German subsidiary, the planned action
to restructure our Brazilian business, and the merger of our Mexican
subsidiaries.

With respect to our foreign branches, 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. The issuance of the regulations resulted in us
recognizing an estimated one-time income tax benefit of $110 million during the
fourth quarter 2016.


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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.


Results of Operations 2016 vs. 2015 and 2015 vs. 2014

Year Ended December 31,
(dollars in millions)                               2016        2015        2014
Revenue                                           $ 8,172     $ 8,229     $ 6,777
Network access costs                                2,725       2,833       2,529
Network related expenses                            1,346       1,432       1,246
Depreciation and amortization                       1,250       1,166       

808

Selling, general and administrative expenses        1,407       1,467       1,181
Total Costs and Expenses                            6,728       6,898       5,764
Operating Income                                    1,444       1,331       1,013
Other Income (Expense):
Interest income                                         4           1           1
Interest expense                                     (546 )      (642 )      (654 )
Loss on modification and extinguishment of debt       (40 )      (218 )       (53 )
Venezuela deconsolidation charge                        -        (171 )         -
Other, net                                            (20 )       (18 )       (69 )
Total Other Expense                                  (602 )    (1,048 )      (775 )
Income Before Income Taxes                            842         283         238
Income Tax (Expense) Benefit                         (165 )     3,150          76
Net Income                                        $   677     $ 3,433     $   314




Discussion of all significant variances:

Revenue by Channel:


Year Ended December 31,
(dollars in millions)                   2016       2015       2014

Core Network Services Revenue: North America - Wholesale Channel $ 1,694 $ 1,746 $ 1,472 North America - Enterprise Channel 4,668 4,461 3,048 EMEA - Wholesale Channel

                  247        278        334
EMEA - Enterprise Channel                 497        557        570

Latin America - Wholesale Channel 147 182 217 Latin America - Enterprise Channel 514 533 567 Total Core Network Services Revenue 7,767 7,757 6,208 Wholesale Voice Services

                  405        472        569
Total Revenue                         $ 8,172    $ 8,229    $ 6,777




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Revenue by Service Offering:

Year Ended December 31,
(dollars in millions)                     2016       2015       2014

Core Network Services Revenue: Colocation and Datacenter Services $ 604 $ 606 $ 590 Transport and Fiber

                       2,308      2,350      2,087
IP and Data Services                      3,659      3,589      2,530

Voice Services (Local and Enterprise) 1,196 1,212 988 Total Core Network Services Revenue 7,767 7,757 6,195 Wholesale Voice Services

                    405        472        582
Total Revenue                           $ 8,172    $ 8,229    $ 6,777



Revenue decreased 1% in 2016 compared to 2015 and increased 21% in 2015 compared
to 2014. Core Network Services revenue remained essentially flat at $7.767
billion in 2016 compared to $7.757 billion in 2015, although enterprise channel
revenue increased $128 million, partially offset by a $118 million decrease in
wholesale channel revenue.

Enterprise channel revenue increased $207 million in North America in 2016
compared to 2015, primarily due to growth in VPN services and wavelengths
services provided to enterprise customers. This growth was partially offset by
Latin America, where enterprise channel revenue declined $19 million, primarily
due to the effect of the September 30, 2015 deconsolidation of our Venezuelan
subsidiary with $57 million of enterprise channel revenue and the strengthening
of the U.S. dollar against Latin American currencies in 2016 compared to the
exchange rates in 2015, partially offset by an increase in enterprise channel
revenue of $37 million, due largely to growth in IP, wavelengths, and VPN
services to enterprise customers. Enterprise channel revenue in EMEA decreased
$60 million compared to 2015, primarily due to the effect of the stronger U.S.
dollar against European currencies and decreased U.K. Government revenue.

Wholesale channel revenue decreased $52 million in North America in 2016
compared to 2015 primarily due to a decline in private line and IP services,
partially offset by VPN, dark fiber and wavelengths services growth. Latin
America wholesale channel revenue decreased $35 million in 2016, primarily due
to the effect of the September 30, 2015 deconsolidation of our Venezuelan
subsidiary of $15 million, in addition to a decrease in IP and data services,
VPN, and private line services. EMEA wholesale channel revenue decreased $31
million primarily due to certain large disconnects and the strengthening of the
U.S. dollar against local currencies in 2016 compared to exchange rates in 2015.
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 $70 million in 2016 compared to 2015, driven primarily by an
increase in VPN services of $118 million, CDN services of $18 million and
managed services of $13 million. These increases were partially offset by the
effect of the September 30, 2015 deconsolidation of our Venezuelan subsidiary of
$47 million and the strengthening of the U.S. dollar against local currencies in
2016 compared to the exchange rates in 2015 of $34 million. Transport and fiber
decreased by $42 million, primarily due to a decrease in private line of $123
million, the effect of the September 30, 2015 deconsolidation of our Venezuelan
subsidiary of $14 million, and the strengthening of the U.S. dollar against
local currencies in 2016 compared to the exchange rates in 2015 of $12 million,
partially offset by increases in wavelengths services of $76 million and dark
fiber services of $30 million. Voice services decreased by $16 million,
primarily due to the decrease of intercarrier compensation for voice services of
$14 million, the strengthening of the U.S. dollar against local currencies in
2016 compared to the exchange rates in 2015 of $11 million, the

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decrease of collaboration services of $7 million, partially offset by the
increase in voice services by $16 million. Colocation and datacenter services
decreased by $2 million, primarily due to the effect of the September 30, 2015
deconsolidation of our Venezuelan subsidiary of $11 million and the
strengthening of the U.S. dollar against local currencies in 2016 compared to
the exchange rates in 2015 of $8 million, partially offset by growth in managed
security services, data center, and colocation services.

Wholesale Voice Services revenue decreased in all regions in 2016 compared to
2015, primarily due to competitive pressures caused by industry consolidation
and our focus on maintaining or growing Wholesale Voice Services profitability.

 The increase in total revenue in 2015 compared to 2014 was primarily driven by
a full year of additional revenue in 2015 associated with acquisition of tw
telecom in the fourth quarter of 2014, compared to $285 million representing two
months of revenue from the tw telecom acquisition included in the 2014 results.
Assuming the tw telecom revenue was included for the full year of 2014, the
total revenue would have increased from $8.123 billion in 2014 to $8.229 billion
in 2015, or a 1% increase (see Note 3 - Events Associated with the Acquisition
of tw telecom inc. in the Notes to the Consolidated Financial Statements). This
increase was primarily driven by enterprise channel growth of $313 million in
North America, offset by declines in Latin America revenue of $69 million and
EMEA revenue of $69 million primarily due to the strengthening of the U.S.
dollar against local currencies in 2015, declines of $99 million in Wholesale
Voice Services revenue and the effect of the deconsolidation of our Venezuelan
subsidiary as of September 30, 2015.

We experienced continued growth in our IP and data services of $1.056 billion,
transport and fiber services of $258 million and voice services of $233 million
during 2015 compared to 2014 driven primarily by the acquisition of tw telecom
and end user customer demand for VPN and bandwidth in the enterprise channel.
The increase in IP and data services was predominantly driven by our VPN and
managed services and revenue from the tw telecom acquisition.  We also
experienced increases in transport and fiber driven by dark fiber, wavelengths
and professional services and in colocation and datacenter services and voice
services, which also benefited from the tw telecom acquisition, offset by the
adverse effect of weakening currencies in EMEA and Latin America against the
U.S. dollar.

Core Network Services revenue increased in the North America region in
2015 compared to 2014 as a result of the full year of results from the tw
telecom acquisition and growth in services provided to the existing enterprise
customer base. These increases were partially offset by decreases in EMEA and
Latin America for 2015 due to the appreciation of the U.S. dollar against
currencies in EMEA and Latin America.

Wholesale Voice Services revenue decreased in all regions in 2015 compared to
2014. In 2015 compared to 2014, Wholesales Voice Services revenue decreased in
North America and EMEA and remained flat in Latin America. The changes during
the periods are primarily due to competitive pressures and our focus on
maintaining 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 33% in 2016 compared
to 34% in 2015 and 37% in 2014. The decrease is primarily due to an improving
mix of higher profit on-net Core Network Services and a decline in lower profit
Wholesale Voice Services. Additionally, we continue to implement initiatives to
reduce both fixed and variable network access costs, which resulted in a
decrease in Network Access Costs.


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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 decreased 6% in 2016 from 2015 and increased 15% in
2015 from 2014. The decrease in 2016 compared to 2015 was primarily related to
decreased employee related expense of $46 million and a decrease in facilities
and network based expenses of $27 million as we continued to optimize our
workforce and facilities. Additionally, in the third quarter of 2015, we
implemented certain workforce reductions, resulting in approximately $8 million
of restructuring charges recorded in Network Related Expenses.

The increase in 2015 compared to 2014 was primarily related to an increase in
employee related expense of $106 million and an increase in facilities and rent
expense of $62 million resulting from the acquisition of tw telecom.
Additionally, in the third quarter of 2015, we implemented certain workforce
reductions, resulting in approximately $8 million of restructuring charges
recorded in Network Related Expenses.

Depreciation and Amortization expense increased 7% in 2016 from 2015 and
increased 44% in 2015 from 2014. The increase in 2016 compared to 2015 is
primarily related to $101 million of depreciation and amortization charges
associated with additional capital expenditures, net of fully depreciated
assets, partially offset by $17 million of foreign currency exchange rate
changes in EMEA and Latin America. The increase in 2015 compared to 2014 is
primarily attributable to $312 million of depreciation and amortization charges
associated with the assets acquired from tw telecom and increased capital
expenditures, partially offset by the impact of foreign currency exchange rate
changes in EMEA and Latin America of $17 million.

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 decreased 4% in 2016 compared to 2015 and increased 24% in 2015
compared to 2014. The decrease in 2016 was primarily related to decreased
employee-related expenses of $24 million as we continued to drive greater
operational efficiencies, as well as lower other tax of $7 million and a
decrease in bad debt expense of $5 million. In 2016 we also released an accrual
for an assessment of $12 million and associated interest of $14 million
corresponding to certain Peruvian tax litigation. See Note 15 - Commitments,
Contingencies and Other Items in the notes to Consolidated Financial Statements
for additional information. Additionally, in the third quarter of 2015, we
implemented certain workforce reductions, resulting in approximately $16 million
of restructuring charges recorded in SG&A expenses. These decreases were
partially offset by an increase in non-cash stock-based compensation of $13
million in 2016 compared to 2015. The increase in 2015 compared to 2014 was
primarily related to $199 million of additional employee related expenses and an
increase in professional services and non-network rent of $51 million, primarily
associated with the acquisition of tw telecom, partially offset by a decrease of
$18 million in restructuring charges from $34 million in 2014. We incurred $32
million and $81 million in expenses related to the acquisition of tw telecom in
2015 and 2014, respectively.

Non-cash, stock-based compensation expense of $156 million, $141 million and $73
million was recorded in 2016, 2015 and 2014, respectively, related to outperform
stock appreciation rights, performance restricted stock units ("PRSUs"),
restricted stock units, incentive and retention plans and shares issued for our
matching contribution to the 401(k) plan. Approximately $134 million, $121
million

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and $64 million of non-cash stock-based compensation expense was recorded in
SG&A Expenses in 2016, 2015 and 2014, respectively, and $22 million, $20 million
and $9 million was recorded in Network Related Expenses in 2016, 2015 and 2014,
respectively. The increase in 2016 compared to 2015 was primarily due to
additional grants of restricted stock units and performance stock units,
partially offset by decreased expense due to a 2015 change in retirement
eligibility, which accelerated the expensing of awards for certain retirement
eligible personnel in 2015, and outperform stock appreciation right awards
reaching full amortization by the third quarter of 2016. The increase in 2015
compared to 2014 was primarily related to additional grants of restricted stock
units, PRSUs, and increased matching contributions for our 401(k) plan due to
the additional headcount from the tw telecom acquisition.

Adjusted EBITDA, as defined by us, is net income (loss) 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 generally accepted accounting
principles ("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:

                                                        Year Ended December 31,
(dollars in millions)                          2016              2015              2014
Net Income                                $         677     $       3,433     $         314
Income Tax Expense (Benefit)                        165            (3,150 )             (76 )
Total Other Expense                                 602             1,048               775
Depreciation and amortization                     1,250             1,166               808
Non-Cash Stock Compensation
Attributable to Stock Awards                        156               141                73
Non-Cash Impairment                                   -                 -                 1
Adjusted EBITDA                           $       2,850     $       2,638     $       1,895

North America                             $       3,220     $       3,048     $       2,065
EMEA                                                215               235               214
Latin America                                       293               302               348
Unallocated Corporate Expenses                     (878 )            (947 )            (732 )
Adjusted EBITDA                           $       2,850     $       2,638     $       1,895



Adjusted EBITDA was $2.850 billion in 2016 compared with $2.638 billion in 2015
and $1.895 billion in 2014. The increase in Adjusted EBITDA is attributable to
growth in our higher incremental profit Core Network Services revenue and
continued improvements in network access costs as a percentage of revenue and
lower network related and SG&A Expenses, partially offset by lower wholesale
voice revenue and the September 30, 2015 deconsolidation of our Venezuelan
subsidiary, which had Adjusted EBITDA of $46 million for the nine months ended
September 30, 2015. See Note 14 - Segment Information in the notes to
Consolidated Financial Statements for additional information on Adjusted EBITDA
by region.

Adjusted EBITDA increased $172 million in the North America region in 2016
compared to 2015, primarily due to increased Core Network Services revenue of
$155 million partially offset by Wholesale Voice Services revenue, as discussed
further above, and initiatives resulting in reduced fixed and variable network
access costs. Network access costs decreased $53 million in 2016 compared to
2015.

Adjusted EBITDA decreased $20 million in the EMEA region in 2016 compared to
2015 as a result of the $91 million decrease in Core Network Services revenue in
2016, partially offset by reduced employee related expenses of $7 million and a
$25 million reduction in network related expenses, as discussed further above.
EMEA Adjusted EBITDA was favorably affected by initiatives that reduced fixed
and variable network access costs. Network access costs in EMEA decreased $39
million in 2016 compared to 2015.

Adjusted EBITDA decreased $9 million in the Latin American region in 2016
compared to 2015, primarily as a result of the $46 million decrease from the
deconsolidation of our Venezuelan subsidiary on September 30, 2015, partially
offset by reduced employee related expenses and other SG&A expenses of $29
million, reduced network access costs of $4 million, and reduced network related
expenses of $4 million, as discussed further above. Adjusted EBITDA was
favorably affected by initiatives that reduced fixed and variable network access
costs.

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Adjusted EBITDA increased in the North America region in 2015 compared to 2014 primarily as a result of the tw telecom acquisition, growth in Core Network Services revenue and initiatives resulting in reduced network access costs.


Adjusted EBITDA increased in the EMEA region in 2015 compared to 2014 as a
result of initiatives that reduced network access costs, which were partially
offset by the effect of the stronger U.S. dollar against European currencies.
Adjusted EBITDA for 2015 was negatively affected by approximately 1% versus the
comparable prior period as a result of the changes in foreign currency rates.
Adjusted EBITDA decreased in the Latin American region in 2015 compared
to 2014 primarily as a result of the effect of the stronger U.S. dollar against
Latin American currencies. Adjusted EBITDA for 2015 was negatively affected by
approximately 2% versus the comparable prior period, as a result of the changes
in foreign currency rates. The decrease was partially offset by initiatives
resulting in reduced network access costs.

Interest Expense decreased $96 million in 2016 from 2015 and decreased $12
million in 2015 from 2014. The decrease in 2016 compared to 2015 is due to a
lower weighted average interest cost of debt of 4.7% at December 31, 2016
compared to 4.9% at December 31, 2015 due to refinancing activities. Interest
expense decreased in 2015 compared to 2014 by $72 million due to a lower
weighted average interest cost of debt of 4.9% at December 31, 2015 compared to
5.9% at December 31, 2014 due to refinancing activities and a $30 million
reduction in interest expense as a result of the conversion of the 7%
Convertible Senior Notes due 2015 and 7% Convertible Senior Notes due 2015,
Series B into common stock, partially offset by $89 million of interest expense
on additional borrowings used to fund the tw telecom acquisition.

Approximately 55% of our long-term debt is subject to variable interest rates
and therefore subject to market risks arising from changes in interest rates. As
of December 31, 2016 we expect annual interest expense in 2017 to approximate
$570 million based on current interest rates on our debt outstanding as of
December 31, 2016. See Note 10 - Long-Term Debt in the notes to Consolidated
Financial Statements for additional information on our financing activities.

Loss on Modification and Extinguishment of Debt was $40 million in 2016 compared
to a loss of $218 million in 2015 and a loss of $53 million in 2014. See Note 10
- Long-Term Debt in the notes to the Consolidated Financial Statements for more
details regarding our financing activities.

In the second quarter of 2016, we recorded a charge of approximately $40 million related to the April 2016 redemption of the 7% Senior Notes due 2020.


The loss recorded during 2015 was related to a charge of approximately $36
million related to the redemption of the 9.375% Senior Notes due 2019 in April
2015, $100 million related to the redemptions of the 8.125% Senior Notes due
2019 and 8.875% Senior Notes due 2019 in April 2015, $27 million related to the
refinancing of the $2 billion senior secured Tranche B Team Loan due 2022 in May
2015 and $55 million related to the redemption of the 8.625% Senior Notes due
2020.

The loss recorded during 2014 was related to the refinancing of the 11.875% Senior Notes due 2019.

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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.
                                                           Year Ended December 31,
(dollars in millions)                             2016                2015              2014
(Gain) Loss on Sale of Property, Plant,
and Equipment and Other Assets              $          (2 )     $           1      $         (3 )
Foreign Currency Loss related to
Venezuela                                               -                  11                43
Other Foreign Currency Loss                            31                  18                18
Impairment                                              -                   -                17
Other Income                                           (9 )               (12 )              (6 )
Other, net                                  $          20       $          18      $         69



The Other, net expense in 2016 and 2015 was incurred primarily due to foreign
currency losses attributable to the appreciation of the U.S. dollar for certain
intercompany balances denominated in the local currency of foreign subsidiaries
in North America, EMEA and Latin America that are not considered to be long-term
in nature.

Other, net expense in 2014 is primarily due to foreign currency fluctuations of
local currencies relative to the U.S. dollar, including foreign currency losses
attributable to the devaluation of the Venezuelan bolivar as discussed below,
and the partial impairment of our indefinite-lived intangible asset, partially
offset by net foreign currency gains.

During the first quarter of 2014, the Venezuelan government enacted additional
changes to the country's foreign exchange system. The government expanded the
types of transactions that may be allowed via the weekly auctions under the
Complementary System of Foreign Currency Acquirement ("SICAD 1"). The Venezuelan
government also announced the replacement of its existing foreign currency
administration with the National Center for Foreign Commerce ("CENCOEX"). At
that time, entities could seek approval to transact through CENCOEX at the
official rate of 6.30 Venezuelan bolivars to the U.S. dollar; however, certain
transactions could be approved at the latest SICAD 1 rate, depending on the
entity's facts and circumstances.

During the second quarter of 2014, based on additional experience with the new
foreign exchange mechanisms, we concluded that the most appropriate rate was
SICAD 1. Accordingly, we recognized a loss of approximately $34 million in 2014,
resulting from the devaluation of Venezuelan bolivar denominated monetary assets
and liabilities from the official rate of 6.3 to the SICAD 1 rate. Based upon
the further deterioration of the SICAD rate from 10.6 as of June 30, 2014 to
12.0 as of September 30, 2014, we recognized an additional loss of approximately
$7 million in the third quarter of 2014. As of December 31, 2014, SICAD 1 was
12.0 Venezuelan bolivars to the U.S. dollar.

During the second quarter of 2015, we recognized a charge of $6 million related
to the devaluation of the Venezuelan SICAD I exchange rate from 12.0 bolivars to
the U.S. dollar to 12.8 bolivars to the U.S. dollar at June 30, 2015.

During the third quarter of 2015 prior to deconsolidation, we recognized a charge of $5 million related to the devaluation of the Venezuelan SICAD I exchange rate from 12.8 bolivars to the U.S. dollar to 13.5 bolivars to the U.S. dollar effective September 1, 2015.


Income Tax (Expense) Benefit was $165 million of expense in 2016 compared to
$3.150 billion of benefit in 2015 and $76 million of benefit in 2014. Income tax
expense for the year ended December 31, 2016 includes an estimated one-time $110
million income tax benefit related to the issuance of new regulations under
Internal Revenue Code Section 987 addressing the taxation of foreign currency

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translation gains and losses arising from foreign branches, an $82 million
income tax benefit related to the release of deferred tax valuation allowances
primarily in Germany, Brazil, and Mexico, and a $22 million benefit from the
vesting of stock based compensation due to the adoption of ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting, offset by income tax
expense associated with current year taxable earnings and $24 million income tax
expense related to income tax rate changes. The determinations to release the
foreign valuation allowances were driven by our projection of future
profitability for each legal entity due to the recapitalization of our German
subsidiary, the planned action to restructure our Brazilian business, and the
merger of our Mexican subsidiaries. Our effective tax rate is lower than the
statutory rate primarily due to the benefit related to the issuance of new
regulations under Internal Revenue Code Section 987, the income tax benefit on
the foreign valuation allowance releases, and the adoption of ASU 2016-09,
partially offset by limitations on certain deductions, the inability to
recognize tax benefits on losses incurred in certain jurisdictions due to
maintenance of valuation allowances against deferred taxes in those
jurisdictions, as well as, other discrete items such as enacted tax rate
changes.

During the fourth quarter of 2015, we released approximately $3.3 billion of our
deferred tax valuation allowance related to our business in the United States.
Income tax expense in prior periods was primarily related to taxes in foreign
jurisdictions. In making the determination to release the valuation allowance
against U.S. federal and state deferred tax assets, we took into consideration
our movement into a cumulative income position for the most recent three-year
period, including pro forma adjustments for acquired entities, our eight out of
nine consecutive quarters of pre-tax operating income, and forecasts of future
earnings for our U.S. business. The release was reflected as an income tax
benefit in 2015.

During the fourth quarter of 2014, we released approximately $100 million of
deferred tax valuation allowance primarily related to our business in the United
Kingdom due to a recapitalization and consolidation of legal entities whereby
one U.K. entity with a full valuation allowance was merged with an entity that
had no valuation allowance against its deferred tax assets, as we had an
expectation of future taxable income for the combined entities. The release was
reflected as an income tax benefit in 2014.

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.

Venezuela Effects


Effective September 30, 2015, we deconsolidated our Venezuelan subsidiary from
our consolidated financial statements. Despite the deconsolidation of our
Venezuelan subsidiary, we continue to wholly own our Venezuelan subsidiary,
operate in the region and remain committed to serving our Venezuelan customers.
We deem it appropriate to continue to deconsolidate Venezuela.

There are a number of currency and other operating controls and restrictions in
Venezuela, which have evolved over time and may continue to evolve in the
future. These evolving conditions have resulted in an other-than-temporary lack
of exchangeability between the Venezuelan bolivar and U.S. dollar, and have
restricted our Venezuelan operations' ability to pay dividends and settle
intercompany obligations in U.S. dollars. The severe currency controls imposed
by the Venezuelan government have significantly limited the ability to realize
the benefits from earnings of our Venezuelan operations and access the resulting
liquidity provided by those earnings in U.S. dollars. We expect that this
condition will continue for the foreseeable future. Additionally, government
regulations affecting our ability to manage our Venezuelan subsidiary's capital
structure, purchasing, product pricing, customer invoicing and collections, and
labor relations; and the current political and economic situation within
Venezuela have resulted in an

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acute degradation in the ability to make key operational decisions. This lack of
exchangeability and degradation in our ability to control key operational
decisions has resulted in a lack of control over our Venezuelan subsidiary for
U.S. accounting purposes. Therefore, we concluded we no longer met the
accounting criteria for consolidation and deconsolidated our Venezuelan
subsidiary effective as of September 30, 2015 and began accounting for the
investment in our Venezuelan subsidiary using the cost method of accounting.
This change resulted in a one-time charge of $171 million, which includes $83
million of bolivar denominated cash and $40 million of intercompany receivables
from our Venezuelan subsidiary. The factors that led to the deconsolidation of
our Venezuelan subsidiary at the end of the third quarter of 2015 continued to
exist through the end of 2016. Any dividends from our Venezuelan subsidiaries
will be recorded as other income upon receipt of the cash in U.S. dollars. While
we do not expect to enter into material transactions with our subsidiary in
Venezuela that would result in the creation of additional intercompany
receivable balances, if any such transactions were completed, we would evaluate
collectability of the intercompany receivable balance at that time which could
result in a charge negatively affecting our results of operations. Please see
Note 1 to the accompanying unaudited Consolidated Financial Statements. Prior to
the deconsolidation, our operations in Venezuela accounted for approximately 1%
of consolidated total revenue for the nine months ended September 30, 2015 and
for the twelve months ended December 31, 2014, and approximately 3% and 4% of
consolidated operating income for the same periods, respectively.

Financial Condition-December 31, 2016


Cash flows provided by operating activities, investing activities and financing
activities for the years ended December 31, 2016 and 2015, respectively, are
summarized as follows:
                                                            Year Ended December 31,
(dollars in millions)                                 2016            2015          Change

Net Cash Provided by Operating Activities $ 2,343 $ 1,855 $ 488 Net Cash Used in Investing Activities

                 (1,319 )        (1,344 )            25
Net Cash Used in Financing Activities                    (56 )          (219 )           163
Effect of Exchange Rates on Cash and Cash
Equivalents                                               (3 )           (18 )            15

Net Change in Cash and Cash Equivalents $ 965 $ 274 $ 691




Operating Activities

Cash provided by operating activities increased to $2.343 billion in 2016
compared to $1.855 billion in 2015. The increase in cash provided by operating
activities was primarily due to growth in earnings before income tax driven by
continued optimization of Network Access Costs, and an increase in cash provided
by working capital. 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, bonuses
and capital expenditures.

Investing Activities

Cash used in investing activities decreased to $1.319 billion in 2016 compared
to $1.344 billion in 2015, primarily as a result of an $83 million write-down in
2015 of our Venezuelan bolivar denominated cash balance, which was
deconsolidated as of September 30, 2015. This decrease was partially offset by
an increase in capital expenditures, which totaled $1.334 billion in 2016 and
$1.229 billion in 2015.


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Financing Activities


Cash used in financing activities of $56 million in 2016 decreased compared to
$219 million used in financing activities in 2015. See Note 10 - Long-Term Debt
in the notes to the Consolidated Financial Statements for more details regarding
our debt transactions during 2016 and 2015.

Effect of Exchange Rates on Cash and Cash Equivalents


The effect of exchange rates on cash and cash equivalents in 2016 and 2015 was a
reduction in cash of $3 million and $18 million, respectively, and was primarily
due to the fluctuations of the U.S. dollar against currencies in EMEA and Latin
America, including Venezuela prior to its deconsolidation.

Liquidity and Capital Resources

We had $1.819 billion of cash and cash equivalents on hand at December 31, 2016. We also had $38 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 December 31, 2016.


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, principal
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 losses, 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:


                                                 Year Ended December 31,
(dollars in millions)                         2016        2015        2014
Net Cash Provided by Operating Activities   $ 2,343     $ 1,855     $ 1,161
Capital Expenditures                         (1,334 )    (1,229 )      (910 )
Free Cash Flow                              $ 1,009     $   626     $   251



Free Cash Flow was $1.009 billion in 2016 compared to $626 million in 2015,
reflecting a $383 million improvement driven by $488 million of higher cash
provided by operating activities offset by $105 million of higher spending on
capital expenditures in 2016. For the full year 2017, we expect to generate Free
Cash Flow of $1.10 to $1.16 billion excluding any CenturyLink merger related
expenses.

Capital expenditures for 2017 are expected to be approximately 16% of revenue,
consistent with 16% of revenue in 2016 as we invest in base capital expenditures
(estimated capital required to keep the network operating efficiently and
support new service development) with the remaining capital expenditures
expected to be partly success-based, which is tied to a specific customer
revenue opportunity, and partly project-based where capital is used to expand
the network based on our expectation that the project will eventually lead to
incremental revenue.

Net cash interest payments are expected to increase to approximately $520
million in 2017 from $508 million in 2016 based on forecasted interest rates on
our variable rate debt outstanding as of December 31, 2016. As of December 31,
2016, we had contractual debt obligations, including capital lease obligations,
but excluding interest and discounts on debt issuance, of $7 million that mature
in 2017, $306 million in 2018, and $822 million in 2019.

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We currently have the ability to repatriate cash and cash equivalents into the
United States without paying or accruing U.S. taxes. We do not currently intend
to repatriate to the United States any of our foreign cash and cash equivalents
from operating entities outside of Latin America. We have no material
restrictions on our ability to repatriate to the United States foreign cash and
cash equivalents. We had approximately $49 million of non-U.S. denominated cash
and cash equivalents at December 31, 2016.

We believe our current liquidity and anticipated future cash flows from operations will be sufficient to fund our business for at least the next twelve months.


We may need to refinance all or a portion of our indebtedness at or before
maturity and cannot provide assurances that we will be able to refinance any
such indebtedness on commercially reasonable terms or at all. In addition, we
may elect to secure additional capital in the future, at acceptable terms, to
improve our liquidity or fund acquisitions. In addition, in an effort to reduce
future cash interest payments as well as future amounts due at maturity or to
extend debt maturities, we may, from time to time, issue new debt, enter into
debt for debt, debt for equity or cash transactions to purchase our outstanding
debt securities in the open market or through privately negotiated transactions.
In addition, we may consider other uses of capital or opportunities to return
cash to stockholders. We will evaluate any such transactions in light of the
existing market conditions and the possible dilutive effect to stockholders. The
amounts involved in any such transaction, individually or in the aggregate, may
be material.

In addition to raising capital through the debt and equity markets, we may sell or dispose of existing businesses, investments or other non-core assets.


Consolidation of the communications industry may continue. We will continue to
evaluate consolidation opportunities and could make additional acquisitions in
the future.

In pursuing any of these various actions, we would also need to address any restrictions contained in the CenturyLink Merger agreement or obtain a waiver of those restrictions.

Off-Balance Sheet Arrangements

We have not entered into off-balance sheet arrangements.

Contractual Obligations

The following table summarizes our contractual obligations and other commercial commitments at December 31, 2016, as further described in the Notes to Consolidated Financial Statements.

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Payments Due by Period

                                                Less than          2 - 3   

4 - 5 After 5

                                 Total            1 Year           Years          Years           Years
(dollars in millions)
Contractual Obligations
Long-Term Debt, including
current portion               $   11,009     $            7     $    1,128     $    2,454     $     7,420
Interest Obligations               2,990                523          1,013            796             658
Asset Retirement
Obligations                           89                 13             10              3              63
Operating Leases                   1,537                282            466            288             501
Right of Way Agreements              743                162            151            105             325
Purchase and Other
Obligations                        1,276                941            212             51              72
Other Commercial
Commitments
Letters of Credit                     39                  5              4              1              29




Our debt instruments contain certain covenants which, among other things, limit
additional indebtedness, dividend payments, certain investments and transactions
with affiliates. If we should fail to comply with these covenants, amounts due
under the instruments may be accelerated at the debt holder's discretion after
the declaration of an event of default. Our debt instruments do not have
covenants that require us or our subsidiaries to maintain certain levels of
financial performance or other financial measures such as total leverage or
minimum revenue. These types of covenants are commonly referred to as
"maintenance covenants."

Interest obligations assume interest rates on $4.9 billion of variable rate debt
do not change from December 31, 2016. In addition, interest is calculated based
on debt outstanding as of December 31, 2016.

Our asset retirement obligations consist of legal requirements to remove certain
of our network infrastructure at the expiration of the underlying right-of-way
("ROW") term and restoration requirements for leased facilities. The initial and
subsequent measurement of our asset retirement obligations require us to make
estimates regarding the eventual costs and probability or likelihood that we
will be required to remove certain of our network infrastructure and restore
certain of our leased properties.

Certain right of way agreements include provisions for increases in payments in
future periods based on the rate of inflation as measured by various price
indexes. We have not included estimates for these increases in future periods in
the amounts included above.

Certain non-cancelable right of way agreements provide for automatic renewal on
a periodic basis. We include payments due during these automatic renewal periods
given the significant cost to relocate our network and other facilities.

Certain other right of way agreements are currently cancelable or can be
terminated under certain conditions by us. We include the payments under such
cancelable right of way agreements in the table above for a period of 1 year
from January 1, 2017, if we do not consider it likely that we will cancel the
right of way agreement within the next year.

Purchase and other obligations represent all our outstanding purchase order amounts as of December 31, 2016 ($616 million), contractual commitments with third parties to purchase network access services ($425 million) and fixed maintenance payments for portions of our network ($235 million).

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The table above does not include other long-term liabilities, such as liabilities recorded for legal matters that are not contractual obligations by nature. We cannot determine with any degree of certainty the years in which these liabilities might ultimately be paid.


Due to uncertainty regarding the completion of tax audits and possible outcomes,
the remaining estimate of the timing of payments related to uncertain tax
positions and interest cannot be made. See Note 13 - Income Taxes and Note 15 -
Commitments, Contingencies and Other Items in the notes to Consolidated
Financial Statements for additional information regarding our uncertain tax
positions.

© Edgar Online, source Glimpses

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