NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context requires otherwise, references in this report to "QC" refer to Qwest Corporation, references to "Qwest," "we," "us," and "our" refer to Qwest Corporation and its consolidated subsidiaries, references to "QSC" refer to our direct parent company, Qwest Services Corporation, and its consolidated subsidiaries, references to "QCII" refer to QSC's direct parent company and our indirect parent company, Qwest Communications International Inc., and its consolidated subsidiaries, and references to "Lumen" or "Lumen Technologies" refer to QCII's direct parent company and our ultimate parent company, Lumen Technologies, Inc., and its consolidated subsidiaries.
(1) Background and Summary of Significant Accounting Policies
General
We are an integrated communications company engaged primarily in providing a broad array of communications services to our business and residential customers. Our specific products and services are detailed under the heading "Operations - Products and Services" in Item 1 of Part I of this report.
We generate the majority of our total consolidated operating revenue from services provided in the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.
On April 1, 2011, our indirect parent QCII became a wholly-owned subsidiary of Lumen Technologies, Inc. in a tax-free, stock-for-stock transaction.
Basis of Presentation
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. Transactions with our non-consolidated affiliates (referred to herein as affiliates) have not been eliminated.
We reclassified certain prior period amounts to conform to the current period presentation. See Note 14—Products and Services Revenue for additional information. These changes had no impact on total operating revenue, total operating expenses or net income for any period presented.
Operating lease assets are included in Other, net under goodwill and other assets on our consolidated balance sheets. Current operating lease liabilities are included in Other under accrued expenses and other liabilities on our consolidated balance sheets. Noncurrent operating lease liabilities are included in Other under deferred credits and other liabilities on our consolidated balance sheets.
Segments
Our operations are integrated into and reported as part of Lumen Technologies. Lumen's chief operating decision maker ("CODM") is our CODM but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the SEC. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we have one reportable segment.
Summary of Significant Accounting Policies
Change in Accounting Policy
During the first quarter of 2020, we elected to change the presentation for taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, including federal and certain state Universal Service Fund ("USF") regulatory fees, to present all such taxes on a net basis in our statement of operations. Prior to the first quarter of 2020, we assessed whether we were the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. The previous policy resulted in presenting such USF fees on a gross basis within operating revenue and cost of services and products, and all other significant taxes on a net basis. We applied this change in accounting policy retrospectively during the first quarter of 2020. As a result, we have decreased both operating revenue and cost of services and products by $105 million, $105 million and $98 million for the years ended December 31, 2020, 2019 and 2018, respectively. The change had no impact on operating income or net income in our consolidated statements of operations. Refer to our Form 8-K filing dated May 7, 2020 for further information.
We changed our policy to present such taxes on the net basis and believe the new policy is preferable because of the historical and potential future regulatory rate changes outside of our control resulting in significant variability in tax and fee revenue that are not indicative of our operating performance. We believe that net presentation provides the most useful and transparent financial information and improves comparability and consistency of financial results.
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we make when accounting for specific items and matters are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can materially affect the reported amounts of assets, liabilities and components of stockholder's equity as of the dates of the consolidated balance sheets, as well as the reported amounts of revenue, expenses and components of cash flows during the periods presented in our other consolidated financial statements. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 13—Income Taxes and Note 16—Commitments, Contingencies and Other Items for additional information.
For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.
For matters related to income taxes, if we determine that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.
For all of these and other matters, actual results could differ materially from our estimates.
Revenue Recognition
We earn most of our consolidated revenue from contracts with customers, primarily through the provision of communications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606. We also earn revenue from leasing arrangements (primarily fiber capacity agreements) and governmental subsidy payments, neither of which are accounted for under ASC 606.
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model:
•Identification of the contract with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when, or as, we satisfy a performance obligation.
We provide an array of communications services to business and residential customers, including local voice, VPN, Ethernet, data, broadband, private line (including special access), network access, transport, voice, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business.
We recognize revenue for services when we provide the applicable service or when control is transferred. Recognition of certain payments received in advance of services being provided is deferred. These advance payments include certain activation and certain installation charges. If the activation and installation charges are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which ranges from one to five years depending on the service. In most cases, termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.
For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis.
In certain cases, customers may be permitted to modify their contracts. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract.
Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The revenue associated with each performance obligation is then recognized as earned.
We periodically sell optical capacity on our network. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 10 to 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity as ASC 606 revenue, which is adjusted for the time value of money and is recognized ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is accounted for as non-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for other non-owned optical capacity assets.
In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods and services used to fulfill the performance obligations associated with the transaction.
We have service level commitments pursuant to contracts with certain of our customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a corresponding reduction to revenue in the period that the service level commitment was not met.
Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis.
We defer (or capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average contract life. Our deferred contract costs for our customers have average amortization periods of approximately 30 months for consumer and 29 months for business. These deferred costs are monitored every period to reflect any significant change in assumptions.
See Note 3—Revenue Recognition for additional information.
Affiliate Transactions
We provide to our affiliates telecommunications services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services. Services provided by us to our affiliates are recognized as operating revenue-affiliates in our consolidated statements of operations. We also purchase services from our affiliates including telecommunications services, marketing and employee-related support services. Services provided to us from our affiliates are recognized as operating expenses-affiliates on our consolidated statements of operations. Because of the significance of the services we provide to our affiliates and our affiliates provide to us, the results of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.
We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates. Pricing between affiliates currently uses market based, volume discounted rates.
Our ultimate parent company, Lumen Technologies, Inc. has cash management arrangements with a majority of its income-generating subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. Under these arrangements, the majority of our cash balance is transferred on a daily basis for centralized management by Lumen Technologies, Inc. and most affiliate transactions are deemed to be settled at the time the transactions are recorded in our accounting records. The resulting net balance at the end of each period is reported as advances to affiliates or advances from affiliates on the accompanying consolidated balance sheets. From time to time, we may declare and pay dividends to our parent, QSC. These dividends are settled in accordance with the cash management process described above, which has the net effect of reducing our advances to affiliates or increasing our advances from affiliates. Dividends paid are reflected on our consolidated statements of stockholder's equity and the consolidated statements of cash flows reflects the changes in advances to affiliates as investing activities and changes in advances from affiliates as financing activities. Interest is assessed on advances to and from affiliates using the current interest rate for our note payable-affiliate.
The affiliate obligations, net in current and noncurrent liabilities on our consolidated balance sheets primarily represents the cumulative allocation of expense, net of payments, associated with QCII’s pension plans and post-retirement benefits plans prior to the plan mergers. In 2015, we agreed to a plan to settle the outstanding affiliate obligations, net balance with QCII over a 30 year term. Under the plan, payments are scheduled to be made on a monthly basis. For the years ended December 31, 2020 and 2019, we made settlement payments of $71 million and $76 million, respectively, to QCII in accordance with the plan. Changes in the affiliate obligations, net are reflected in operating activities on our consolidated statements of cash flows.
In the normal course of business, we transfer assets to and from various affiliates through our parent, QSC, which are recorded through our equity. It is our policy to record asset transfers based on carrying values.
Qwest Corporation is currently indebted to an affiliate of our ultimate parent company, Lumen Technologies, Inc., under a revolving promissory note. For additional information, see "Note Payable - Affiliate" in Note 6—Long-Term Debt And Note Payable - Affiliate.
Advertising Costs
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations. Our advertising expense was $25 million, $28 million and $58 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Legal Costs
In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. We expense these costs as the related services are received.
Income Taxes
Our results are included in the Lumen Technologies consolidated federal income tax return and certain combined state income tax returns. Lumen Technologies allocates income tax expense to us based upon a separate return allocation method which results in income tax expense that approximates the expense that would result if we were a stand-alone entity. Our reported deferred tax assets and liabilities, as discussed below and in Note 13—Income Taxes, are primarily determined as a result of the application of the separate return allocation method and therefore the settlement of these amounts is dependent upon our parent, Lumen Technologies, Inc., rather than tax authorities. Our current expectation is that the vast majority of deferred tax assets and liabilities will be settled through our general intercompany obligation based upon the current Lumen Technologies, Inc. policy. Lumen Technologies, Inc. has the right to change their policy regarding settlement of these assets and liabilities at any time.
The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods and adjustments to our liabilities for uncertain tax positions. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and the tax basis of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered. Each quarter we evaluate the need to retain all or a portion of the valuation allowance on our deferred tax assets. See Note 13—Income Taxes for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. Our cash collections are transferred to Lumen Technologies, Inc. on a daily basis and our ultimate parent funds our cash disbursement needs. The net cash transferred to Lumen Technologies, Inc. has been reflected as advances to affiliates in our consolidated balance sheets.
Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for payment. Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheet. This activity is included in the operating activities section in our consolidated statements of cash flows. There were no book overdrafts included in accounts payable at December 31, 2020 or December 31, 2019.
Restricted Cash
Restricted cash consists primarily of cash and investments that serve to collateralize certain performance and operating obligations. Restricted cash is recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables less an allowance for credit losses. Prior to the adoption of ASU 2016-13, the allowance for credit losses receivable reflected our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. We implemented the new standard effective January 1, 2020, as discussed in the Recently Adopted Accounting Pronouncements - "Measurement of Credit Losses on Financial Instruments", below. For more information, see Note 5—Credit Losses on Financial Instruments.
We generally consider our accounts past due if they are outstanding over 30 days. Our past due accounts are written off against our allowance for credit losses when collection is considered to be not probable. Any recoveries of accounts previously written off are generally recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable, net of the allowance for credit losses, approximates fair value.
Property, Plant and Equipment
As a result of our indirect acquisition by Lumen Technologies, Inc., property, plant and equipment acquired at the time of acquisition was recorded based on its estimated fair value as of the acquisition date. Subsequently purchased and constructed property, plant and equipment are recorded at cost. Property, plant and equipment is depreciated primarily using the straight-line group method. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are pooled for purposes of depreciation and tracking. The equal life group procedure is used to establish each pool's average remaining useful life. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is recognized in our consolidated statements of operations only if a disposal is unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as incurred. Interest is capitalized during the construction phase of network and other internal-use capital projects. Employee-related costs for construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining useful life of our asset base. Our remaining useful life assessments evaluate the possible loss in service value of assets that may precede the physical retirement. Assets shared among many customers may lose service value as those customers reduce their use of the network. However, the asset is not retired until all customers no longer utilize the asset and we determine there is no alternative use for the asset.
We review long-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For assessment purposes, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its estimated fair value. Recoverability of the asset group to be held and used is assessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not recoverable, we recognize an impairment charge for the amount by which the carrying amount of the asset group exceeds its estimated fair value.
Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships and capitalized software are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of ten years, using either the sum-of-the-years-digits or the straight-line methods, depending on the type of customer. We amortize capitalized software using the straight-line method over estimated lives ranging up to seven years. Other intangible assets not arising from business combinations are initially recorded at cost.
Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line method over its estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized software is included in other intangible assets, net, in our consolidated balance sheets.
We are required to assess goodwill for impairment at least annually, or more frequently, if an event occurs or circumstances change that would indicate an impairment may have occurred. We are required to write-down the value of goodwill in periods in which the carrying amount of the reporting unit equity exceeds the estimated fair value of the equity of the reporting unit limited to the goodwill balance. The impairment assessment is performed at the reporting unit level. We have determined that our operations consist of one reporting unit, consistent with our determination that our business consists of one operating segment. See Note 2—Goodwill, Customer Relationships and Other Intangible Assets for additional information.
Pension and Post-Retirement Benefits
A substantial portion of our active and retired employees participate in the Lumen Combined Pension Plan. On December 31, 2014, the QCII pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, The CenturyLink Retirement Plan is now named the Lumen Combined Pension Plan. Prior to the pension plan merger, the above-noted employees participated in the QCII pension plan. In addition, certain of our employees participate in Lumen's post-retirement health care and life insurance benefit plans. Lumen Technologies allocates service costs relating to pension and post-retirement health care and life insurance benefits to us and its other affiliates. The amounts contributed by us through Lumen Technologies are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of Lumen Technologies. The allocation of the service costs to us is based upon our employees who are currently earning benefits under the plans.
For further information on qualified pension, post-retirement and other post-employment benefit plans, see Lumen's annual report on Form 10-K for the year ended December 31, 2020.
Recently Adopted Accounting Pronouncements
During 2020, we adopted Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments." During 2019, we adopted ASU 2016-02, "Leases (ASC 842)". In 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers”.
Each of these is described further below.
Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13. The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires us to estimate the total credit losses expected on the portfolio of financial instruments.
We adopted ASU 2016-13, "Measurement of Credit Losses on Financial instruments" ("ASU 2016-13") on January 1, 2020, and recognized a cumulative adjustment to our retained earnings as of the date of adoption of $3 million, net of tax effect. Please refer to Note 5—Credit Losses On Financial Instruments for more information.
Leases
We adopted Accounting Standards Update ("ASU") 2016-02, "Leases (ASC 842)", as of January 1, 2019, using the non-comparative transition option pursuant to ASU 2018-11. Therefore, we have not restated comparative period financial information for the effects of ASC 842, and we have not made the new required lease disclosures for comparative periods beginning before January 1, 2019. Instead, we recognized ASC 842's cumulative effect transition adjustment (discussed below) as of January 1, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things (i) allowed us to carry forward the historical lease classification; (ii) did not require us to reassess whether any expired or existing contracts are or contain leases under the new definition of a lease; and (iii) did not require us to reassess whether previously capitalized initial direct costs for any existing leases would qualify for capitalization under ASC 842. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We did not elect the hindsight practical expedient regarding the likelihood of exercising a lessee purchase option or assessing any impairment of right-of-use assets for existing leases.
On March 5, 2019, the FASB issued ASU 2019-01, "Leases (ASC 842): Codification Improvements", effective for public companies for fiscal years beginning after December 15, 2019. The new ASU aligns the guidance in ASC 842 for determining fair value of the underlying asset by lessors that are not manufacturers or dealers, with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in ASC 820, "Fair Value Measurement") should be applied. More importantly, the ASU also exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. Early adoption permits public companies to adopt concurrent with the transition to ASC 842 on leases. We adopted ASU 2019-01 as of January 1, 2019.
Adoption of the new standards resulted in the recording of operating lease assets and operating lease liabilities of approximately $126 million and $133 million, respectively, as of January 1, 2019. In addition, we recorded a $22 million cumulative adjustment to accumulated deficit as of January 1, 2019, for the impact of the new accounting standards. Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new guidance, as discussed above, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update ("ASU") ASU 2014-09 which replaces virtually all existing generally accepted accounting principles on revenue recognition with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs.
We adopted the new revenue recognition standard on January 1, 2018 using the modified retrospective transition method applying the rules to all open contracts existing as of January 1, 2018. During the year ended December 31, 2018, we recorded a cumulative catch-up adjustment that increased our retained earnings by $141 million, net of $49 million of income taxes.
See Note 3—Revenue Recognition for additional information.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). ASU 2019-12 removes certain exceptions for investments, intra-period allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 will become effective for us in the first quarter of fiscal 2021 and early adoption is permitted. We do not believe the adoption will have a significant impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, designed to ease the burden of accounting for contract modifications related to the global market-wide reference rate transition period. Subject to certain criteria, ASU 2020-04 provides qualifying entities the option to apply expedients and exceptions to contract modifications and hedging accounting relationships made until December 31, 2022. We are evaluating ASU 2020-04's applicability to relevant transactions referencing the London Inter-bank Offering Rate ("LIBOR") or another reference rate expected to be discontinued and the resulting impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-09, "Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762” (“ASU 2020-09”). This ASU amends and supersedes various SEC paragraphs to reflect SEC Release No. 33-10762, which includes amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. The cumulative effect of initially applying ASU 2020-09 on January 4, 2021 will not have material impact to our consolidated financial statements.
See Note 6—Long-Term Debt and Note Payable - Affiliate for additional information.
(2) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
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As of December 31,
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2020
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2019
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(Dollars in millions)
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Goodwill
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$
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9,360
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9,360
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Customer relationships, less accumulated amortization of $5,611 and $5,231
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$
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88
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468
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Other intangible assets, less accumulated amortization of $1,831 and $1,780
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255
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311
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Total other intangible assets, net
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$
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343
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779
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Substantially, all of our goodwill was derived from Lumen's acquisition of us where the purchase price exceeded the fair value of the net assets acquired.
We assess our goodwill for impairment annually as of October 31,or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. We are required to write-down the value of goodwill in periods in which the carrying value of equity exceeds the estimated fair value of equity, limited to the amount of goodwill. Goodwill is evaluated for impairment at the reporting unit level, and we have determined that we have one reporting unit.
At October 31, 2020 and 2019, we estimated the fair value of our equity by considering both a market approach and a discounted cash flow method. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting unit beyond the cash flows from the discrete projection period. Based on our assessment performed with respect to our reporting unit as described above, we concluded that the estimated fair value of our equity exceeded the carrying value by 48% and 65% at October 31, 2020 and 2019, respectively. Therefore no impairment was recorded in either period.
Lumen’s stock price declined significantly in the first quarter of 2019 causing us to evaluate our goodwill for impairment as of March 31, 2019. Because Lumen's low stock price indicated the carrying value of our reporting unit was more likely than not in excess of its fair value, we estimated the fair value of our operations using only the market approach. Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry. The market multiples approach that we used in the quarter ended March 31, 2019 incorporated significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of certain cost synergies. In developing the market multiple, we also considered observed trends of our industry participants. As of March 31, 2019, based on our assessments performed as described above, we concluded that our goodwill was not impaired.
Our fair value estimates for evaluating goodwill incorporated significant judgements and assumptions including forecast revenues and expenses, cost of capital, and control premiums. In developing market multiples, we also considered observed trends of our industry participants and other qualitative factors that required significant judgment. Alternative estimates, judgements, and interpretations of these factors could have resulted in different conclusions regarding the need for an impairment charge.
As of December 31, 2020, the gross carrying amount of goodwill, customer relationships and other intangible assets was $17.1 billion.
Total amortization expense for intangible assets for the years ended December 31, 2020, 2019 and 2018 was $481 million, $533 million and $581 million, respectively.
We estimate that total amortization expense for intangible assets for the years ending December 31, 2021 through 2025 will be as follows:
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(Dollars in millions)
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Year ending December 31,
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2021
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$
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188
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2022
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99
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2023
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25
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2024
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9
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2025
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8
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We annually review the estimated lives and methods used to amortize our other intangible assets. The actual amounts of amortization expense may differ materially from our estimates, depending on the results of our annual reviews.
(3) Revenue Recognition
Reconciliation of Total Revenue to Revenue from Contracts with Customers
The following tables provide disaggregation of revenue from contracts with customers based on service offerings for the years ended December 31, 2020, 2019 and 2018. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards.
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|
|
Year Ended December 31, 2020
|
|
|
Total Revenue
|
|
Adjustments for Non-ASC 606 Revenue(7)
|
|
Total Revenue from Contracts with Customers
|
|
|
(Dollars in millions)
|
|
IP and data services (1)
|
$
|
524
|
|
|
—
|
|
|
524
|
|
|
Transport and infrastructure (2)
|
2,604
|
|
|
(297)
|
|
|
2,307
|
|
|
Voice and collaboration (3)
|
1,517
|
|
|
—
|
|
|
1,517
|
|
|
IT and managed services (4)
|
2
|
|
|
—
|
|
|
2
|
|
|
Regulatory revenue (5)
|
179
|
|
|
(179)
|
|
|
—
|
|
|
Affiliate revenue (6)
|
2,487
|
|
|
(3)
|
|
|
2,484
|
|
|
Total revenue
|
$
|
7,313
|
|
|
(479)
|
|
|
6,834
|
|
|
|
|
|
|
|
|
|
Timing of revenue
|
|
|
|
|
|
|
Goods and services transferred at a point in time
|
|
|
|
|
$
|
46
|
|
|
Services performed over time
|
|
|
|
|
6,788
|
|
|
Total revenue from contracts with customers
|
|
|
|
|
$
|
6,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Total Revenue
|
|
Adjustments for Non-ASC 606 Revenue(7)
|
|
Total Revenue from Contracts with Customers
|
|
|
(Dollars in millions)
|
|
IP and data services (1)
|
$
|
595
|
|
|
—
|
|
|
595
|
|
|
Transport and infrastructure (2)
|
2,773
|
|
|
(308)
|
|
|
2,465
|
|
|
Voice and collaboration (3)
|
1,618
|
|
|
—
|
|
|
1,618
|
|
|
IT and managed services (4)
|
4
|
|
|
—
|
|
|
4
|
|
|
Regulatory revenue (5)
|
189
|
|
|
(189)
|
|
|
—
|
|
|
Affiliate revenue (6)
|
2,873
|
|
|
—
|
|
|
2,873
|
|
|
Total revenue
|
$
|
8,052
|
|
|
(497)
|
|
|
7,555
|
|
|
|
|
|
|
|
|
|
Timing of revenue
|
|
|
|
|
|
|
Goods and services transferred at a point in time
|
|
|
|
|
$
|
54
|
|
|
Services performed over time
|
|
|
|
|
7,501
|
|
|
Total revenue from contracts with customers
|
|
|
|
|
$
|
7,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Total Revenue
|
|
Adjustments for Non-ASC 606 Revenue(7)
|
|
Total Revenue from Contracts with Customers
|
|
|
(Dollars in millions)
|
|
IP and data services (1)
|
$
|
587
|
|
|
—
|
|
|
587
|
|
|
Transport and infrastructure (2)
|
2,870
|
|
|
(317)
|
|
|
2,553
|
|
|
Voice and collaboration (3)
|
1,783
|
|
|
—
|
|
|
1,783
|
|
|
IT and managed services (4)
|
6
|
|
|
—
|
|
|
6
|
|
|
Regulatory revenue (5)
|
214
|
|
|
(214)
|
|
|
—
|
|
|
Affiliate revenue (6)
|
2,935
|
|
|
—
|
|
|
2,935
|
|
|
Total revenue
|
$
|
8,395
|
|
|
(531)
|
|
|
7,864
|
|
|
|
|
|
|
|
|
|
Timing of revenue
|
|
|
|
|
|
|
Goods and services transferred at a point in time
|
|
|
|
|
$
|
69
|
|
|
Services performed over time
|
|
|
|
|
7,795
|
|
|
Total revenue from contracts with customers
|
|
|
|
|
$
|
7,864
|
|
_______________________________________________________________________________
|
|
|
|
|
|
|
|
(1)
|
|
Includes primarily VPN data networks, Ethernet, IP and other ancillary services
|
|
(2)
|
|
Includes primarily broadband, private line (including business data services) and other ancillary services.
|
|
(3)
|
|
Includes local voice, including wholesale voice, and other ancillary services.
|
|
(4)
|
|
Includes IT services and managed services revenue.
|
|
(5)
|
|
Includes CAF II and federal and state USF support revenue.
|
|
(6)
|
|
Includes telecommunications and data services we bill to our affiliates.
|
|
(7)
|
|
Includes regulatory revenue and lease revenue not within the scope of ASC 606.
|
Customer Receivables and Contract Balances
The following table provides balances of customer receivables, contract assets and contract liabilities as of December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
(Dollars in millions)
|
|
Customer receivables (1)
|
$
|
346
|
|
|
430
|
|
|
Contract assets
|
13
|
|
|
18
|
|
|
Contract liabilities
|
300
|
|
|
338
|
|
(1)Gross customer receivables, including gross affiliate receivables, of $396 million and $462 million, net of allowance for credit losses of $50 million and $32 million, at December 31, 2020 and December 31, 2019, respectively.
Contract liabilities are consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which typically ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheet. During the years ended December 31, 2020, December 31, 2019 and December 31, 2018, we recognized $223 million, $273 million and $42 million, respectively, of revenue that was included in contract liabilities as of January 1, 2020, January 1, 2019 and January 1, 2018, respectively.
Performance Obligations
As of December 31, 2020, our estimated revenue expected to be recognized in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied is approximately $173 million. We expect to recognize approximately 99% of this revenue through 2023, with the balance recognized thereafter.
These amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), and (ii) contracts that are classified as leasing arrangements that are not subject to ASC 606.
Contract Costs
The following table provides changes in our contract acquisition costs and fulfillment costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
Acquisition Costs
|
|
Fulfillment Costs
|
|
|
(Dollars in millions)
|
|
Beginning of period balance
|
$
|
86
|
|
|
64
|
|
|
Costs incurred
|
49
|
|
|
23
|
|
|
Amortization
|
(62)
|
|
|
(33)
|
|
|
End of period balance
|
$
|
73
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Acquisition Costs
|
|
Fulfillment Costs
|
|
|
(Dollars in millions)
|
|
Beginning of period balance
|
$
|
90
|
|
|
57
|
|
|
Costs incurred
|
60
|
|
|
39
|
|
|
Amortization
|
(64)
|
|
|
(32)
|
|
|
End of period balance
|
$
|
86
|
|
|
64
|
|
Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of telecommunications services to customers, including labor and materials consumed for these activities.
Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average contract life of 30 months for consumer customers and average contract life of 29 months for business customers. Amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next 12 months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next 12 months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.
(4) Leases
Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new accounting guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance, as discussed in Note 1—Background And Summary Of Significant Accounting Policies.
We primarily lease to or from third parties various office facilities, colocation facilities and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
We determine if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rates. As part of the present value calculation for the lease liabilities, we use an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on our unsecured rates, adjusted to approximate the rates at which we could borrow on a collateralized basis over a term similar to the recognized lease term. We apply the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.
Some of our lease arrangements contain lease components, non-lease components (including common-area maintenance costs) and executory costs (including real estate taxes and insurance costs). We generally account for each component separately based on the estimated standalone price of each component. For colocation leases, we account for the lease and non-lease components as a single lease component.
Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Lease expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Operating and short-term lease cost
|
$
|
67
|
|
|
43
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
5
|
|
|
9
|
|
|
Interest on lease liability
|
—
|
|
|
1
|
|
|
Total finance lease cost
|
5
|
|
|
10
|
|
|
Total lease cost
|
$
|
72
|
|
|
53
|
|
We lease various equipment, office facilities, retail outlets, and other network sites. These leases, with few exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initial non-cancelable term plus any term under renewal options that are reasonably assured. For the years ended December 31, 2020, 2019 and 2018, our gross rental expense was $72 million, $53 million and $64 million, respectively. We also received sublease rental income for the years ended December 31, 2020, 2019 and 2018 of $12 million, $10 million and $2 million, respectively.
Supplemental consolidated balance sheet information and other information related to leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Leases (Dollars in millions)
|
Classification on the Balance Sheet
|
2020
|
|
2019
|
|
Assets
|
|
|
|
|
|
Operating lease assets
|
Other noncurrent assets
|
$
|
67
|
|
|
105
|
|
|
Finance lease assets
|
Property, plant and equipment, net of accumulated depreciation
|
8
|
|
|
14
|
|
|
Total leased assets
|
$
|
75
|
|
|
119
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current
|
|
|
|
|
|
Operating
|
Other current liabilities
|
$
|
28
|
|
|
29
|
|
|
Finance
|
Current maturities of long-term debt
|
1
|
|
|
5
|
|
|
Noncurrent
|
|
|
|
|
|
Operating
|
Other noncurrent liabilities
|
76
|
|
|
89
|
|
|
Finance
|
Long-term debt
|
4
|
|
|
5
|
|
|
Total lease liabilities
|
$
|
109
|
|
|
128
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
4.4
|
|
5.3
|
|
Finance leases
|
|
6.3
|
|
5.3
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
|
4.71
|
%
|
|
6.08
|
%
|
|
Finance leases
|
|
6.62
|
%
|
|
5.55
|
%
|
Supplemental consolidated cash flow statement information related to leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows for operating leases
|
$
|
32
|
|
|
35
|
|
|
Operating cash flows for financing leases
|
5
|
|
|
1
|
|
|
Financing cash flows for finance leases
|
—
|
|
|
10
|
|
|
Supplemental lease cash flow disclosures
|
|
|
|
|
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
19
|
|
|
21
|
|
As of December 31, 2020, maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
|
(Dollars in millions)
|
|
2021
|
$
|
32
|
|
|
1
|
|
|
2022
|
34
|
|
|
1
|
|
|
2023
|
18
|
|
|
1
|
|
|
2024
|
14
|
|
|
1
|
|
|
2025
|
8
|
|
|
1
|
|
|
Thereafter
|
10
|
|
|
1
|
|
|
Total lease payments
|
116
|
|
|
6
|
|
|
Less: interest
|
(12)
|
|
|
(1)
|
|
|
Total
|
104
|
|
|
5
|
|
|
Less: current portion
|
(28)
|
|
|
(1)
|
|
|
Long-term portion
|
$
|
76
|
|
|
4
|
|
As of December 31, 2020, we had no material operating or finance leases that had not yet commenced.
Operating Lease Income
We lease various data transmission capacity, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations.
For the years ended December 31, 2020, 2019 and 2018, our gross rental income was $312 million, $320 million and $522 million, respectively which represents 4%, 4% and 6%, respectively, of our operating revenue for the years ended December 31, 2020, 2019 and 2018.
(5) Credit Losses on Financial Instruments
In accordance with ASC 326, "Financial Instruments - Credit Losses", we aggregate financial assets with similar risk characteristics to align our expected credit losses with the credit quality or deterioration over the life of such assets. We monitor certain risk characteristics within our aggregated financial assets and revise their composition accordingly, to the extent internal and external risk factors change each reporting period. Financial assets that do not share risk characteristics with other financial assets are evaluated separately. Our financial assets measured at amortized cost primarily consist of accounts receivable.
In developing our accounts receivable portfolio, we pooled certain assets with similar credit risk characteristics based on the nature of our customers, their industry, policies used to grant credit terms and their historical and expected credit loss patterns.
Prior to the adoption of the new credit loss standard, the allowance for doubtful accounts receivable reflected our best estimate of probable losses inherent in our receivable portfolio determined based on historical experience, specific allowances for known troubled accounts, and other currently available evidence.
We implemented the new standard effective January 1, 2020, using a loss rate method to estimate our allowance for credit losses. Our determination of the current expected credit loss rate begins with our use of historical loss experience as a percentage of accounts receivable. We measure our historical loss period based on the average days to recognize accounts receivable as credit losses. When asset specific characteristics and current conditions change from those in the historical period, due to changes in our credit and collections strategy, certain classes of aged balances, or credit loss and recovery policies, we perform a qualitative and quantitative assessment to update our current loss rate, which as noted below has increased due to an increase in historic loss experience and weakening economic forecasts. We use regression analysis to develop an expected loss rate using historical experience and economic data over a forecast period. We measure our forecast period based on the average days to collect payment on billed accounts receivable. To determine our allowance for credit losses, we combine the historical, current, and expected credit loss rates and apply them to our period end accounts receivable.
If there is a deterioration of a customer's financial condition or if future default rates in general differ from currently anticipated default rates (including changes caused by COVID-19), we may need to adjust the allowance for credit losses, which would affect earnings in the period that adjustments are made.
The assessment of the correlation between historical observed default rates, current conditions and forecasted economic conditions requires judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the allowance for credit losses. The amount of credit loss is sensitive to changes in circumstances and forecasted economic conditions. Our historical credit loss experience, current conditions and forecast of economic conditions may also not be representative of the customers' actual default experience in the future.
The following table presents the activity of our allowance for credit losses for our accounts receivable portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
Consumer
|
|
Total
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Beginning balance at January 1, 2020 (1)
|
$
|
17
|
|
|
18
|
|
|
35
|
|
|
|
|
|
|
Provision for expected losses
|
30
|
|
|
36
|
|
|
66
|
|
|
|
|
|
|
Write-offs charged against the allowance
|
(22)
|
|
|
(26)
|
|
|
(48)
|
|
|
|
|
|
|
Recoveries collected
|
4
|
|
|
4
|
|
|
8
|
|
|
|
|
|
|
Ending balance at December 31, 2020
|
$
|
29
|
|
|
32
|
|
|
61
|
|
|
|
|
|
______________________________________________________________________
(1)The beginning balance includes the cumulative effect of the adoption of the new credit loss standard.
For the year ended December 31, 2020, we increased our allowance for credit losses for our business and consumer accounts receivable portfolio due to an increase in historical and expected loss experience, which we believe were predominantly attributable to the COVID-19 induced economic slowdown. We believe that decreased write-offs (net of recoveries) driven by COVID-19 regulations and programs have further contributed to an increase in our allowance for credit losses.
(6) Long-Term Debt and Note Payable - Affiliate
The following chart reflects our consolidated long-term debt, including unamortized premiums and discounts, unamortized debt issuance costs and note payable-affiliate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Interest Rates (2)
|
|
Maturities (2)
|
|
2020
|
|
2019
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Senior notes
|
6.500% - 7.750%
|
|
2021 - 2057
|
|
$
|
3,170
|
|
|
5,956
|
|
|
Term loan (1)
|
LIBOR + 2.00%
|
|
2027
|
|
215
|
|
|
100
|
|
|
Finance leases
|
Various
|
|
Various
|
|
6
|
|
|
10
|
|
|
Unamortized premiums, net
|
|
|
|
|
5
|
|
|
—
|
|
|
Unamortized debt issuance costs
|
|
|
|
|
(62)
|
|
|
(115)
|
|
|
Total long-term debt
|
|
|
|
|
3,334
|
|
|
5,951
|
|
|
Less current maturities
|
|
|
|
|
(948)
|
|
|
(1,105)
|
|
|
Long-term debt, excluding current maturities
|
|
|
|
|
$
|
2,386
|
|
|
4,846
|
|
|
Note payable-affiliate
|
4.974%
|
|
2022
|
|
$
|
1,130
|
|
|
1,069
|
|
_______________________________________________________________________________
(1) Qwest Corporation's Term Loan had an interest rate of 2.150% as of December 31, 2020 and 3.800% as of December 31, 2019.
(2) As of December 31, 2020.
Redemption of Senior Notes
On December 14, 2020, Qwest Corporation redeemed in full all $775 million aggregate principal amount of its outstanding 6.125% Notes due 2053 (the "6.125% Notes").
On October 26, 2020, Qwest Corporation redeemed the remaining $160 million aggregate principal amount of its outstanding 6.625% Notes due 2055 (the "6.625% Notes"). Following this redemption, there were no bonds outstanding for the 6.625% Notes.
On September 16, 2020, Qwest Corporation partially redeemed $250 million aggregate principal amount of its outstanding 6.625% Notes.
On August 7, 2020, Qwest Corporation redeemed all of the remaining $300 million aggregate principal amount of its outstanding 6.875% Notes due 2054 (the "6.875% Notes"). Following this redemption, there were no bonds outstanding for the 6.875% Notes.
On June 29, 2020, Qwest Corporation partially redeemed $200 million aggregate principal amount of its outstanding 6.875% Notes.
On January 15, 2020, Qwest Corporation redeemed in full (i) all $850 million aggregate principal amount of its outstanding 6.875% senior notes due 2033, and (ii) all $250 million aggregate principal amount of its outstanding 7.125% senior notes due 2043.
For the year ended December 31, 2020, redemptions of notes resulted in a loss of $63 million.
During 2019, we did not repay any of our long-term debt.
Term Loan
In 2015, we entered into a term loan in the amount of $100 million with CoBank ACB. On October 23, 2020, we borrowed $215 million under a variable-rate term loan with CoBank ACB and used the resulting net proceeds to pay off its previous $100 million term loan with CoBank ACB. Additionally, on October 26, 2020, we used the remaining net proceeds to partially facilitate the above-mentioned redemption of our remaining 6.625% Notes. The outstanding unpaid principal amount of this new term loan plus any accrued and unpaid interest is due on October 23, 2027. Interest is paid at least quarterly based upon either the LIBOR or the base rate (as defined in the credit agreement) plus an applicable margin between 1.50% to 2.50% per annum for LIBOR loans and 0.50% to 1.50% per annum for base rate loans depending on Qwest Corporation's then current senior unsecured long-term debt rating. At December 31, 2020, and 2019, the outstanding principal balance owed under the new term loan and its predecessor was $215 million and $100 million, respectively.
Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt as of December 31, 2020 (excluding unamortized premiums, net, unamortized debt issuance costs and note payable-affiliate) maturing during the following years:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2021
|
$
|
951
|
|
|
2022
|
1
|
|
|
2023
|
1
|
|
|
2024
|
1
|
|
|
2025
|
251
|
|
|
2026 and thereafter
|
2,186
|
|
|
Total long-term debt
|
$
|
3,391
|
|
Note Payable - Affiliate
Qwest Corporation is currently indebted to an affiliate of our ultimate parent company, Lumen Technologies, Inc., under a revolving promissory note that provides Qwest Corporation with a funding commitment of up to $965 million in aggregate principal amount (the "Intercompany Note"). The outstanding principal balance owed by Qwest Corporation under the Intercompany Note and the accrued interest thereon is due and payable on demand, but if no demand is made, then on June 30, 2022. Interest is accrued on the outstanding principal balance during the respective interest period using a weighted average per annum interest rate on the consolidated outstanding debt of Lumen Technologies, Inc. and its subsidiaries. As of December 31, 2020, the Intercompany Note had an outstanding balance of $1.13 billion and bore interest at a weighted-average interest rate of 4.974%. As of December 31, 2020 and 2019, the Intercompany Note is reflected on our consolidated balance sheets as a current liability under "Note payable - affiliate". In accordance with the terms of the Intercompany Note, interest shall be assessed on June 30th and December 31st (an "Interest Period"). Any assessed interest for an Interest Period that remains unpaid on the last day of the subsequent Interest Period is to be capitalized on such date and is to begin accruing interest. Through December 31, 2020, $166 million of such interest has been capitalized since entering into the Intercompany Note. As of December 31, 2020 and 2019, $28 million and $31 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet, respectively.
Interest Expense
Interest expense includes interest on total long-term debt. The following table presents the amount of gross interest expense, net of capitalized interest and interest expense-affiliates, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(Dollars in millions)
|
|
Interest expense:
|
|
|
|
|
|
|
Gross interest expense
|
$
|
308
|
|
|
407
|
|
|
472
|
|
|
Capitalized interest
|
(29)
|
|
|
(27)
|
|
|
(24)
|
|
|
Total interest expense
|
$
|
279
|
|
|
380
|
|
|
448
|
|
|
Interest expense-affiliates, net
|
$
|
74
|
|
|
62
|
|
|
57
|
|
Covenants
Our senior notes were issued under indentures dated April 15, 1990 and October 15, 1999. These indentures contain certain covenants including, but not limited to: (i) a prohibition on certain liens on our assets; and (ii) a limitation on mergers or sales of all, or substantially all, of our assets, which limitation requires that a successor assume the obligation with regard to these notes. These indentures do not contain any cross-default provisions. These indentures do not contain any financial covenants or restrictions on our ability to issue new securities thereunder. Except for a limited number of series of our notes, we generally can redeem our senior notes, at our option, typically at a fixed price.
Under our term loan, we must maintain a debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of not more than 2.85:1.0, as determined and calculated in the manner described in the term loan documentation. The term loan also contains a negative pledge covenant, which generally requires us to secure equally and ratably any advances under the term loan if we pledge assets or permit liens on our property for the benefit of other debtholders. The term loan also has a cross payment default and cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. Our debt to EBITDA ratio could be adversely impacted by a wide variety of events, including unforeseen contingencies, many of which are beyond our control. This could reduce our financing flexibility due to potential restrictions on incurring additional debt under certain provisions of our debt agreements or, in certain circumstances, could result in a default under certain provisions of such agreements.
None of our long-term debt is secured or guaranteed by other companies.
Compliance
At December 31, 2020 and 2019, we believe we were in compliance with the financial covenants contained in our material debt agreements in all material respects.
Subsequent Event
On February 16, 2021, we fully redeemed all $235 million aggregate principal amount of our outstanding 7.000% Senior Notes due 2056.
(7) Accounts Receivable
The following table presents details of our accounts receivable balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Trade and purchased receivables
|
$
|
325
|
|
|
471
|
|
|
Earned and unbilled receivables
|
63
|
|
|
81
|
|
|
Other
|
37
|
|
|
1
|
|
|
Total accounts receivable
|
425
|
|
|
553
|
|
|
Less: allowance for credit losses
|
(61)
|
|
|
(39)
|
|
|
Accounts receivable, less allowance
|
$
|
364
|
|
|
514
|
|
We are exposed to concentrations of credit risk from our customers. We generally do not require collateral to secure our receivable balances. We have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other telecommunications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables.
The following table presents details of our allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Additions
|
|
Deductions
|
|
Ending
Balance
|
|
|
(Dollars in millions)
|
|
2020
|
$
|
39
|
|
|
66
|
|
|
(44)
|
|
|
61
|
|
|
2019
|
$
|
41
|
|
|
51
|
|
|
(53)
|
|
|
39
|
|
|
2018
|
$
|
47
|
|
|
60
|
|
|
(66)
|
|
|
41
|
|
_______________________________________________________________________________
(1)On January 1, 2020, we adopted ASU 2016-13 "Measurement of Credit Losses on Financial Instruments" and recognized a cumulative adjustment to our accumulated deficit as of the date of adoption of $3 million, net of $1 million tax effect. This adjustment is included within "Deductions". Please refer to Note 5—Credit Losses on Financial Instruments for more information.
(8) Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable
Lives
|
|
As of December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
(Dollars in millions)
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
Land
|
N/A
|
|
$
|
332
|
|
|
332
|
|
|
Fiber, conduit and other outside plant(1)
|
15-45 years
|
|
8,270
|
|
|
7,735
|
|
|
Central office and other network electronics(2)
|
7-10 years
|
|
4,964
|
|
|
4,641
|
|
|
Support assets(3)
|
3-30 years
|
|
2,679
|
|
|
2,670
|
|
|
Construction in progress(4)
|
N/A
|
|
411
|
|
|
538
|
|
|
Gross property, plant and equipment
|
|
|
16,656
|
|
|
15,916
|
|
|
Accumulated depreciation
|
|
|
(8,347)
|
|
|
(7,746)
|
|
|
Net property, plant and equipment
|
|
|
$
|
8,309
|
|
|
8,170
|
|
_______________________________________________________________________________
(1)Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.
(2)Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.
(3)Support assets consist of buildings, computers and other administrative and support equipment.
(4)Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still under construction.
We recorded depreciation expense of $834 million, $831 million and $855 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(9) Severance
Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from the increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workload demands due to reduced demand for certain services.
We report severance liabilities within accrued expenses and other liabilities-salaries and benefits in our consolidated balance sheets and report severance expenses in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations.
Changes in our accrued liability for severance expenses were as follows:
|
|
|
|
|
|
|
|
|
Severance
|
|
|
(Dollars in millions)
|
|
Balance at December 31, 2018
|
$
|
33
|
|
|
Accrued to expense
|
66
|
|
|
Payments, net
|
(36)
|
|
|
Balance at December 31, 2019
|
63
|
|
|
Accrued to expense
|
17
|
|
|
Payments, net
|
(53)
|
|
|
Balance at December 31, 2020
|
$
|
27
|
|
(10) Employee Benefits
Pension and Post-Retirement Benefits
QCII's post-retirement benefit plans were merged into Lumen's post-retirement benefit plans on January 1, 2012 and on December 31, 2014, QCII's qualified pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, which is now named the Lumen Combined Pension Plan. Based on current laws and circumstances, (i) Lumen Technologies was not required to make a cash contribution to the Lumen Combined Pension Plan in 2020 and (ii) Lumen Technologies does not expect it will be required to make a contribution in 2021. The amount of required contributions to the Lumen Combined Pension Plan in 2021 and beyond will depend on earnings on plan investments, prevailing discount rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. Lumen Technologies occasionally makes voluntary contributions in addition to required contributions, and Lumen Technologies made such voluntary cash contributions of $500 million to the Lumen Combined Pension Plan during 2018. Lumen Technologies did not make a voluntary contribution in 2019 or 2020.
The unfunded status of Lumen's qualified pension plan for accounting purposes was $1.7 billion as of December 31, 2020 and 2019, which includes the merged QCII qualified pension plan. The unfunded status of Lumen's post-retirement benefit plans for accounting purposes was $3.0 billion as of December 31, 2020 and 2019.
Lumen Technologies allocates current service costs to subsidiaries relative to employees who are currently earning benefits under the pension and post-retirement benefit plans. The net cost allocated to us is paid on a monthly basis through Lumen's intercompany cash management process.
The affiliate obligations, net in current and noncurrent liabilities on the consolidated balance sheets primarily represents the cumulative allocation of expense, net of payments, associated with QCII's pension plans and post-retirement benefits plans prior to the plan mergers. In 2015, we agreed to a plan to settle the outstanding pension and post-retirement affiliate obligations, net balance with QCII over a 30 year term. Under the plan, payments are scheduled to be made on a monthly basis. For the years ended December 31, 2020 and 2019, we made settlement payments in the aggregate of $71 million and $76 million, respectively, to QCII under the plan. Changes in the affiliate obligations, net are reflected in operating activities on our consolidated statements of cash flows.
We were allocated $41 million of pension service costs and $10 million of post-retirement service costs during the year ended December 31, 2020, which represented 70% of Lumen's total pension and post-retirement service costs for the year. The combined net pension and post-retirement service costs is included in cost of services and products and selling, general and administrative expenses on our consolidated statement of operations for the year ended December 31, 2020.
We were allocated $40 million of pension service costs and $11 million of post-retirement service costs during the year ended December 31, 2019, which represented 70% of Lumen's total pension and post-retirement service costs for the year. The combined net pension and post-retirement service costs is included in cost of services and products and selling, general and administrative expenses on our consolidated statement of operations for the year ended December 31, 2019.
We were allocated $46 million of pension service costs and $11 million of post-retirement service costs during the year ended December 31, 2018, which represented 70% of Lumen's total pension and post-retirement service costs for the year. The combined net pension and post-retirement service costs is included in cost of services and products and selling, general and administrative expenses on our consolidated statement of operations for the year ended December 31, 2018.
Lumen Technologies sponsors a noncontributory qualified defined benefit pension plan that covers certain of our eligible employees. The CenturyLink Combined Pension Plan also provides survivor and disability benefits to certain employees. In November 2009, and prior to the plan merger, the pension plan was amended to no longer provide pension benefit accruals for active non-represented employees after December 31, 2009. In addition, non-represented employees hired after January 1, 2009 are not eligible to participate in the plans. Active non-represented employees who participate in these plans retain their accrued pension benefit earned as of December 31, 2009 and certain participants will continue to earn interest credits on their benefit after December 31, 2009. Employees are eligible to receive their vested accrued benefit when they separate from Lumen Technologies. The plans also provided a death benefit for eligible beneficiaries of certain retirees; however, the plan was amended to eliminate this benefit effective March 1, 2010 for retirees who retired prior to January 1, 2004 and whose deaths occur after February 28, 2010 and eliminate the death benefit for eligible beneficiaries of certain retirees who retired after December 31, 2003.
Lumen Technologies maintains post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. The QCII post-retirement benefit plans were merged into Lumen's post-retirement benefit plans on January 1, 2012. The benefit obligation for the occupational health care and life insurance post-retirement plans is estimated based on the terms of benefit plans. In calculating this obligation, Lumen Technologies considers numerous assumptions, estimates and judgments, including but not limited to, discount rates, health care cost trend rates and plan amendments. During the third quarter of 2019, we renewed a collective bargaining agreement which covers our unionized employees. The terms of the new agreement had no material impact on the post-retirement benefit plans.
The terms of the post-retirement health care and life insurance plans between Lumen Technologies and its eligible non-represented employees and its eligible post-1990 non-represented retirees are established by Lumen Technologies and are subject to change at its discretion. Lumen Technologies has a practice of sharing some of the cost of providing health care benefits with its non-represented employees and post-1990 non-represented retirees. The benefit obligation for the non-represented post-retirement health care benefits is based on the terms of the current written plan documents and is adjusted for anticipated continued cost sharing with non-represented employees and post-1990 non-represented retirees. However, Lumen's contribution under its post-1990 non-represented retirees' health care plan is capped at a specific dollar amount.
Medicare Prescription Drug, Improvement and Modernization Act of 2003
Lumen Technologies sponsors post-retirement health care plans with several benefit options that provide prescription drug benefits that Lumen Technologies deems actuarially equivalent to or exceeding Medicare Part D. Lumen Technologies recognizes the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of its post-retirement benefit obligation and net periodic post-retirement benefit expense.
Other Benefit Plans
Health Care and Life Insurance
We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our health care benefit expense for current employees was $132 million, $171 million and $211 million for the years ended December 31, 2020, 2019 and 2018, respectively. Employees' group basic life insurance plans are fully insured and the premiums are paid by Lumen Technologies.
401(k) Plans
Lumen Technologies sponsors a qualified defined contribution plan covering substantially all of our employees. Under this plan, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the plan and by the Internal Revenue Service ("IRS"). Currently, we match a percentage of our employees' contributions in cash. We recognized $34 million, $46 million and $45 million in expense related to this plan for the years ended December 31, 2020, 2019 and 2018, respectively.
(11) Share-based Compensation
Share-based compensation expenses are included in cost of services and products, and selling, general, and administrative expenses in our consolidated statements of operations.
For the years ended December 31, 2020, 2019 and 2018, we recorded share-based compensation expense of approximately $21 million, $26 million and $24 million, respectively. We recognized an income tax benefit from our compensation expense of approximately $5 million, $6 million and $6 million during the years ended December 31, 2020, 2019 and 2018, respectively.
(12) Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable, note payable-affiliate and long-term debt, excluding finance lease and other obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable and note payable-affiliate approximate their fair values.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.
The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:
|
|
|
|
|
|
|
|
|
|
|
Input Level
|
|
Description of Input
|
|
|
|
|
|
Level 1
|
|
Observable inputs such as quoted market prices in active markets.
|
|
Level 2
|
|
Inputs other than quoted prices in active markets that are either directly or indirectly observable.
|
|
Level 3
|
|
Unobservable inputs in which little or no market data exists.
|
The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding finance lease and other obligations, as well as the input levels used to determine the fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
|
|
Input
Level
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
(Dollars in millions)
|
|
Liabilities-Long-term debt (excluding finance lease and other obligations)
|
2
|
|
$
|
3,328
|
|
|
3,532
|
|
|
5,941
|
|
|
6,258
|
|
(13) Income Taxes
The components of the income tax expense from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(Dollars in millions)
|
|
Income tax expense:
|
|
|
|
|
|
|
Federal and foreign
|
|
|
|
|
|
|
Current
|
$
|
425
|
|
|
415
|
|
|
(39)
|
|
|
Deferred
|
40
|
|
|
95
|
|
|
408
|
|
|
State and local
|
|
|
|
|
|
|
Current
|
128
|
|
|
126
|
|
|
31
|
|
|
Deferred
|
2
|
|
|
5
|
|
|
94
|
|
|
Income tax expense
|
$
|
595
|
|
|
641
|
|
|
494
|
|
The effective income tax rate for continuing operations differs from the statutory tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(in percent)
|
|
Effective income tax rate:
|
|
|
|
|
|
|
Federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
|
State income taxes-net of federal effect
|
4.4
|
%
|
|
4.1
|
%
|
|
6.1
|
%
|
|
Accounting method changes
|
—
|
%
|
|
—
|
%
|
|
(3.9)
|
%
|
|
Other
|
0.4
|
%
|
|
0.9
|
%
|
|
(0.3)
|
%
|
|
Effective income tax rate
|
25.8
|
%
|
|
26.0
|
%
|
|
22.9
|
%
|
The effective rate for the year ended December 31, 2018, was favorably impacted by a tax benefit of $83 million generated by filing tax accounting method changes that accelerated significant tax deductions.
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Deferred tax liabilities:
|
|
|
|
|
Property, plant and equipment
|
$
|
(1,369)
|
|
|
(1,256)
|
|
|
Intangibles assets
|
(169)
|
|
|
(280)
|
|
|
Total deferred tax liabilities
|
(1,538)
|
|
|
(1,536)
|
|
|
Deferred tax assets:
|
|
|
|
|
Payable to affiliate due to post-retirement benefit plan participation
|
284
|
|
|
326
|
|
|
Other
|
15
|
|
|
20
|
|
|
Gross deferred tax assets
|
299
|
|
|
346
|
|
|
Less valuation allowance on deferred tax assets
|
(8)
|
|
|
(8)
|
|
|
Net deferred tax assets
|
291
|
|
|
338
|
|
|
Net deferred tax liabilities
|
$
|
(1,247)
|
|
|
(1,198)
|
|
At December 31, 2020, we have established a valuation allowance of $8 million as it is not more likely than not that this amount of deferred tax assets will be realized.
As of December 31, 2020, the $1.2 billion net deferred tax liability is reflected as a $1.2 billion long-term liability and $2 million is reflected as a noncurrent deferred tax asset in other, net on our consolidated balance sheets. As of December 31, 2019, the entire net deferred tax liability is reflected as a long-term liability.
With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2012. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.
A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2020 and 2019 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Unrecognized tax benefits at beginning of period
|
$
|
414
|
|
|
433
|
|
|
Increase due to tax positions taken in a prior year
|
—
|
|
|
—
|
|
|
Decrease due to tax positions taken in a prior year
|
(26)
|
|
|
(19)
|
|
|
Unrecognized tax benefits at end of period
|
$
|
388
|
|
|
414
|
|
The total amount of unrecognized tax benefits (including interest and net of federal benefit) that, if recognized, would impact the effective income tax rate was $422 million and $432 million as of December 31, 2020 and 2019, respectively.
Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $60 million and $40 million as of December 31, 2020 and 2019, respectively.
Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may not change in the next 12 months. The actual amount of changes, if any, will depend on future developments and events, many of which are outside our control.
We paid $556 million and $539 million related to income taxes for the years ended December 31, 2020 and 2019, respectively and received $8 million from QSC related to income taxes in the year ended December 31, 2018.
(14) Products and Services Revenue
We are an integrated communications company engaged primarily in providing an array of communications services, including local voice, broadband, private line (including business data services), Ethernet, network access, information technology and other ancillary services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.
We categorize our products, services and revenue among the following six categories:
•IP and Data Services, which include primarily VPN data networks, Ethernet, retail video, IP and other ancillary services;
•Transport and Infrastructure, which include broadband, private line (including business data services) and other ancillary services;
•Voice and Collaboration, which includes primarily local voice, including wholesale voice, and other ancillary services;
•IT and Managed Services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;
•Regulatory Revenue, which consist of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenue. We receive federal support payments from both federal and state USF programs and from the federal CAF program. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from our customers; and
•Affiliate Services, which are telecommunication services we provide to our affiliates that we also provide to our external customers. In addition, we provide to our affiliates computer system development and support services, network support and technical services.
From time to time, we may change the categorization of our products and services.
Our operating revenue for our products and services consisted of the following categories for the years ended December 31, 2020, 2019 and 2018:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(Dollars in millions)
|
|
IP and Data Services
|
$
|
524
|
|
|
595
|
|
|
587
|
|
|
Transport and Infrastructure
|
2,604
|
|
|
2,773
|
|
|
2,870
|
|
|
Voice and Collaboration
|
1,517
|
|
|
1,618
|
|
|
1,783
|
|
|
IT and Managed Services
|
2
|
|
|
4
|
|
|
6
|
|
|
Regulatory Services
|
179
|
|
|
189
|
|
|
214
|
|
|
Affiliate Services
|
2,487
|
|
|
2,873
|
|
|
2,935
|
|
|
Total operating revenue
|
$
|
7,313
|
|
|
8,052
|
|
|
8,395
|
|
We do not have any single external customer that provides more than 10% of our total consolidated operating revenue. Substantially all of our consolidated revenue comes from customers located in the United States.
Our operations are integrated into and reported as part of the consolidated segment data of Lumen Technologies. Lumen's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we determined that we have one reportable segment.
(15) Affiliate Transactions
We provide telecommunications service to our affiliates that we also provide to external customers. In addition, we provide to our affiliates, computer system development and support services and network support and technical services.
Below are details of the services we provide to our affiliates:
•Telecommunications services. Data, broadband and voice services in support of our affiliates' service offerings;
•Computer system development and support services. Information technology services primarily include the labor cost of developing, testing and implementing the system changes necessary to support order entry, provisioning, billing, network and financial systems, as well as the cost of improving, maintaining and operating our operations support systems and shared internal communications networks; and
•Network support and technical services. Network support and technical services relate to forecasting demand volumes and developing plans around network utilization and optimization, developing and implementing plans for overall product development, provisioning and customer care.
We charge our affiliates for services that we also provide to external customers, while other services that we provide only to our affiliates are priced by applying a fully distributed cost ("FDC") methodology. FDC rates include salaries and wages, payroll taxes, employee related benefits, miscellaneous expenses, and charges for the use of our buildings, computing and software assets. Whenever possible, costs are directly assigned to our affiliates for the services they use. If costs cannot be directly assigned, they are allocated among all affiliates based upon cost causative measures; or if no cost causative measure is available, these costs are allocated based on a general allocator. These cost allocation methodologies are reasonable. From time to time, we adjust the basis for allocating the costs of a shared service among affiliates. Such changes in allocation methodologies are generally billed prospectively.
We also purchase services from our affiliates including telecommunication services, insurance, flight services and other support services such as legal, regulatory, finance and accounting, tax, human resources and executive support. Our affiliates charge us for these services based on FDC.
Qwest Corporation is currently indebted to an affiliate of our ultimate parent company, Lumen Technologies, under a revolving promissory note. For additional information, see "Note Payable - Affiliate" in Note 6—Long-Term Debt And Note Payable - Affiliate.
(16) Commitments, Contingencies and Other Items
We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.
Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for our litigation and non-income tax contingencies at December 31, 2020 and December 31, 2019 aggregated to approximately $19 million and $50 million, respectively, and are included in "Other" current liabilities and "Other Liabilities" in our consolidated balance sheet as of such date. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.
Principal Proceedings
Billing Practices Suits
In June 2017, a former employee of a Lumen Technologies subsidiary filed an employment lawsuit against Lumen Technologies (at the time known as CenturyLink, Inc.) claiming that she was wrongfully terminated for alleging that Lumen charged some of its retail customers for products and services they did not authorize. Thereafter, based in part on the allegations made by the former employee, several legal proceedings were filed.
In June 2017, McLeod v. CenturyLink, a consumer class action, was filed against Lumen Technologies in the U.S. District Court for the Central District of California alleging that Lumen Technologies charged some of its retail customers for products and services they did not authorize. Other complaints asserting similar claims have been filed in other federal and state courts, as well. The lawsuits assert claims including fraud, unfair competition, and unjust enrichment. Also, in June 2017, Craig. v. CenturyLink, Inc., et al., a securities investor class action, was filed in U.S. District Court for the Southern District of New York, alleging that Lumen Technologies failed to disclose material information regarding improper sales practices, and asserting federal securities law claims. A number of other cases asserting similar claims have also been filed.
Beginning June 2017, Lumen Technologies received several shareholder derivative demands addressing related topics. In August 2017, Lumen Technologies' Board of Directors formed a special litigation committee of outside directors to address the allegations of impropriety contained in the shareholder derivative demands. In April 2018, the special litigation committee concluded its review of the derivative demands and declined to take further action. Since then, derivative cases were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita and in federal court in Louisiana and Minnesota. These cases have been brought on behalf of Lumen Technologies against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.
The consumer class actions, the securities investor class actions, and the federal derivative actions were transferred to the U.S. District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings as In Re: CenturyLink Sales Practices and Securities Litigation.
Lumen Technologies received final approval of the settlement of the consumer class actions for payments totaling $15.5 million plus certain notice and administration costs. Approximately 12,000 potential class members elected to opt out of the class settlement and may elect to pursue their individual claims against Lumen Technologies on these issues through various dispute resolution processes, including individual arbitration. Subject to certain conditions, Lumen Technologies has agreed to settle the claims of approximately 11,000 such class members asserted by one law firm. Additionally, Lumen Technologies has reached an agreement settling the securities investor class actions for payment of $55 million, which Lumen expects to be paid by its insurers. The settlement of the securities class claims is subject to court approval.
Lumen has engaged in discussions regarding related claims with a number of state attorneys general, and has entered into agreements settling certain of the consumer practices claims asserted by state attorneys general. While Lumen Technologies does not agree with allegations raised in these matters, it has been willing to consider reasonable settlements where appropriate.
Locate Service Investigations
In June 2019, Minnesota and Arizona initiated investigations related to the timeliness of responses by certain of our vendors to requests for marking the location of underground telecommunications facilities. We, along with Lumen and its other subsidiaries are cooperating with the investigations. In February 2020, the Minnesota claims were settled. The terms of the settlement were not material to our consolidated results of operations or financial position.
Other Proceedings, Disputes and Contingencies
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, regulatory hearings relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third-party tort actions.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of which are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial during 2021 if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are subject to various federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $300,000 in fines and penalties.
The outcome of these other proceedings described under this heading is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on us.
The ultimate outcome of the above-described matters may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing above in this Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us.
Right-of-Way
At December 31, 2020, our future rental commitments for Right-of-Way agreements were as follows:
|
|
|
|
|
|
|
|
|
Right-of-Way Agreements
|
|
|
(Dollars in millions)
|
|
2021
|
$
|
19
|
|
|
2022
|
8
|
|
|
2023
|
6
|
|
|
2024
|
5
|
|
|
2025
|
4
|
|
|
2026 and thereafter
|
20
|
|
|
Total future minimum payments
|
$
|
62
|
|
Purchase Commitments
We have several commitments primarily for marketing activities and support services from a variety of vendors to be used in the ordinary course of business totaling $18 million at December 31, 2020. Of this amount, we expect to purchase $15 million in 2021 and $3 million in 2022. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we were contractually committed as of December 31, 2020.
(17) Other Financial Information
Other Current Assets
The following table presents details of other current assets in our consolidated balance sheets:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Prepaid expenses
|
$
|
40
|
|
|
41
|
|
|
Contract acquisition costs
|
47
|
|
|
50
|
|
|
Contract fulfillment costs
|
28
|
|
|
28
|
|
|
Other
|
7
|
|
|
9
|
|
|
Total other current assets
|
$
|
122
|
|
|
128
|
|
Other Noncurrent Liabilities
The following table presents details of other noncurrent liabilities in our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
|
(Dollars in millions)
|
|
Unrecognized tax benefits
|
$
|
448
|
|
|
454
|
|
|
Deferred revenue
|
108
|
|
|
108
|
|
|
Noncurrent operating lease liability
|
76
|
|
|
89
|
|
|
Other
|
53
|
|
|
61
|
|
|
Total other noncurrent liabilities
|
$
|
685
|
|
|
712
|
|
(18) Labor Union Contracts
As of December 31, 2020, approximately 44% of our employees were members of various bargaining units represented by the Communication Workers of America ("CWA") and the International Brotherhood of Electrical Workers ("IBEW"). During the third quarter of 2019, we reached new agreements with the CWA and IBEW, which represented all of the above noted represented employees. Therefore, there are no collective bargaining agreements that are scheduled to expire over the 12 month period ending December 31, 2021. We believe that relations with our employees continue to be generally good.
(19) Stockholder's Equity
Common Stock
We have one share of common stock (no par value) issued and outstanding, which is owned by QSC.
In addition, in the normal course of business, we transfer assets and liabilities to and from QSC and its affiliates, which are recorded through our equity. It is our policy to record these asset transfers based on carrying values.
Dividends
We declared and paid the following cash dividend to QSC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(Dollars in millions)
|
|
Cash dividend declared to QSC
|
$
|
1,725
|
|
|
1,600
|
|
|
1,275
|
|
|
Cash dividend paid to QSC
|
1,725
|
|
|
1,600
|
|
|
1,275
|
|
The timing of cash payments for declared dividends to QSC is at our discretion in consultation with QSC. We may declare and pay dividends to QSC in excess of our earnings to the extent permitted by applicable law. Our debt covenants do not limit the amount of dividends we can pay to QSC. Dividends paid are reflected on our consolidated statement of cash flows as financing activities.
