Company Quick10K Filing
Qwest
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 0 $0
10-Q 2019-11-08 Quarter: 2019-09-30
10-Q 2019-08-09 Quarter: 2019-06-30
10-Q 2019-05-13 Quarter: 2019-03-31
10-K 2019-03-22 Annual: 2018-12-31
10-Q 2018-11-13 Quarter: 2018-09-30
10-Q 2018-08-13 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-03-12 Annual: 2017-12-31
10-Q 2017-11-13 Quarter: 2017-09-30
10-Q 2017-08-08 Quarter: 2017-06-30
10-Q 2017-05-10 Quarter: 2017-03-31
10-K 2017-03-02 Annual: 2016-12-31
10-Q 2016-11-09 Quarter: 2016-09-30
10-Q 2016-08-05 Quarter: 2016-06-30
10-Q 2016-05-09 Quarter: 2016-03-31
10-K 2016-03-01 Annual: 2015-12-31
10-Q 2015-11-12 Quarter: 2015-09-30
10-Q 2015-08-07 Quarter: 2015-06-30
10-Q 2015-05-11 Quarter: 2015-03-31
10-K 2015-02-27 Annual: 2014-12-31
10-Q 2014-11-07 Quarter: 2014-09-30
10-Q 2014-08-08 Quarter: 2014-06-30
10-Q 2014-05-15 Quarter: 2014-03-31
10-K 2014-03-07 Annual: 2013-12-31
10-Q 2013-11-13 Quarter: 2013-09-30
10-Q 2013-08-14 Quarter: 2013-06-30
10-Q 2013-05-13 Quarter: 2013-03-31
10-K 2013-03-12 Annual: 2012-12-31
10-Q 2012-11-13 Quarter: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-03-02 Annual: 2011-12-31
10-Q 2011-11-08 Quarter: 2011-09-30
10-Q 2011-08-12 Quarter: 2011-06-30
10-Q 2011-05-06 Quarter: 2011-03-31
10-K 2011-02-22 Annual: 2010-12-31
10-Q 2010-11-04 Quarter: 2010-09-30
10-Q 2010-08-06 Quarter: 2010-06-30
10-Q 2010-05-05 Quarter: 2010-03-31
10-K 2010-02-17 Annual: 2009-12-31
8-K 2018-09-21 Officers, Exhibits
8-K 2018-08-20 Other Events, Exhibits
CTY 2019-09-30
Part I-Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 ctq2019093010qex311.htm
EX-31.2 ctq2019093010qex312.htm
EX-32.1 ctq2019093010qex321.htm
EX-32.2 ctq2019093010qex322.htm

Qwest Earnings 2019-09-30

CTY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
CTY 0 20,743 10,611 8,368 5,815 858 3,294 6,062 69% 1.8 4%
REKR
TDS
PWFL
AMOV
VISL
TIGO
TEO 371,738 142,825 17,923 0 2,029 2,029 -1,878 0% -0.9 1%
VIV 102,561 30,954 0 0 0 0 -3,910 0%
ATTO 1,213 873 0 0 0 0 -0 0%

Document
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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                to                               
Commission File No. 001-03040
 
Q W E S T  C O R P O R A T I O N
(Exact name of registrant as specified in its charter)
 
Colorado
 
84-0273800
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 CenturyLink Drive,
Monroe,
Louisiana
 
71203
(Address of principal executive offices)
 
(Zip Code)
(318388-9000
(Registrant's telephone number, including area code)
 

THE REGISTRANT, A WHOLLY OWNED INDIRECT SUBSIDIARY OF CENTURYLINK, INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No 


1

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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
6.125% Notes Due 2053
 
CTY
 
New York Stock Exchange
6.875% Notes Due 2054
 
CTV
 
New York Stock Exchange
6.625% Notes Due 2055
 
CTZ
 
New York Stock Exchange
7.00% Notes Due 2056
 
CTAA
 
New York Stock Exchange
6.5% Notes Due 2056
 
CTBB
 
New York Stock Exchange
6.75% Notes Due 2057
 
CTDD
 
New York Stock Exchange
On November 8, 2019, there was one share of common stock outstanding.
 

2

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TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* All references to "Notes" in this quarterly report refer to these Notes to Consolidated Financial Statements.

3

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Special Note Regarding Forward-Looking Statements

This report and other documents filed by us under the federal securities law include, and future oral or written statements or press releases by us and our management may include, forward-looking statements about our business, financial condition, operating results and prospects. These "forward-looking" statements are defined by, and are subject to the "safe harbor" protections under, the federal securities laws. These statements include, among others:
forecasts of our anticipated future results of operations, cash flows or financial position;
statements concerning the anticipated impact of our transactions, investments, product development, transformational projects and other initiatives, including the impact of our participation in government programs;
statements about our liquidity, profit margins, tax position, tax rates, asset values, contingent liabilities, growth opportunities and growth rates, business prospects, regulatory and competitive outlook, market share, product capabilities, investment and expenditure plans, business strategies, capital allocation plans, financing alternatives and sources, and pricing plans; and
other similar statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts, many of which are highlighted by words such as “may,” “will,” “would,” “could,” “should,” “plan,” “believes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “likely,” “seeks,” “hopes,” or variations or similar expressions with respect to the future.
These forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions upon which they are based, (i) are not guarantees of future results, (ii) are inherently speculative and (iii) are subject to a number of risks and uncertainties. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect. All of our forward-looking statements are qualified in their entirety by reference to our discussion of factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward looking statements. Factors that could affect actual results include but are not limited to:
the effects of competition from a wide variety of competitive providers, including decreased demand for our more mature service offerings and increased pricing pressures;
the effects of new, emerging or competing technologies, including those that could make our products less desirable or obsolete;
our ability to attain our key operating imperatives, including simplifying and consolidating our network, simplifying and automating our service support systems, strengthening our relationships with customers and attaining projected cost savings;
our ability to safeguard our network, and to avoid the adverse impact on our business from possible security breaches, service outages, system failures, equipment breakage, or similar events impacting our network or the availability and quality of our services;
the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, interconnection obligations, special access, universal service, broadband deployment, data protection and net neutrality;
our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and product mix;
possible changes in the demand for our products and services, including our ability to effectively respond to increased demand for high-speed data transmission services;
our ability to successfully maintain the quality and profitability of our existing product and service offerings and to introduce profitable new offerings on a timely and cost-effective basis;
our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt repayments and dividends;

4

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our ability to implement our operating plans, corporate strategies and capital allocation plans or changes in such plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise;
our ability to effectively retain and hire key personnel and to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages;
the negative impact of increases in the costs of CenturyLink’s pension, health, post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations, which could affect our business and liquidity;
adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower debt credit ratings, unstable markets or otherwise;
our ability to meet the terms and conditions of our debt obligations;
our ability to maintain favorable relations with our key business partners, suppliers, vendors, landlords, lenders and financial institutions;
our ability to collect our receivables from financially troubled customers;
any adverse developments in legal or regulatory proceedings involving us or our affiliates, including CenturyLink;
changes in tax, communications, healthcare or other laws or regulations, in governmental support programs, or in general government funding levels;
the effects of changes in accounting policies, practices or assumptions, including changes that could potentially require future impairment charges;
the effects of adverse weather, terrorism or other natural or man-made disasters;
the effects of more general factors such as changes in interest rates, in exchange rates, in operating costs, in public policy, in the views of financial analysts, or in general market, labor, economic or geo-political conditions;
adverse effects of material weaknesses or any other significant deficiencies identified in our internal controls over financial reporting; and
other risks referenced in this report or other of our filings with the SEC.
Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans (including our dividend or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

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PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QWEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
OPERATING REVENUE
 
 
 
 
 
 
 
Operating revenue
$
1,338

 
1,397

 
4,002

 
4,209

Operating revenue - affiliates
701

 
752

 
2,143

 
2,171

Total operating revenue
2,039

 
2,149

 
6,145

 
6,380

OPERATING EXPENSES
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)
630

 
697

 
1,825

 
2,106

Selling, general and administrative
131

 
172

 
445

 
602

Operating expenses - affiliates
186

 
203

 
600

 
616

Depreciation and amortization
344

 
360

 
1,017

 
1,081

Total operating expenses
1,291

 
1,432

 
3,887

 
4,405

OPERATING INCOME
748

 
717

 
2,258

 
1,975

OTHER (EXPENSE) INCOME
 
 
 
 
 
 
 
Interest expense
(95
)
 
(112
)
 
(286
)
 
(350
)
Interest expense - affiliates, net
(15
)
 
(15
)
 
(46
)
 
(42
)
Other income, net
5

 
(26
)
 
19

 
(1
)
Total other expense, net
(105
)
 
(153
)
 
(313
)
 
(393
)
INCOME BEFORE INCOME TAXES
643

 
564

 
1,945

 
1,582

Income tax expense
166

 
111

 
504

 
322

NET INCOME
$
477

 
453

 
1,441

 
1,260

See accompanying notes to consolidated financial statements.

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QWEST CORPORATION
CONSOLIDATED BALANCE SHEETS

 
September 30, 2019 (Unaudited)
 
December 31, 2018
 
(Dollars in millions)
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
3

 
5

Accounts receivable, less allowance of $41 and $41
505

 
546

Advances to affiliates
1,604

 
1,148

Other
141

 
147

Total current assets
2,253

 
1,846

Property, plant and equipment, net of accumulated depreciation of $7,530 and $6,951
8,103

 
8,077

GOODWILL AND OTHER ASSETS
 
 
 
Goodwill
9,360

 
9,360

Operating lease assets
117

 

Customer relationships, net
570

 
893

Other intangible assets, net
329

 
311

Other, net
98

 
96

Total goodwill and other assets
10,474

 
10,660

TOTAL ASSETS
$
20,830

 
20,583

LIABILITIES AND STOCKHOLDER'S EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
7

 
11

Accounts payable
412

 
441

Note payable - affiliate
1,069

 
1,008

Accrued expenses and other liabilities
 
 
 
Salaries and benefits
167

 
251

Income and other taxes
153

 
140

Interest
58

 
55

Other
84

 
75

Current affiliate obligations, net
73

 
79

Current portion of deferred revenue
205

 
212

Total current liabilities
2,228

 
2,272

LONG-TERM DEBT
5,946

 
5,948

DEFERRED CREDITS AND OTHER LIABILITIES
 
 
 
Deferred revenue
99

 
91

Deferred income taxes, net
1,001

 
1,098

Noncurrent operating lease liabilities
90

 

Affiliate obligations, net
698

 
759

Other
559

 
547

Total deferred credits and other liabilities
2,447

 
2,495

COMMITMENTS AND CONTINGENCIES (Note 8)

 

STOCKHOLDER'S EQUITY
 
 
 
Common stock - one share without par value, owned by Qwest Services Corporation
10,050

 
10,050

Retained earnings (accumulated deficit)
159

 
(182
)
Total stockholder's equity
10,209

 
9,868

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
$
20,830

 
20,583

See accompanying notes to consolidated financial statements.

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QWEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 
Nine Months Ended September 30,
 
2019
 
2018
 
(Dollars in millions)
OPERATING ACTIVITIES
 
 
 
Net income
$
1,441

 
1,260

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,017

 
1,081

Deferred income taxes
(96
)
 
9

Provision for uncollectible accounts
36

 
51

Accrued interest on affiliate note
61

 
43

Net loss on early retirement of debt

 
30

Changes in current assets and liabilities:
 
 
 
Accounts receivable
5

 
3

Accounts payable
(14
)
 
(5
)
Accrued income and other taxes
13

 
(7
)
Other current assets and liabilities, net
(88
)
 
(108
)
Other current assets and liabilities - affiliates, net
(14
)
 
(7
)
Changes in other noncurrent assets and liabilities, net
6

 
385

Changes in affiliate obligations, net
(67
)
 
(94
)
Other, net
17

 
11

Net cash provided by operating activities
2,317

 
2,652

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(777
)
 
(732
)
Changes in advances to affiliates
(456
)
 
360

Proceeds from sale of property, plant and equipment and other assets
24

 
5

Net cash used in investing activities
(1,209
)
 
(367
)
FINANCING ACTIVITIES
 
 
 
Payments of long-term debt
(10
)
 
(1,355
)
Dividends paid to Qwest Services Corporation
(1,100
)
 
(925
)
Net cash used in financing activities
(1,110
)
 
(2,280
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(2
)
 
5

Cash, cash equivalents and restricted cash at beginning of period
7

 
3

Cash, cash equivalents and restricted cash at end of period
$
5

 
8

Supplemental cash flow information:
 
 
 
Income taxes (paid) refunded, net
$
(584
)
 
58

Interest paid (net of capitalized interest of $19 and $20)
$
(281
)
 
(366
)
 
 
 
 
Cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
3

 
6

Restricted cash included in other noncurrent assets
2

 
2

Total
$
5

 
8

See accompanying notes to consolidated financial statements.

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QWEST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
COMMON STOCK
 
 
 
 
 
 
 
Balance at beginning of period
$
10,050

 
10,050

 
10,050

 
10,050

Balance at end of period
10,050

 
10,050

 
10,050

 
10,050

RETAINED EARNINGS (ACCUMULATED DEFICIT)
 
 
 
 
 
 
 
Balance at beginning of period
82

 
(353
)
 
(182
)
 
(713
)
Net income
477

 
453

 
1,441

 
1,260

Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $—, ($7), $— and ($50) taxes

 
19

 

 
147

Dividends declared to Qwest Services Corporation
(400
)
 
(350
)
 
(1,100
)
 
(925
)
Balance at end of period
159

 
(231
)
 
159

 
(231
)
TOTAL STOCKHOLDER'S EQUITY
$
10,209

 
9,819

 
10,209

 
9,819

See accompanying notes to consolidated financial statements.

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QWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, and references to "CenturyLink" refer to our ultimate parent company, CenturyLink, Inc. and its consolidated subsidiaries including Level 3 Parent, LLC, referred to as "Level 3".
(1) Background

General
We are an integrated communications company engaged primarily in providing an array of communications services to our residential and business customers. Our specific products and services are detailed in Note 7—Products and Services Revenue 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.

Basis of Presentation

Our consolidated balance sheet as of December 31, 2018, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations and cash flows for the first nine months of the year are not necessarily indicative of the consolidated results of operations and cash flows that might be expected for the entire year. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2018.

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 7—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.

Segments

Our operations are integrated into and reported as part of CenturyLink. CenturyLink'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.


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Recently Adopted Accounting Pronouncements

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 will not make 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 Financial Accounting Standards Board ("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. The standards did not materially impact our consolidated net earnings and had no material impact on cash flows. 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.

Recently Issued Accounting Pronouncements

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments". 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 our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are evaluating the potential impact ASU 2016-13 will have on our financial assets measured at amortized cost including, but not limited to, customer receivables and contract asset balances.

Over the fourth quarter, we will complete our evaluation of the impact to our accounting and internal controls over financial reporting as a result of ASU 2016-13. We expect to adopt ASU 2016-13 on January 1, 2020 and recognize the impacts through a cumulative adjustment to accumulated deficit as of the date of adoption.


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(2) Goodwill, Customer Relationships and Other Intangible Assets

Goodwill, customer relationships and other intangible assets consisted of the following:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in millions)
Goodwill
$
9,360

 
9,360

Customer relationships, less accumulated amortization of $5,129 and $4,806
$
570

 
893

Other intangible assets, less accumulated amortization of $1,760 and $1,712
$
329

 
311



As of September 30, 2019, the gross carrying amount of goodwill, customer relationships and other intangible assets was $17.1 billion. The total amortization expense for intangible assets for the three months ended September 30, 2019 and 2018 totaled $133 million and $144 million, respectively, and for the nine months ended September 30, 2019 and 2018 totaled $404 million and $440 million, respectively.

We estimate that total amortization expense for intangible assets for the years ending December 31, 2019 through 2023 will be as follows:
 
(Dollars in millions)
2019 (remaining three months)
$
131

2020
467

2021
155

2022
52

2023
39



(3) Revenue Recognition

Refer to the Revenue Recognition section of Note 1—Background and Summary of Significant Accounting Policies and Note 3—Revenue Recognition in our annual report on Form 10-K for the year ended December 31, 2018 for further information regarding our application of ASC 606, “Revenue from Contracts with Customers”, including practical expedients and judgments applied in determining the amounts and timing of revenue from contracts with customers.

Reconciliation of Total Revenue to Revenue from Contracts with Customers

The following table provides the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
Total revenue
$
2,039

 
2,149

 
6,145

 
6,380

Adjustments for non-ASC 606 revenue (1)
(123
)
 
(82
)
 
(375
)
 
(240
)
Total revenue from contracts with customers
$
1,916

 
2,067

 
5,770

 
6,140

______________________________________________________________________ 
(1) 
Includes regulatory revenue, lease revenue, sublease rental income and revenue from fiber capacity lease arrangements which are not within the scope of ASC 606.

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Customer Receivables and Contract Balances

The following table provides balances of customer receivables, contract assets and contract liabilities as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in millions)
Customer receivables (1)
$
493

 
518

Contract liabilities
318

 
207

Contract assets
75

 
64

(1)
Gross customer receivables of $528 million and $554 million, net of allowance for doubtful accounts of $35 million and $36 million, at September 30, 2019 and December 31, 2018, respectively.
Contract liabilities consist of 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 ranges from one to seven years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets.

The following table provides information about revenue recognized for the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
Revenue recognized in the period from:
 
 
 
 
 
 
 
Amounts included in contract liability at the beginning of the period (January 1, 2019 and 2018, respectively)
$
4

 
11

 
269

 
291

Performance obligations satisfied in previous periods

 

 

 



Performance Obligations

As of September 30, 2019, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts that are partially or wholly unsatisfied is approximately $181 million. We expect to recognize approximately 98% of this revenue through 2021, with the balance recognized thereafter.

We do not disclose 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), or contracts that are classified as leasing arrangements that are not subject to ASC 606.


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Contract Costs

The following table provides changes in our contract acquisition costs and fulfillment costs:
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
 
Acquisition Costs
 
Fulfillment Costs
 
Acquisition Costs
 
Fulfillment Costs
 
(Dollars in millions)
Beginning of period balance
$
87

 
60

 
89

 
58

Costs incurred
15

 
10

 
29

 
13

Amortization
(15
)
 
(8
)
 
(29
)
 
(13
)
End of period balance
$
87

 
62

 
89

 
58


 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
 
Acquisition Costs
 
Fulfillment Costs
 
Acquisition Costs
 
Fulfillment Costs
 
(Dollars in millions)
Beginning of period balance
$
90

 
57

 
91

 
61

Costs incurred
44

 
29

 
45

 
20

Amortization
(47
)
 
(24
)
 
(47
)
 
(23
)
End of period balance
$
87

 
62

 
89

 
58



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 communications 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 customer life of 30 months for consumer customers and up to 49 months for business customers. Amortized fulfillment costs are included in cost of services 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 twelve months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next twelve 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.


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We primarily lease various office facilities, switching and colocation facilities, equipment and dark fiber. 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 (including fixed payments, such as, rent, real estate taxes and insurance costs) and non-lease components (including common-area maintenance 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:
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
(Dollars in millions)
Operating and short-term lease cost
$
8

 
24

Finance lease cost:
 
 
 
Amortization of right-of-use assets
2

 
7

Interest on lease liability
1

 
1

Total finance lease cost
3

 
8

Total lease cost
$
11

 
32




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Supplemental unaudited consolidated balance sheet information and other information related to leases:
Leases (millions)
Classification on the Balance Sheet
 
September 30, 2019
Assets
 
 
 
Operating lease assets
Operating lease assets
 
$
117

Finance lease assets
Property, plant and equipment, net of accumulated depreciation
 
16

Total leased assets
 
 
$
133

 
 
 
 
Liabilities
 
 
 
Current
 
 
 
Operating
Other current liabilities
 
$
29

Finance
Current portion of long-term debt
 
7

Noncurrent
 
 
 
Operating
Noncurrent operating lease liabilities
 
90

Finance
Long-term debt
 
5

Total lease liabilities
 
 
$
131

 
 
 
 
Weighted-average remaining lease term (years)
 
 
Operating leases
 
 
5.4

Finance leases
 
 
4.9

Weighted-average discount rate
 
 
Operating leases
 
 
6.71
%
Finance leases
 
 
5.26
%


Supplemental unaudited consolidated cash flow statement information related to leases:
 
Nine Months Ended September 30, 2019
 
(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
27

Financing cash flows from finance leases
8



As of September 30, 2019, maturities of lease liabilities were as follows:
 
Operating Leases
 
Finance Leases
 
(Dollars in millions)
2019 (remaining three months)
$
8

 
2

2020
32

 
5

2021
30

 
1

2022
27

 
1

2023
22

 
1

Thereafter
36

 
4

Total lease payments
155

 
14

Less: interest
(36
)
 
(2
)
Total
119

 
12

Less: current portion
(29
)
 
(7
)
Long-term portion
$
90

 
5



As of September 30, 2019, we had no material operating or finance leases that had not yet commenced.

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Operating Lease Income

Qwest leases various data transmission capacity, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income is included in operating revenue in the consolidated statements of operations.

For the three and nine months ended September 30, 2019, our gross rental income was $79 million and $242 million, respectively, which represents 4% of our operating revenue for both periods. For the three and nine months ended September 30, 2018, our gross rental income was $83 million and $249 million, respectively which represents 4% of our operating revenue for both periods.

Disclosures under ASC 840

We adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption.

The future annual minimum payments under capital lease agreements as of December 31, 2018 were as follows:
 
Capital Lease Obligations
 
(Dollars in millions)
2019
$
10

2020
6

2021
2

2022
1

2023
1

2024 and thereafter
4

Total minimum payments
24

Less: amount representing interest and executory costs
(5
)
Present value of minimum payments
19

Less: current portion
(12
)
Long-term portion
$
7



At December 31, 2018, our future rental commitments for operating leases were as follows:
 
Operating Leases
 
(Dollars in millions)
2019
$
35

2020
28

2021
27

2022
23

2023
19

2024 and thereafter
32

Total future minimum payments(1)
$
164

_______________________________________________________________________________

(1)
Minimum payments have not been reduced by minimum sublease rentals of $22 million due in the future under non-cancelable subleases.


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(5) Long-Term Debt and Revolving Promissory Note

The following chart reflects (i) the consolidated long-term debt of Qwest Corporation and its subsidiaries, including unamortized discounts and premiums, unamortized debt issuance costs and (ii) note payable - affiliate:
 
Interest Rates
 
Maturities
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
(Dollars in millions)
Senior notes
6.125% - 7.750%
 
2021 - 2057
 
$
5,956

 
5,956

Term loan
4.050%
 
2025
 
100

 
100

Finance lease and other obligations
Various
 
Various
 
12

 
21

Unamortized (discounts) premiums, net
 
 
 
 

 
(1
)
Unamortized debt issuance costs
 
 
 
 
(115
)
 
(117
)
Total long-term debt
 
 
 
 
5,953

 
5,959

Less current maturities
 
 
 
 
(7
)
 
(11
)
Long-term debt, excluding current maturities
 
 
 
 
$
5,946

 
5,948

Note payable - affiliate
5.843%
 
2022
 
$
1,069

 
1,008


Note Payable - Affiliate

On September 30, 2017, Qwest Corporation entered into an amended and restated revolving promissory note in the amount of $965 million with an affiliate of our ultimate parent company, CenturyLink, Inc. This note replaced and amended the original $1.0 billion revolving promissory note Qwest Corporation entered into on April 18, 2012 with the same affiliate. The outstanding principal balance owed by Qwest Corporation under this revolving promissory 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 balance during an interest period using a weighted average per annum interest rate on the consolidated outstanding debt of CenturyLink and its subsidiaries. As of September 30, 2019, the amended and restated revolving promissory note had an outstanding balance of $1.069 billion and bore interest at a weighted-average interest rate of 5.843%. As of September 30, 2019 and December 31, 2018, the amended and restated revolving promissory note is reflected on our consolidated balance sheets as a current liability under "Note payable - affiliate". In accordance with the terms of the amended and restated revolving promissory 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 September 30, 2019, $104 million of such interest has been capitalized. As of September 30, 2019, $16 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet.

Aggregate Maturities of Long-Term Debt

Set forth below is the aggregate principal amount of our long-term debt (excluding unamortized premiums and discounts and unamortized debt issuance costs and excluding note payable-affiliate) maturing during the following years:
 
(Dollars in millions)
2019 (remaining three months)
$
2

2020
5

2021
951

2022

2023
1

2024 and thereafter
5,109

Total long-term debt
$
6,068



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Compliance

As of September 30, 2019, we believe we were in compliance with the financial covenants contained in our material debt agreements in all material respects.

Other

For additional information on our long-term debt and credit facilities, see Note 4—Long-Term Debt and Revolving Promissory Note to our consolidated financial statements in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2018.

(6) Fair Value Disclosure

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Input Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Input Level 2 refers to fair values estimated using significant other observable inputs and Input Level 3 includes fair values estimated using significant unobservable inputs.
Due to their short-term nature, the carrying amounts of our cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximate their fair values.
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 level used to determine the fair values indicated below:
 
 
 
September 30, 2019
 
December 31, 2018
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
(Dollars in millions)
Liabilities—Long-term debt (excluding finance lease and other obligations)
2
 
$
5,941

 
6,226

 
5,938

 
5,118



(7) 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, 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;

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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, we provide to our affiliates, telecommunication services that we also provide to 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:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
IP and Data Services
$
169

 
155

 
467

 
459

Transport and Infrastructure
716

 
739

 
2,140

 
2,215

Voice and Collaboration
405

 
449

 
1,250

 
1,369

IT and Managed Services

 
1

 
2

 
5

Regulatory Revenue
48

 
53

 
143

 
161

Affiliate Services
701

 
752

 
2,143

 
2,171

Total operating revenue
$
2,039

 
2,149

 
6,145

 
6,380



We recognize revenue in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies. The USF surcharges are assigned to the products and services categories based on the underlying revenue. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.

The following table provides the amount of USF surcharges and transaction taxes:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
USF surcharges and transaction taxes
$
33

 
28

 
91

 
93



(8) 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.

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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 September 30, 2019 aggregated to approximately $23 million 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.

In this Note, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter.

Switched Access Disputes

Subsidiaries of CenturyLink, Inc., including us, are among hundreds of companies involved in an industry-wide dispute, raised in nearly 100 federal lawsuits (filed between 2014 and 2016) that have been consolidated in the United States District Court for the Northern District of Texas for pretrial procedures. The disputes relate to switched access charges that local exchange carriers ("LECs") collect from interexchange carriers ("IXCs") for IXCs' use of LEC's access services. In the lawsuits, IXCs, including Sprint Communications Company L.P. ("Sprint") and various affiliates of Verizon Communications Inc. ("Verizon"), assert that federal and state laws bar LECs from collecting access charges when IXCs exchange certain types of calls between mobile and wireline devices that are routed through an IXC. Some of these IXCs have asserted claims seeking refunds of payments for access charges previously paid and relief from future access charges.

In November 2015, the federal court agreed with the LECs and rejected the IXCs' contention that federal law prohibits these particular access charges, and also allowed the IXCs to refile state-law claims. Since then, many of the LECs and IXCs have filed revised pleadings and additional motions, which remain pending. Separately, some of the defendants, including us, have petitioned the FCC to address these issues on an industry-wide basis.

The outcome of these disputes and lawsuits, as well as any related regulatory proceedings that could ensue, are currently not predictable.

Billing Practices Suits

In June 2017, a former employee of CenturyLink filed an employment lawsuit against CenturyLink claiming that she was wrongfully terminated for alleging that CenturyLink charged some of its retail customers for products and services they did not authorize. Starting shortly thereafter and continuing since then, and based in part on the allegations made by the former employee, several legal proceedings have been filed.

In June 2017, McLeod v. CenturyLink, a putative consumer class action, was filed against CenturyLink in the U.S. District Court for the Central District of California alleging that it charged some of its retail customers for products and services they did not authorize. A number of 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 putative securities investor class action, was filed in U.S. District Court for the Southern District of New York, alleging that it 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.


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Beginning June 2017, CenturyLink received several shareholder derivative demands addressing related topics. In August 2017, CenturyLink's 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. Two of these cases, Castagna v. Post and Pinsly v. Post, were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita. The remaining derivative cases were filed in federal court in Louisiana and Minnesota. These cases have been brought on behalf of CenturyLink against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.

The consumer putative class actions, the securities investor putative class actions, and the federal derivative actions have been 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. Subject to confirmatory discovery and court approval, CenturyLink agreed to settle the consumer putative class actions for payments of $15.5 million to compensate class members and of up to $3.5 million for administrative costs. CenturyLink has accrued a contingent liability for those amounts.

In July 2017, the Minnesota state attorney general filed State of Minnesota v. CenturyTel Broadband Services LLC, et al. in the Anoka County Minnesota District Court, alleging claims of fraud and deceptive trade practices relating to improper consumer sales practices. The suit seeks an order of restitution on behalf of all CenturyLink customers, civil penalties, injunctive relief, and costs and fees. Additionally, CenturyLink has received and responded to information requests and inquiries from other states.

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 CenturyLink and its other subsidiaries are cooperating with the investigations.

Other Proceedings, Disputes and Contingencies

From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions 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 in the coming 24 months 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 $100,000 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 matters listed above in this Note do not reflect all of our contingencies. For additional information on our contingencies, see Note 15—Commitments, Contingencies and Other Items to the financial statements included in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2018. 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.


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(9) Dividends

From time to time we may declare and pay dividends to our direct parent company, QSC, sometimes in excess of our earnings to the extent permitted by applicable law. Our debt covenants do not currently limit the amount of dividends we can pay to QSC.

During the nine months ended September 30, 2019 and 2018, we declared and paid dividends of $1.1 billion and $925 million, respectively, to QSC. Dividends paid are reflected on our consolidated statements of cash flows as financing activities.

(10) Other Financial Information

Other Current Assets

The following table presents details of other current assets reflected in our consolidated balance sheets:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in millions)
Prepaid expenses
$
49

 
37

Contract acquisition costs
50

 
52

Contract fulfillment costs
28

 
27

Other
14

 
31

Total other current assets
$
141

 
147



(11) Labor Union Contracts
    
As of September 30, 2019, approximately 42% of our employees were represented by the Communication Workers of America ("CWA") or 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 next 12 months. We believe relations with our employees continue to be generally good.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to "QC" refer to Qwest Corporation, and references to "Qwest," "we," "us" and "our" refer to Qwest Corporation and its consolidated subsidiaries.
All references to "Notes" in this Item 2 of Part I refer to the Notes to Consolidated Financial Statements included in Item 1 of Part I of this report.
Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" appearing at the beginning of this report and "Risk Factors" in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018 for a discussion of certain factors that could cause our actual results to differ from our anticipated results or otherwise impact our business, financial condition, results of operations, liquidity or prospects.
Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our annual report on Form 10-K for the year ended December 31, 2018, and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations for the first nine months of the year are not necessarily indicative of the results of operations that might be expected for the entire year.

We are an integrated communications company engaged primarily in providing an array of communications services to our residential and business customers. Our specific products and services are detailed in Note 7—Products and Services Revenue of this report.

Our ultimate parent company, CenturyLink, Inc. ("CenturyLink"), has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and intercompany obligations vary from time to time. Under these arrangements, the majority of our cash balance is advanced on a daily basis for centralized management by CenturyLink. From time to time we may declare and pay dividends to Qwest Services Corporation ("QSC"), our direct parent, using cash owed to us under these advances, which has the net effect of reducing the amount of these advances. We report the balance of these transfers on our consolidated balance sheet as advances to affiliates.

At September 30, 2019, we served 3.1 million broadband subscribers. Our methodology for counting broadband subscribers may not be comparable to those of other companies.

For the reasons noted in Note 1—Background to our consolidated financial statements in Item 1 of Part I of this report, we believe we have one reportable segment.

We categorize our products, services and revenue among the following six categories:
IP and Data Services, which include primarily VPN data networks, Ethernet, 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 service;
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

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Affiliate Services, we provide our affiliates telecommunication services that we also provide to 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.

The following analysis is organized to provide the information we believe will be useful for understanding material trends affecting our business.

Results of Operations

The following table summarizes the results of our consolidated operations for the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
Operating revenue
$
2,039

 
2,149

 
6,145

 
6,380

Operating expenses
1,291

 
1,432

 
3,887

 
4,405

Operating income
748

 
717

 
2,258

 
1,975

Total other expense, net
(105
)
 
(153
)
 
(313
)
 
(393
)
Income tax expense
166

 
111

 
504

 
322

Net income
$
477

 
453

 
1,441


1,260

For a discussion of certain trends that impact our business, see the MD&A discussion of trends impacting CenturyLink's business included in CenturyLink's reports filed with the Securities and Exchange Commission ("SEC"), including most recently its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019.
Operating Revenue

The following tables summarize our consolidated operating revenue recorded under each of our six above-described revenue categories:
 
Three Months Ended September 30,
 
 Increase/
(Decrease)
 
% Change
 
2019
 
2018
 
 
 
(Dollars in millions)
 
 
IP and Data Services
$
169

 
155

 
14

 
9
 %
Transport and Infrastructure
716

 
739

 
(23
)
 
(3
)%
Voice and Collaboration
405

 
449

 
(44
)
 
(10
)%
IT and Managed Services

 
1

 
(1
)
 
(100
)%
Regulatory Revenue
48

 
53

 
(5
)
 
(9
)%
Affiliate Services
701

 
752

 
(51
)
 
(7
)%
Total operating revenue
$
2,039

 
2,149

 
(110
)
 
(5
)%

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Nine Months Ended September 30,
 
 Increase/
(Decrease)
 
% Change
 
2019
 
2018
 
 
 
(Dollars in millions)
 
 
IP and Data Services
$
467

 
459

 
8

 
2
 %
Transport and Infrastructure
2,140

 
2,215

 
(75
)
 
(3
)%
Voice and Collaboration
1,250

 
1,369

 
(119
)
 
(9
)%
IT and Managed Services
2

 
5

 
(3
)
 
(60
)%
Regulatory Revenue
143

 
161

 
(18
)
 
(11
)%
Affiliate Services
2,143

 
2,171

 
(28
)

(1
)%
Total operating revenue
$
6,145

 
6,380

 
(235
)
 
(4
)%
Total operating revenue decreased by $110 million, or 5%, and $235 million, or 4%, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The change in operating revenue for both periods was primarily due to decreases in voice and collaboration, transport and infrastructure and affiliate services. The decrease in voice and collaboration was due to a continued decline in revenue services from our local voice services. The reduction in transport and infrastructure was attributable to a continued decline in private line (including business data services).
Operating Expenses
The following tables summarize our consolidated operating expenses:
 
Three Months Ended September 30,
 
 Increase/
(Decrease)
 
% Change
 
2019
 
2018
 
 
 
(Dollars in millions)
 
 
Cost of services and products (exclusive of depreciation and amortization)
$
630

 
697

 
(67
)
 
(10
)%
Selling, general and administrative
131

 
172

 
(41
)
 
(24
)%
Operating expenses - affiliates
186

 
203

 
(17
)
 
(8
)%
Depreciation and amortization
344

 
360

 
(16
)
 
(4
)%
Total operating expenses
$
1,291

 
1,432

 
(141
)
 
(10
)%
 
Nine Months Ended September 30,
 
 Increase/
(Decrease)
 
% Change
 
2019
 
2018
 
 
 
(Dollars in millions)
 
 
Cost of services and products (exclusive of depreciation and amortization)
$
1,825

 
2,106

 
(281
)
 
(13
)%
Selling, general and administrative
445

 
602

 
(157
)
 
(26
)%
Operating expenses - affiliates
600

 
616

 
(16
)
 
(3
)%
Depreciation and amortization
1,017

 
1,081

 
(64
)
 
(6
)%
Total operating expenses
$
3,887

 
4,405

 
(518
)
 
(12
)%
Cost of Services and Products (exclusive of depreciation and amortization)

Cost of services and products (exclusive of depreciation and amortization) decreased $67 million, or 10%, and $281 million, or 13%, respectively, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The decrease in our cost of services and products (exclusive of depreciation and amortization) for both periods was primarily due to lower salaries and wages and employee related expenses from lower headcount, reduced customer premises equipment costs from lower sales, lower voice usage costs and a decline in professional services, which were offset by higher right of way and dark fiber expenses.


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Selling, General and Administrative

Selling, general and administrative expenses decreased by $41 million, or 24%, and $157 million, or 26%, respectively, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The decrease in our selling, general and administrative expenses for both periods was primarily due to lower salaries and wages and employee related expenses from lower headcount, lower contract labor costs and declines in commissions, professional fees, marketing and advertising, insurance and fees, property, other taxes and bad debt expense and an increase in the amount of labor capitalized or deferred. These decreases were partially offset by higher building and network maintenance costs.

Operating Expenses - Affiliates

Operating expenses - affiliates decreased by $17 million, or 8%, and $16 million, or 3%, respectively, for the three and nine month ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The change in operating expenses - affiliates for both periods was primarily due to the decline in the level of services provided to us by our affiliates.

Depreciation and Amortization

The following tables provide details of our depreciation and amortization expense:
 
Three Months Ended September 30,
 
 Increase/
(Decrease)
 
% Change
 
2019
 
2018
 
 
 
(Dollars in millions)
 
 
Depreciation
$
211

 
216

 
(5
)
 
(2
)%
Amortization
133

 
144

 
(11
)
 
(8
)%
Total depreciation and amortization
$
344

 
360

 
(16
)
 
(4
)%
 
Nine Months Ended September 30,
 
 Increase/
(Decrease)
 
% Change
 
2019
 
2018
 
 
 
(Dollars in millions)
 
 
Depreciation
$
613

 
641

 
(28
)
 
(4
)%
Amortization
404

 
440

 
(36
)
 
(8