What changed in this filing

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Item 1. Business

2021-03-03 compared with 2020-03-05 · 149 added, 166 removed, 75 unchanged (81% of the section changed)

We are an integrated communications company engaged primarily in providing an array of communications services to our business and residential customers.

Changes From Prior Periodic Reports

In this report we have complied with the disclosure required by the Securities and Exchange Commission ("SEC") release No.

33-10825 "Modernization of Regulation S-K Items 101, 103, and 105" and we have early adopted the changes in disclosure standards included in SEC release No.

33-10890 "Management's Discussion and Analysis, Selected Financial Data, Supplementary Financial Information."

Modernization of Regulation S-K Items 101, 103 and 105

Effective as of November 9, 2020, the SEC issued Release No.

33-10825, “Modernization of Regulation S-K Items 101, 103, and 105”.

This release was adopted to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K.

Specifically, this release requires registrants to provide disclosure relating to their human capital resources and to restructure their risk factor disclosures.

Additionally, the release increases the threshold for disclosure of environmental proceedings to which the government is a party.

This report reflects these changes.

These changes are required for any annual period subsequent to the effective date of November 9, 2020.

As such we have adopted these changes in this report.

Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information

In November 2020, the SEC issued Release No.

33-10890, “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information” which will become fully effective on August 9,

2021, with voluntary compliance permitted on or after February 10, 2021.

This release was adopted to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K.

Specifically, the SEC eliminated the requirement for selected financial data, only requiring quarterly disclosure when there are retrospective changes affecting comprehensive income, and amending the matters required to be presented under Management’s Discussion and Analysis (“MD&A”) to, among other things, eliminate the requirement of the contractual obligations table.

With our early adoption of this release we have eliminated from this report the items discussed above that are no longer required.

Information on our material contractual obligations is still disclosed in the narrative within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report.

Business Overview and Purpose

We are an integrated communications company engaged primarily in providing our customers with an array of communications services and solutions.

Our specific products and services are detailed below under the heading "Operations - Products and Services."

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.

Our ultimate parent company, Lumen Technologies, Inc., has cash management arrangements or loan arrangements with a majority of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends.

Under these arrangements, the majority of our cash balance is advanced on a daily basis for centralized management by an affiliate of Lumen, and most affiliate transactions are deemed to be settled at the time the transactions are recorded.

The resulting net balance at the end of each period is reported as advances to affiliates or advances from affiliates in our consolidated balance sheets.

From time to time we may declare and pay dividends to our parent, QSC.

The 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.

We were incorporated under the laws of the State of Colorado in 1911.

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Years Ended December 31,

2020 2019 2018

(Dollars in millions)

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Operating income $ 2,711 2,884 2,660

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The enactment of the Tax Cuts and Jobs Act in December 2017 resulted in a re-measurement of our deferred tax assets and liabilities at the new federal corporate tax rate of 21% .

The re-measurement resulted in a tax benefit of $555 million .

Net income $ 1,707 1,827 1,665

The following table summarizes certain selected financial information from our consolidated balance sheets:

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(Dollars in millions)

Total assets $ 18,659 20,999

Total long-term debt (1)

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(1) Total long-term debt does not include note payable-affiliate.

For additional information on our total long-term debt, see Note 5—Long-Term Debt and Revolving Promissory Note to our consolidated financial statements in Item 8 of Part II of this report.

For additional information on our total long-term debt, see Note 6—Long-Term Debt And Note Payable - Affiliate to our consolidated financial statements in Item 8 of Part II of this report.

For information on our total obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Future Contractual Obligations" in Item 7 of Part II of this report.

Substantially all of our long-lived assets are located in the United States and substantially all of our total consolidated operating revenue is from customers located in the United States.

For the reasons noted in Note 13—Products and Services Revenue to our consolidated financial statements in Item 1 of Part I of this report, we believe we have one reportable segment.

For the reasons noted in Note 14—Products and Services Revenue to our consolidated financial statements in Item 8 of Part II of this report, we believe we have one reportable segment.

Products and Services

While most of our customized customer interactions involve multiple integrated technologies and services, we organize our products and services according to the core technologies that drive them.

We report our related revenue under the following categories:

At December 31, 2020, we reported our related revenue under the following categories:

IP and Data Services, Transport and Infrastructure Services, Voice and Collaboration Services, IT and Managed Services, Regulatory Revenue and Affiliate Services, each of which is described in further detail below.

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• Retail Video.

Our video services span a range of technologies aimed at consumers and business customers.

Our retail video services span a range of technologies aimed at consumers and business customers.

We also offer various broadcast services to deliver audio and video feeds over fiber or satellite for broadcast and production firms

Transport and Infrastructure

Our broadband services deliver a cost-effective Internet connection through existing telephone lines or fiber-optic cables while companies enjoy high speed data transfer.

Our broadband services deliver a cost-effective Internet connection through existing telephone lines or fiber-optic cables while customers enjoy high speed data transfer.

A substantial portion of our broadband subscribers are located within the local service area of our wireline telephone operations;

• Private Line.

We deliver a private line (including business data services), a direct circuit or channel specifically dedicated for connecting two or more organizational sites.

We deliver private line services, a direct circuit or channel specifically dedicated for connecting two or more organizational sites.

Private line service offers a high-speed, secure solution for frequent transmission of large amounts of data between sites, including wireless backhaul transmissions;

• Unbundled Network Elements and Other .

We provide select technology elements to other network carriers on a regional basis for the inclusion of those technologies in their offerings;

We provide select technology elements to other network carriers on a regional basis who include those technologies in their offerings;

• Wavelength.

We deliver high bandwidth optical networks to firms requiring an end-to-end transport solution with Ethernet technology by contracting for a scalable amount of bandwidth connecting sites or providing high-speed access to cloud computing resources.

Voice and Collaboration

We offer to our business and residential customers a complete portfolio of traditional Time Division Multiplexing ("TDM") voice services to businesses and enterprises including Primary Rate Interface (“PRI”) service, local inbound service, switched one-plus, toll free, long distance and international services.

We offer our customers a complete portfolio of traditional Time Division Multiplexing voice services including Primary Rate Interface service, local inbound service, switched one-plus, toll free, long distance and international services.

IT and Managed Services

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Our IT-based services deliver strategic consulting and solutions to C-suite executives in mid to large enterprises.

Services involve architecting technologies to address business needs.

These services involve architecting technologies to address business needs.

Solutions range from System Integration Services to Big Data Analytics, building and managing strategic application suites such as SAP and deploying security technologies.

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• Universal Service Fund ("USF") Support Payments.

We receive federal and state USF support payment 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;

• Connect America Fund ("CAF").

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• Affiliate Services.

We provide our affiliates, with telecommunication services that we also provide to external customers.

We provide our affiliates certain telecommunication services that we also provide to external customers.

Please see our products and services listed above for further description of these services.

In addition, we provide to our affiliates computer system development and support services, network support and technical services.

In addition, we provide 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.

Additional Information

For further information on regulatory, technological and competitive factors that could impact our revenue, see "Regulation" and "Competition" under this Item 1 below and "Risk Factors" under Item 1A below.

For more information on the financial contributions of our various services, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this report.

For additional information about us and our ultimate parent, CenturyLink, Inc., please refer to the periodic reports filed by CenturyLink, Inc.

with the SEC, which can be accessed by visiting the websites listed below under “Website Access and Important Investor Information.”

Most of our products and services are provided using our telecommunications network, which consists of fiber-optic and copper cables, high-speed transport equipment, data switches and routers, voice switches and other equipment.

Our local exchange carrier networks also include central offices and remote site assets, and form a portion of the public switched telephone network.

Our and Lumen's network, through which we provide most of our products and services consists of fiber-optic and copper cables, high-speed transport equipment, electronics, voice switches, data switches and routers, and various other equipment.

We operate part of our network with leased assets, and a substantial portion of our equipment with licensed software.

We continue to enhance and expand our network by deploying various technologies to provide additional capacity to our customers.

Rapid and significant changes in technology are expected to continue in the telecommunications industry.

Our future success will depend, in part, on our ability to anticipate and adapt to changes in technology and customer demands, including demands for enhanced digitization, automation and customer self-service capabilities.

In addition, we anticipate that continued increases in internet usage by our customers will require us to make significant capital expenditures to increase network capacity or to implement network management practices to alleviate network capacity shortages.

The FCC's stringent definition of broadband service and consumers' demand for faster transmission speeds could create additional requirements for higher capital spending.

Any such additional expenditure could adversely impact our results of operations and financial condition.

Similarly, we continue to take steps to simplify and modernize our network.

To attain our objectives, we plan to continue to pursue several complex projects that we expect will be costly and may take several years to complete.

The costs of these projects could materially increase if we conclude that we need to replace any portion or all of our legacy systems.

Like other large communications companies, we are a constant target of cyber-attacks of varying degrees, which has caused us to spend increasingly more time and money to deal with increasingly sophisticated attacks.

Some of the attacks result in security breaches, and we periodically notify our customers, our employees, our regulators or the public of these breaches when necessary or appropriate.

None of these resulting security breaches to date have materially adversely affected our business, results of operations or financial condition.

Similarly, like other large communication companies operating complex networks, from time to time in the ordinary course of our business we experience disruptions in our service.

Although none of these outages have thus far materially adversely affected us, certain of these outages have resulted in regulatory fines, negative publicity, service credits and other adverse consequences.

We rely on several other communications companies to provide our offerings.

We lease a portion of our core fiber network from our competitors and other third parties.

Many of these leases will lapse in future years.

A portion of our services are provided by other carriers under agency agreements or through reselling arrangements with other carriers.

Our future ability to provide services on the terms of our current offerings will depend in part upon our ability to renew or replace these leases, agreements and arrangements on terms substantially similar to those currently in effect.

For additional information regarding our systems, network assets, network risks, capital expenditure requirements and reliance upon third parties, see "Risk Factors," generally, in Item 1A of Part I of this report, and, in particular, "Risk Factors—Risks Affecting Our Business" and "Risk Factors—Risks Affecting Our Liquidity and Capital Resources." For more information on our properties, see "Properties" in Item 2 of Part I of this report.

Patents, Trade Names, Trademarks and Copyrights

Either directly or through our affiliates, we have rights in various patents, trade names, trademarks, copyrights and other intellectual property necessary to conduct our business.

Our services often use the intellectual property of others, including licensed software.

We also occasionally license our intellectual property to others as we deem appropriate.

Our patent portfolio includes patents covering technologies ranging from data and voice services to content distribution to transmission and networking equipment.

Patents give us the right to prevent others, particularly competitors, from using our proprietary technologies.

Patent licenses give us the freedom to operate our business without the risk of interruption from the holder of the patent that has been licensed to us.

We, or our affiliates, plan to continue to file new patent applications as we enhance and develop products and services, and we plan to continue to seek opportunities to expand our patent portfolio through strategic acquisitions and licensing.

We periodically receive offers from third parties to purchase or obtain licenses for patents and other intellectual property rights in exchange for royalties or other payments.

We also periodically receive notices, or are named in lawsuits, alleging that our products or services infringe on patents or other intellectual property rights of third parties, or receive request to indemnify customers who allege that their use of our products or services caused them to be names in an infringement proceeding.

In certain instances, these matters can potentially adversely impact our operations, operating results or financial position.

For additional information, see “Risk Factors—Risks Affecting Our Business” in Item 1A of Part I of this report, and Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report.

We and Lumen view our network as one of our most critical assets.

We and Lumen have devoted, and plan to continue to devote, substantial resources to (i) simplify and modernize our network and legacy systems and (ii) expand our and Lumen’s network to address demand for enhanced or new products.

Although either we or Lumen own most of our network, we lease a substantial portion of our core fiber network from several other communication companies under arrangements that will periodically need to be renewed or replaced to support our current network operations.

Like other large communications companies, we are a constant target of cyber-attacks of various degrees, and from time to time in the ordinary course of our business we experience disruption in our services.

For additional information regarding our systems, network assets, network risks, capital expenditure requirements and reliance upon third parties, see "Risk Factors," in Item 1A of Part I of this report.

Competition and Market Overview

Organizations across the globe are competing to capitalize on opportunities created by emerging technologies.

The need for data-intensive and latency-sensitive emerging technologies continues to grow.

Helping businesses address these needs requires a platform that integrates essential technology services.

We compete in a dynamic and highly competitive market, and we expect continued intense competition from a wide variety of sources under these evolving market conditions.

In addition to competition from large communications providers, we are increasingly facing competition from systems integrators, cloud service providers, software companies, infrastructure companies, cable companies, device providers, resellers, and smaller niche providers, among others.

Our ability to compete hinges upon effectively enhancing and better integrating our existing products, introducing new products on a timely and cost-effective basis, meeting changing customer needs, providing high-quality information security to build customer confidence and combat cyber-attacks, extending our core technology into new applications and anticipating emerging standards, business models, software delivery methods and other technological changes.

Depending on the applicable market and requested services, competition can be intense, especially if one or more competitors in the market have network assets better suited to the customer’s needs, are offering faster transmission speeds or lower prices, or in certain markets, are incumbent communications providers that have a longer history of providing service in the market.

For our traditional voice services, providers of wireless voice, social networking and electronic messaging services are significant competitors as many customers are increasingly relying on these providers to communicate, resulting in the long-term systemic decline we have seen in our legacy, traditional voice services.

Other potential sources of competition include non-carrier systems that are capable of bypassing our local networks, either partially or completely, through various means.

Developments in software have permitted new competitors to offer affordable networking products that historically required more expensive hardware investment.

We anticipate that all these trends will continue to place downward pressures on the use of our network.

Additionally, the Telecommunications Act of 1996 obligates the incumbent local telephone companies ("ILECs"), to permit competitors to interconnect their facilities to the ILEC’s network and to take various other steps that are designed to promote competition, including obligations to (i) negotiate interconnection agreements in good faith, (ii) provide nondiscriminatory “unbundled” access to specific portions of the ILEC’s network and (iii) permit competitors to physically or virtually colocate their plant on the ILEC’s property.

As a result of these regulatory, consumer and technological developments, we also face competition from competitive local exchange carriers, or CLECs, particularly in densely populated areas.

CLECs provide competing services through (i) reselling an ILEC's local services, (ii) using an ILEC's unbundled network elements (iii) operating their own facilities or (iv) a combination thereof.

Competition for higher margin, legacy services remains high.

However, our and Lumen’s platform expansion and innovation strategy is focused largely on addressing these competitive pressures.

As both residential and business customers increasingly demand high-speed connections for entertainment, communications and productivity, we expect the demands on our network will continue to increase over the next several years.

To remain competitive and successful, we are continuing to invest in network security, reliability and flexibility and design innovations to deliver competitive services to meet increasing customer bandwidth and speed requirements.

Additional information about competitive pressures is located under the heading "Risk Factors—Business Risks" in Item 1A of Part I of this report.

Market Overview

Understanding and anticipating market trends drives our investment in developing the products and services we believe will be well received by our customers.

As use cases continue to emerge, we expect secure network services will increase in importance as consumers require holistic solutions with the flexibility necessary to help accelerate the convergence of computing and communications capabilities with digital content.

We believe we and Lumen have a world-class set of global fiber assets that positions us to deliver a highly-competitive suite of services.

We generally market our business services to members of in-house IT departments or other highly-sophisticated customers with deep technological experience.

These individuals typically satisfy their IT requirements by contracting with us or a rapidly evolving group of competitors, or by deploying in-house solutions.

We expect our market competition to continue to increase as technology evolves and enables our customers to seek solutions from multiple sources.

We compete to provide services to business customers based on a variety of factors, including the comprehensiveness and reliability of our network, our data transmission speeds, price, the latency of our available intercity and metro routes, the scope of our integrated offerings, the reach and peering capacity of our IP network, and customer service.

As noted above, technological and competitive factors have led to new products and services that have reduced the demand for certain of our traditional network services, especially our traditional ILEC services.

Also, market demand for our broadband services could be adversely affected by advanced wireless data transmission technologies and other systems delivering generally faster average broadband transmission speeds than ours.

Sales and Marketing

We maintain local offices in most of the larger population centers within our local service area.

These offices provide sales and customer support services to the communities in our local markets.

Our enterprise sales and marketing approach revolves around solving complex customer problems with advanced technology and network solutions- striving to make core networks services compatible with digital tools.

We also rely on our call center personnel and a variety of channel partners to promote sales of services that meet the needs of our customers.

Our sales and marketing strategy is to enhance our sales by offering solutions tailored to the needs of our various customers and promoting our brands.

Our offerings include both stand-alone services and bundled services designed to meet the needs of different customer segments.

We conduct most of our operations under the brand name "CenturyLink." Our satellite television service is offered on a co-branded basis under the "DIRECTV" name.

Similarly, our sales and marketing approach to our business customers includes a commitment to provide comprehensive communications solutions for business, wholesale and government customers of all sizes, ranging from small business offices to select enterprise customers.

We strive to offer our business customers stable, reliable, secure and trusted solutions.

To meet the needs of different customers, our offerings include both stand-alone services and bundled services designed to provide a complete offering of integrated services.

Our sales and marketing approach to our business customers includes a commitment to provide comprehensive communications and IT solutions for business, wholesale and government customers of all sizes, ranging from small business offices to select enterprise customers.

Our marketing plans include marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including telecommunications agents, system integrators, value-added resellers and other telecommunications firms.

We support our distribution with digital marketing, direct mail, bill inserts, newspaper and television advertising, website promotions, public relations activities and sponsorship of community events and sports venues.

Our sales and marketing approach to our residential customers emphasizes customer-oriented sales, marketing and service with a local presence.

Our marketing plans include marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including retailers, satellite television providers, door to door sales agents and digital marketing firms.

Our domestic operations are regulated by the Federal Communications Commission (the “FCC”), various state utility commissions and occasionally by local agencies.

The following description discusses some of the major industry regulations that affect our operations, but numerous other regulations not discussed below also have a substantial impact on us.

For additional information, see "Risk Factors" in Item 1A of Part I of this report.

We support our distribution through digital advertising, events, website promotions and public relations.

We maintain local offices in most of the larger population centers within our local service area.

These offices provide sales and customer support services to the communities in our local markets.

Similarly, our sales and marketing approach to our mass market customers emphasizes customer-oriented sales, marketing and service with a local presence.

Our approach includes marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including retailers, satellite television providers, door to door sales agents and digital marketing firms.

Research, Development & Intellectual Property

Due to the dynamic nature of our industry, we prioritize investing in developing new products, improving existing products, and licensing third party intellectual property rights to anticipate and meet our customers’ evolving needs.

Patent licenses give us the freedom to operate our business without the risk of interruption from the holder of the patented technology.

In addition to our patent rights, either directly or through our affiliates, we have rights in various trade names, trademarks, copyrights and other intellectual property that we use to conduct our business.

Our services often use the intellectual property of others, including licensed software.

We also occasionally license our intellectual property to others as we deem appropriate.

For information on various litigation risks associated with owning and using intellectual property rights, see “Risk Factors—Business Risks” in Item 1A of Part I of this report, and Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report.

Our domestic operations are regulated by the Federal Communications Commission (the “FCC”), by various state utility commissions and occasionally by local agencies.

For information on the risks associated with the regulations discussed below, see “Risk Factors—Legal and Regulatory Risks” in Item 1A of Part I of this report.

Changes in the composition and leadership of the FCC, state commissions and other agencies that regulate our business could have significant impacts on our revenue, expenses, competitive position and prospects.

Changes in the composition and leadership of these agencies are often difficult to predict, which makes future planning more difficult.

The following description discusses some of the major regulations that affect our operations, but various others could have a substantial impact on us.

Federal Regulation

The FCC regulates the interstate services we provide, including the business data service charges we bill for wholesale network transmission and intercarrier compensation, including the interstate access charges that we bill to long-distance companies and other communications companies in connection with the origination and termination of interstate phone calls.

The FCC regulates the interstate services we provide, including the business data service charges we bill for wholesale network transmission and intercarrier compensation, including the interstate access charges that we bill other communications companies in connection with the origination and termination of interstate phone calls.

Additionally, the FCC regulates several aspects of our business related to international communications services, privacy, public safety and network infrastructure, including our access to and use of local telephone numbers and our provision of emergency 911 services.

Many of the FCC’s regulations adopted in recent years remain subject to judicial review and additional rulemakings, thus increasing the difficulty of determining the ultimate impact of these changes on us and our competitors.

The following description discusses some of the major regulations affecting our operations, but others could have a substantial impact on us as well.

For additional information, see “Risk Factors” in Item 1A of Part I of this report.

Universal Service

In 2015, CenturyLink accepted Connect America Fund or "CAF" funding from the FCC of approximately $500 million per year for six years to fund the deployment of voice and broadband capable infrastructure for approximately 1.2 million rural households and businesses in 33 states under the CAF II high-cost support program.

Of these amounts, approximately $150 million is attributable to our service area, to provide service to approximately 0.3 million rural households and business in 13 of the 14 states in which we are an ILEC.

The funding from the CAF II support program in these 13 states has substantially replaced the funding from the interstate USF high-cost program that we previously utilized to support voice services in high-cost rural markets in these 13 states.

As a result of accepting CAF II support payments, we are obligated to make substantial capital expenditures to build infrastructure by certain specified milestone deadlines.

For information on the risks associated with participating in this program, see "Risk Factors—Risks Relating to Legal and Regulatory Matters" in Item 1A of Part I of this report.

On January 30, 2020, the FCC approved an order creating the Rural Digital Opportunity Fund (the “RDOF”), which is a new federal support program designed to follow the CAF Phase II program.

Through the RDOF, the FCC plans to award up to $20.4 billion in support payments, beginning January 1, 2022, to communications providers to bring broadband services to unserved areas through multi-round reverse auctions.

The FCC plans to conduct the first auction late in 2020.

The FCC’s order also provides for price cap carriers like us to receive an additional year of CAF II funding in 2021.

Because we are in the very early stages of analyzing this opportunity, we cannot predict its ultimate impact on us or our affiliates, including CenturyLink.

For additional information about the potential financial impact of the CAF II program, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this report.

In 2015, Lumen Technologies accepted Connect America Fund or "CAF" funding from the FCC of approximately $500 million per year for six years to fund the deployment of voice and broadband capable infrastructure for approximately 1.2 million rural households and businesses in 33 of the 37 states in which we or Lumen are an ILEC under the CAF Phase II high-cost support program.

As a result of accepting CAF Phase II support payments for 33 states, we are obligated to make substantial capital expenditures to build infrastructure by certain specified milestone deadlines.

In accordance with the FCC's January 2020 order, Lumen Technologies elected to receive an additional year of CAF Phase II funding in 2021.

In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”) which is a new federal support program designed to replace the CAF Phase II program.

On December 7, 2020, the FCC allocated in its RDOF Phase I auction $9.2 billion in support payments over 10 years to deploy high speed broadband to over 5.2 million unserved locations.

Lumen Technologies won bids for RDOF Phase I support payments of $26 million annually.

These RDOF Phase I support payments are expected to begin January 1, 2022.

For additional information about the potential financial impact of the CAF Phase II program, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this report.

Broadband Regulation

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In December 2017, the FCC voted to repeal most of those regulations and the classification of BIAS as a Title II service and to preempt states from imposing substantial regulations on broadband.

Opponents of this change have appealed this action in federal court and have advocated in favor of re-instituting regulation of Internet services under Title II of the Communications Act.

Opponents of this change appealed this action in federal court.

Several states have also opposed the change and have initiated state executive orders or introduced legislation focused on state-specific Internet service regulation.

In October 2019, the federal court upheld the FCC’s classification decision but vacated a part of its state preemption ruling.

In October 2019, the federal court upheld the FCC’s classification decision but vacated a part of its preemption ruling.

The court also requested the FCC to make further findings relating to its classification decision.

Numerous parties have sought further appellate review of this decision.

The result of these appeals is pending and the potential impact to us is currently unknown.

Numerous parties have appealed this decision, which remain pending.

In addition, members of the Biden Administration and various consumer interest groups have advocated in favor of reclassifying BIAS under Title II.

The ultimate impact of these pending judicial appeals and calls for additional regulation are currently unknown to us, although the imposition of heightened regulation of our Internet operations could potentially hamper our ability to operate our data networks efficiently, restrict our ability to implement network management practices necessary to ensure quality service, increase the cost of operating, maintaining and upgrading our network, and otherwise negatively impact our current operations.

State Regulation of Domestic Operations

In recent years, most states have reduced their regulation of ILECs, including our ILEC operations.

Nonetheless, some state regulatory commissions continue to (i) set the rates that telecommunication companies charge each other for exchanging traffic, (ii) administer support programs designed to subsidize the provision of services to high-cost rural areas, (iii) regulate the purchase and sale of ILECs, (iv) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (v) limit ILECs' ability to borrow and pledge their assets, (vi) regulate transactions between ILECs and their affiliates and (vii) impose various other service standards.

In most states, local voice service, switched and business data services and interconnection services are subject to price regulation, although the extent of regulation varies by type of service and geographic region.

We operate in states where traditional cost recovery mechanisms, including rate structures and state USF,

are under evaluation or have been modified.

The 2017 changes to the federal tax code prompted several states

to review the potential impact to regulated rates.

As laws and regulations change, there can be no assurance that these mechanisms will continue to provide us with any cost recovery.

In recent years, most states have reduced their regulation of ILECs, including ours.

Nonetheless, state regulatory commissions generally continue to (i) set the rates that telecommunication companies charge each other for exchanging traffic, (ii) administer support programs designed to subsidize the provision of services to high-cost rural areas, (iii) regulate the purchase and sale of ILECs, (iv) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (v) limit ILECs' ability to borrow and pledge their assets, (vi) regulate transactions between ILECs and their affiliates and (vii) impose various other service standards.

In most states, switched and business data services and interconnection services are subject to price regulation, although the extent of regulation varies by type of service and geographic region.

Data Privacy Regulations

Various foreign, federal and state laws govern our storage, maintenance and use of customer data, including a wide range of consumer protection, data protection, privacy, intellectual property and similar laws.

Data privacy regulations are complex and vary across jurisdictions.

We must comply with various jurisdictional data

privacy regulations, adopted by various jurisdictions in certain of our domestic markets.

The application, interpretation and enforcement of these laws are often uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction.

These regulations require careful handling of personal and customer data.

We have data handling policies and practices to comply with data privacy requirements, and have resources dedicated to complying with changing data privacy regulations.

Other Regulations

Our networks are subject to numerous local regulations, including codes that regulate our trenching and construction operations or that require us to obtain permits, licenses or franchises to operate.

Such regulations are enacted by municipalities, counties or other regional governmental bodies, and can vary widely from jurisdiction to jurisdiction as a result.

Our networks and properties are subject to numerous federal, state, and/or local regulations, including environmental compliance and remediation expenses.

We are also subject to codes that regulate our trenching and construction operations or that require us to obtain permits, licenses or franchises to operate.

Such regulations are enacted by municipalities, counties, state, federal, or other regional governmental bodies, and can vary widely from jurisdiction to jurisdiction as a result.

Such regulations may also require us to pay substantial fees.

Various federal and state laws govern our storage, maintenance and use of customer data, including a wide range of consumer protection, data protection, privacy, intellectual property and similar laws.

The application, interpretation and enforcement of these laws are often uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction.

Various federal and state legislative or regulatory bodies have recently adopted increasingly restrictive laws or regulations governing the protection or retention of data, and others are contemplating similar actions.

For additional information about these matters, see “Risk Factors—Risks Affecting Our Business” and “Risk Factors—Risks Relating to Legal and Regulatory Matters” in item 1A of Part I of this report.

We compete in a rapidly evolving and highly competitive market, and we expect intense competition from a wide variety of sources under evolving market conditions to continue.

In addition to competition from larger telecommunication service providers, we are facing increasing competition from cable and satellite companies, wireless providers, technology companies, cloud companies, broadband providers, device providers, resellers, sales agents facilities-based providers, and smaller more narrowly focused niche providers.

Further technological advances and regulatory and legislative changes have increased opportunities for a wide range of alternative communications service providers, which in turn have increased competitive pressures on our business.

These alternate providers often face fewer regulations and have lower cost structures than we do.

In addition, the communications industry has, in recent years, experienced substantial consolidation, and some of our competitors in one or more lines of our business are generally larger, have stronger brand names, have more financial and business resources and have broader service offerings than we currently do.

The Telecommunications Act of 1996, which obligates ILECs to permit competitors to interconnect their facilities to the ILEC's network and to take various other steps that are designed to promote competition, imposes several duties on an ILEC if it receives a specific request from another entity which seeks to connect with or provide services using the ILEC's network.

In particular, each ILEC is obligated to (i) negotiate interconnection agreements in good faith, (ii) provide nondiscriminatory "unbundled" access to specific portions of the ILEC's network and (iii) permit competitors, on terms and conditions (including rates) that are just, reasonable and nondiscriminatory, to colocate their physical plant on the ILEC's property, or provide virtual colocation if physical colocation is not practicable.

Current FCC rules require ILECs to lease a network element only in those situations where competing carriers genuinely would be impaired without access to such network elements, and where the unbundling would not interfere with the development of facilities-based competition.

Wireless voice services are a significant source of competition with our traditional ILEC services.

It is increasingly common for customers to completely forego use of traditional wireline phone service and instead rely solely on wireless service for voice services.

We anticipate this trend will continue, particularly with younger customers who are less accustomed to using traditional wireline voice services.

Technological and regulatory developments in wireless services, Wi-Fi, and other wired and wireless technologies have contributed to the development of alternatives to traditional landline voice services.

Moreover, the growing prevalence of electronic mail, text messaging, social networking and similar digital non-voice communications services continues to reduce the demand for traditional landline voice services.

These factors have led to a long-term systemic decline in the number of our wireline voice service customers.

In addition to facing direct competition from those providers described above, ILECs increasingly face competition from alternate communication systems constructed by long distance carriers, large customers, municipalities or alternative access vendors.

These systems are capable of originating or terminating calls without use of an ILEC's networks or switching services.

Other potential sources of competition include non-carrier systems that are capable of bypassing ILECs' local networks, either partially or completely, through various means, including the provision of business data services or independent switching services and the concentration of telecommunications traffic on a few of an ILEC's access lines.

We anticipate that all these trends will continue and lead to decreased billable use of our networks.

Demand for our broadband services could be adversely affected by advanced wireless data transmission technologies being deployed by wireless providers and by certain technologies permitting cable companies and other competitors to deliver generally faster average broadband transmission speeds than ours.

As a result of these regulatory, consumer and technological developments, ILECs also face competition from competitive local exchange carriers, or CLECs, particularly in densely populated areas.

CLECs provide competing services through (i) reselling an ILEC's local services, (ii) using an ILEC's unbundled network elements (iii) operating their own facilities or (iv) a combination thereof.

To succeed, we must continue to invest in our networks to ensure that they can deliver competitive services that meet these increasing bandwidth and speed requirements.

In addition, network reliability and security are increasingly important competitive factors in our business.

With respect to providing our services to residential customers, technology advancements have increased both the quantity and type of competitors that we compete with for our services.

More specifically, voice services face significant product and technology substitution.

Additionally, cable companies have increased broadband speeds and continue to compete with our broadband services, and wireless carriers' latest generation technologies are allowing them to more directly compete with our Broadband services.

The fragmentation of the video market with the proliferation of Over the Top providers has made it difficult for us to offer a cost-effective video product.

Lastly, the regulatory environment in which we operate, while it provides us certain advantages, can make us less nimble than cable, wireless, and other technology companies.

As a result, our strategy is to continue to invest in our network with fiber solutions to increase connection speeds and service quality, partner with video providers such as DIRECTV to provide video and content options to customers, and encourage customers to bundle voice services by providing a high quality voice connection with discounts for bundling.

In addition, we believe initiatives to improve the customer experience and digital experience should increase customer loyalty over time.

The consumer market for broadband services is mature, with a significant portion of households already receiving those services.

We compete for customers on the basis of pricing, packaging of services and features and quality of service.

In order to remain competitive, we believe continually increasing connection speeds is important.

As a result, we continue to invest in our network, which allows for the delivery of higher speed broadband services.

Although our status as an ILEC continues to provide us advantages in providing local services in our local service area, as noted above, we increasingly face significant competition as an increasing number of consumers are willing to substitute cable, wireless and electronic communications for traditional voice telecommunications services.

This has led to an increase in the number and type of competitors within our industry, price compression and a decrease in our market share.

As a result of this product substitution, we face greater competition in providing local services from wireless providers, resellers and sales agents (including ourselves), social media hosts and broadband service providers, including cable companies.

We anticipate this trend will continue, particularly as wireless services providers continue to improve their service offerings and our older legacy customers are replaced over time with younger customers who are less accustomed to using traditional wireline voice services.

We also continue to compete with traditional telecommunications providers, such as national carriers, smaller regional providers, CLECs and independent telephone companies.

Additional information about competitive pressures is located (i) under the heading "Risk Factors—Risks Affecting Our Business" in Item 1A of Part I of this report and (ii) in the discussion immediately below, which contains more specific information on how these trends in competition have impacted our services.

Environmental Matters

From time to time we may incur environmental compliance and remediation expenses, mainly resulting from owning or operating prior industrial sites or operating vehicle fleets or power supplies for our communications equipment.

Although we cannot assess with certainty the impact of any future compliance and remediation obligations or provide you with any assurances regarding the ultimate impact thereof, we do not currently believe that future environmental compliance and remediation expenditures will have a material adverse effect on our financial condition or results of operations.

For additional information, see (i) "Risk Factors—Risks Relating to Legal and Regulatory Matters" and "Risk Factors—Other Risks—We face risks from natural disasters and extreme weather, which can disrupt our operations and cause us to incur additional capital and operating costs" in Item 1A of Part I of this report and (ii) Note 16—Commitments, Contingencies and Other Items included in Item 8 of Part II of this report.

Overall, our business is not materially impacted by seasonality.

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From time to time, weather related problems have resulted in increased costs to repair our network and respond to service calls in some of our markets.

The amount and timing of these costs are subject to the weather patterns of any given year.

The amount and timing of these costs are subject to the weather patterns of any given year, but have generally been highest during the third quarter and have been related to damage from severe storms in our markets.

At December 31, 2020, we had approximately 14,400 employees, of which approximately 6,300 are members of either the Communications Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW").

See "Risk Factors—Risks Affecting Our Business" in Item 1A of Part I of this report and see Note 18—Labor Union Contracts to our consolidated financial statements in Item 8 of Part II of this report for a discussion of risks relating to our labor relations, for additional information on the timing of certain contract expirations.

See "Risk Factors— Business Risks" in Item 1A of Part I of this report and Note 18—Labor Union Contracts to our consolidated financial statements in Item 8 of Part II of this report for a discussion of risks relating to our labor relations and for additional information on the timing of certain contract expirations.

Additional Information

For further information on regulatory, technological and competitive factors that could impact our revenue, see "Regulation" under this Item 1 above, "Competition" under this Item 1, above, and "Risk Factors" under Item 1A below.

For additional information about us and our ultimate parent, Lumen Technologies, Inc., please refer to the periodic reports filed by Lumen Technologies, Inc.

with the SEC, which can be accessed by visiting the websites listed below under “Website Access and Important Investor Information.”

Website Access and Important Investor Information

Our website is the same as that of our ultimate parent company, CenturyLink, which is www.centurylink.com .

We routinely post important investor information in the "Investor Relations" section of our website at ir.centurylink.com .

The information contained on, or that may be accessed through, our website is not part of this report or any other periodic reports that we file with the SEC.

You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports in the "Investor Relations" section of our website ( ir.centurylink.com ) under the heading "SEC Filings." These reports are available on our website and on the SEC's website at www.sec.gov .

From time to time CenturyLink also uses the website to webcast their earnings calls and certain of their meetings with investors or other members of the investment community.

Lumen's and our website is www.lumen.com .

We routinely post important investor information in the "Investor Relations" section of our website at ir.lumen.com .

The information contained on, or that may be accessed through, our website is not part of this quarterly report.

You may obtain free electronic copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K filed by us or our ultimate controlling stockholder Lumen Technologies, Inc., and all amendments to those reports, in the "Investor Relations" section of our website ( ir.lumen.com ) under the heading "FINANCIALS" and subheading "SEC Filings." These reports are also available on the SEC's website at www.sec.gov.

In connection with filing this report, our chief executive officer and chief financial officer made the certifications regarding our financial disclosures required under the Sarbanes-Oxley Act of 2002, and its related regulations.

Lenders should also be aware that while we do, at various times, answer questions raised by analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information.

Accordingly, lenders should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance.

To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

As a large complex organization, we are from time to time subject to litigation, disputes, governmental or internal investigations, service outages, security breaches or other adverse events, or are engaged in discussions regarding a wide range of business or strategic initiatives.

We typically publicly disclose these events only when we determine these disclosures to be material to investors or otherwise required by applicable law, or with respect to pending negotiations, when we have entered into a preliminary or definitive agreement.

As a large complex organization, we are from time to time subject to litigation, disputes, governmental or internal investigations, consent decrees, service outages, security breaches or other adverse events.

We typically publicly disclose these occurrences (and their ultimate outcomes) only when we determine these disclosures to be material to investors or otherwise required by applicable law.

We typically disclose material non-public information by disseminating press releases, making public filings with the SEC, or disclosing information during publicly accessible meetings or conference calls.

Nonetheless, from time to time we have used, and intend to continue to use, our website and social media accounts to augment our disclosures.

Unless otherwise indicated, information contained in this report and other documents filed by us under the federal securities laws concerning our views and expectations regarding the communications industry are based on estimates made by us using data from industry sources, and on assumptions made by us based on our management’s knowledge and experience in the markets in which we operate and the communications industry generally.

Lenders should also be aware that while we do, at various times, answer questions raised by securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information.

Accordingly, lenders should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance.

To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

Unless otherwise indicated, information contained in this report and other documents filed by us under the federal securities laws concerning our views and expectations regarding the technology or communications industries are based on estimates made by us using data from industry sources, and on assumptions made by us based on our management’s knowledge and experience in the markets in which we operate and our industry generally.

You should be aware that we have not independently verified data from industry or other third-party sources and cannot guarantee its accuracy or completeness.

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What changed 10-K

Item 1. Business