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Item 7. Management’s Discussion and Analysis

2021-03-03 compared with 2020-03-05 · 172 added, 182 removed, 146 unchanged (71% of the section changed)

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Certain statements in this report constitute forward-looking statements.

See "Special Note Regarding Forward-Looking Statements" in Part I of this report for factors relating to these statements and "Risk Factors" in Item 1A of Part I of this report for a discussion of certain risk factors applicable to our business, financial condition, results of operations, liquidity and prospects.

See "Special Note Regarding Forward-Looking Statements" immediately prior to Item 1 of Part I of this report for factors relating to these statements and "Risk Factors" in Item 1A of Part I of this report for a discussion of certain risk factors applicable to our business, financial condition, results of operations, liquidity and prospects.

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

Our specific products and services are detailed below under the heading "Operations - Products and Services" in Item 1 of Part I 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.

For the reasons noted in Note 13—Products and Services Revenue to our consolidated financial statements in Item 8 of Part II of this report, we have determined that we have one reportable segment.

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

Under these arrangements, the majority of our cash balance is 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 on our consolidated balance sheets.

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

These dividends are settled in accordance with the cash management process described above, which has the net effect of reducing our advances to affiliates or increasing our advances from affiliates.

At December 31, 2020, we served approximately 2.8 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 And Summary Of Significant Accounting Policies and Note 14—Products and Services Revenue, we have determined that 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;

• IP and Data Services , which primarily consists of VPN data networks, Ethernet, retail video, IP and other ancillary services;

• Transport and Infrastructure , which includes broadband, private line (including business data services) and other ancillary services;

• Voice and Collaboration , which includes primarily local voice, including wholesale voice, and other ancillary services;

IT and managed services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;

Regulatory revenue, which consist of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenue.

• IT and Managed Services, which includes information technology services and managed services, which may be purchased in conjunction with our other network services;

• Regulatory Revenue, which consists of USF and CAF support payments and other operating revenue.

We receive federal support payments from both federal and state USF programs and from the federal CAF II 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;

Affiliate services, which are telecommunication services that we also provide to our external customers.

• Affiliate Services, which are telecommunication services we provide to our affiliates that we also provide to our external customers.

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

From time to time, we change the categorization of our products and services, and we may make similar changes in the future.

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

Trends Impacting Our Operations

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We are expanding and densifying our fiber network, connecting more buildings to our network to generate revenue opportunities and reduce our costs associated with leasing networks from other carriers.

Industry consolidation, coupled with changes in regulation, technology and customer preferences, are significantly reducing demand for our traditional voice services and are pressuring some other revenue streams, while other advances, such as the need for lower latency provided by Edge computing or the implementation of 5G networks, are expected to create opportunities.

• Industry consolidation, coupled with changes in regulation, technology and customer preferences, are significantly reducing demand for our traditional voice services and are pressuring some other revenue streams through volume or rate reductions, while other advances, such as the need for lower latency provided by Edge computing or the implementation of 5G networks, are expected to create opportunities.

• The operating margins of several of our newer, more technologically advanced services, some of which may connect to customers through other carriers, are lower than the operating margins on our traditional, on-net wireline services.

Impact of COVID-19 Pandemic

In response to the safety and economic challenges arising out of the COVID-19 pandemic, we have taken a variety of steps to ensure the availability of our network infrastructure, to promote the safety of our employees, to enable us to continue to provide our products and services worldwide to our customers, and to strengthen our communities.

These steps have included:

• Lumen Technologies taking the FCC’s “Keep Americans Connected Pledge,” under which we waived certain late fees and suspended the application of data caps and service terminations for non-payment by certain consumer and small business customers through the end of the second quarter of 2020;

• establishing new protocols for the safety of our on-site technicians and customers, including our “Safe Connections” program;

• adopting a rigorous employee work-from-home policy and substantially restricting non-essential business travel;

each of which remains in place;

• continuously monitoring our network to enhance its ability to respond to changes in usage patterns;

• donating products or services in several of our communities to enhance their abilities to provide necessary support services;

• taking steps to maintain our internal controls and the security of our systems and data in a remote work environment.

As the pandemic continues and vaccination rates increase, we expect to revise our responses or take additional steps to adjust to changed circumstances.

Social distancing, business and school closures, travel restrictions and other actions taken in response to the pandemic have impacted us, our customers and our business since March 2020.

In particular, during the second half of 2020, we rationalized our lease footprint and ceased the use of 5 leased property locations that were underutilized due to the COVID-19 pandemic.

We determined that we no longer needed the leased space and due to the limited remaining term on the contracts concluded that we had neither the intent nor the ability to sublease the properties.

As a result, we incurred accelerated lease costs of approximately $31 million.

In conjunction with our plans to improve long-term profitability, we expect to continue our real estate rationalization efforts and incur additional costs in 2021.

Additionally, as discussed further elsewhere herein, we are tracking pandemic impacts such as (i) increases in certain of our revenue streams and decreases in others (including late fee revenue), (ii) increases in our allowances for credit losses each quarter since the start of the pandemic, (iii) increases in overtime expenses, and (iv) delays in our cost transformation initiatives.

Thus far, these changes have not materially impacted our financial performance or financial position.

This could change, however, if the pandemic intensifies or economic conditions further deteriorate.

The impact of the pandemic during 2021 will materially depend on additional steps that we may take in response to the pandemic and various events outside of our control, including the pace of vaccinations, the length and severity of the health crisis and economic slowdown, actions taken by governmental agencies or legislative bodies, and the impact of those events on our employees, suppliers and customers.

For additional information, see the risk factor disclosures set forth or referenced in Item 1A of Part II of this report.

For additional information on the impacts of the pandemic, see the remainder of this item, including "— Liquidity and Capital Resources — Pension and Post-retirement Benefit Obligations."

Results of Operations

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Other expense, net (409) (416)

Income before income taxes 2,302 2,468

Income tax expense 595 641

Net income $ 1,707 1,827

Operating Revenue

The following tables summarize our consolidated operating revenue recorded under our six revenue categories:

Years Ended December 31,

The following table summarizes our consolidated operating revenue recorded under our six revenue categories:

Years Ended December 31, % Change

(Dollars in millions)

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Total operating revenue $ 7,313 8,052 (9) %

Total operating revenue decreased by $336 million , or 4% , for the year ended December 31, 2019 as compared to the year ended December 31, 2018 .

The change in operating revenue was primarily due to a decrease in voice and collaboration, transport and infrastructure and regulatory 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).

Total operating revenue decreased by $739 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The decrease in operating revenue was primarily driven by lower affiliate service revenues due to the transfer of employees, and the revenues related to the services those employees provide, from us to an affiliate.

The remaining decline in revenue was primarily due to decreases in our voice, broadband, private line and Ethernet services.

Operating Expenses

The following tables summarize our consolidated operating expenses:

Years Ended December 31,

The following table summarizes our consolidated operating expenses:

Years Ended December 31, % Change

(Dollars in millions)

Cost of services and products (exclusive of depreciation and amortization)

$ 1,995 2,333 (14) %

Selling, general and administrative

564 659 (14) %

Operating expenses-affiliates

728 812 (10) %

Depreciation and amortization

1,315 1,364 (4) %

Total operating expenses $ 4,602 5,168 (11) %

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equipment expenses (such as modem expenses);

costs incurred for universal service funds (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute);

certain legal expenses associated with our operations;

and other expenses directly related to our operations.

Cost of services and products (exclusive of depreciation and amortization) decreased by $329 million , or 12% , for the year ended December 31, 2019 as compared to the year ended December 31, 2018 .

The decrease in our cost of services and products was due to reductions in salaries and wages and employee-related expenses resulting from lower headcount directly related to operating and maintaining our network, customer premises equipment from lower sales , voice usage costs and direct taxes and fees and city receipts taxes.

These reductions were partially offset by higher customer installation expenses, USF rates and dark fiber expenses .

costs incurred for universal service funds (which are state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates);

certain legal and other expenses directly related to our operations.

Cost of services and products (exclusive of depreciation and amortization) decreased by $338 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The decrease in our cost of services and products was primarily due to reductions in salaries and wages and employee-related expenses resulting from lower headcount.

These reductions were partially offset by higher network expenses from project impairments and higher customer premises equipment costs due to increased customer installations.

Selling, General and Administrative

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and other selling, general and administrative expenses.

Selling, general and administrative expenses decreased by $140 million , or 18% , for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to reductions in salaries and wages and employee-related expenses from lower headcount, contract labor costs, commissions, professional fees, marketing and advertising, property and other taxes, bad debt expense, and an increase in the amount of labor capitalized or deferred.

These reductions were partially offset by higher building and network maintenance costs.

Selling, general and administrative expenses decreased by $95 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to reductions in salaries and wages and employee-related expenses from lower headcount, commissions, professional fees, marketing and advertising expenses.

These reductions were partially offset by higher property and other taxes, insurance and fees and bad debt.

Operating Expenses-Affiliates

Since CenturyLink's acquisition of us, we have incurred affiliate expenses related to our use of telecommunication services, marketing and employee related support services provided by CenturyLink and its subsidiaries.

Operating expenses-affiliates decreased by $19 million , or 2% , for the year ended December 31, 2019 as compared to the year ended December 31, 2018 .

The decrease in operating expenses-affiliates was primarily due to the decline in the level of services provided to us by our affiliates.

Since Lumen's acquisition of us, we have incurred affiliate expenses related to our use of telecommunication services, marketing and employee related support services provided by Lumen Technologies and its subsidiaries.

Operating expenses-affiliates decreased by $84 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to the decline in the level of services provided to us by our affiliates.

Depreciation and Amortization

The following tables provide detail of our depreciation and amortization expense:

Years Ended December 31,

The following table provides detail of our depreciation and amortization expense:

Years Ended December 31, % Change

(Dollars in millions)

Depreciation $ 834 831 — %

Amortization 481 533 (10) %

Total depreciation and amortization

$ 1,315 1,364 (4) %

Annual depreciation expense is impacted by several factors, including changes in our depreciable cost basis, changes in our estimates of the remaining economic life of certain network assets and the addition of new plant.

Depreciation expense decreased by $24 million , or 3% , for the year ended December 31, 2019 as compared to the year ended December 31, 2018 .

The decline in depreciation expense was primarily due to the impact of annual rate depreciable life changes of $78 million, partially offset by a net increase in depreciable assets of $54 million.

Amortization expense decreased by $48 million , or 8% , for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to a $45 million decrease in the effect of using an accelerated amortization method resulting in an incremental decline in expense each period as the intangible assets amortize and a $25 million decrease associated with annual rate amortizable life changes of software for the period.

These decreases were partially offset by net growth in amortizable assets of $21 million for the period.

Depreciation expense increased by $3 million, for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

Depreciation expense increased by $78 million due to the increase in depreciable assets which was offset primarily due to a decrease in depreciation expense of $72 million from annual rate depreciable life changes.

Amortization expense decreased by $52 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to a $45 million decrease from the effect of using an accelerated amortization method resulting in an incremental decline in expense each period as the intangible assets amortize and a $8 million decrease associated with annual rate amortizable life changes of software for the period.

Other Consolidated Results

The following tables summarize our total other expense, net and income tax expense:

Years Ended December 31,

The following table summarizes our total other expense, net and income tax expense:

Years Ended December 31, % Change

(Dollars in millions)

Interest expense $ (279) (380) (27) %

Interest expense-affiliates

Other income, net

Interest expense - affiliates, net (74) (62) 19 %

Other (expense) income, net (56) 26 nm

Total other expense, net

$ (409) (416) (2) %

Income tax expense $ 595 641 (7) %

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Interest Expense

Interest expense decreased by $68 million , or 15% , for the year ended December 31, 2019 as compared to the year ended December 31, 2018 and was attributable to the redemption of approximately $1.3 billion of senior notes in the third quarter of 2018.

See Note 5—Long-Term Debt and Revolving Promissory Note to our consolidated financial statements in Item 8 of Part II of this report and Liquidity and Capital Resources below for additional information about our debt.

Interest expense decreased by $101 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

This decrease was primarily due to the decrease in average long-term debt from $6.0 billion to $4.6 billion, and the decrease in our average interest rate from 6.67% to 6.56%.

See Note 6—Long-Term Debt and Note Payable - Affiliate and Liquidity and Capital Resources below for additional information about our debt.

Interest Expense - Affiliates, Net

Affiliate interest expense increased by $5 million , or 9% , for the year ended December 31, 2019 as compared to the year ended December 31, 2018 .

The increase in affiliate interest expense was primarily due to an increase in the principal balance of the note payable - affiliate resulting from the capitalization of interest in the third quarter of 2019.

Other Income, Net

Other income, net reflects certain items not directly related to our core operations, including interest income, gains and losses from non-operating asset dispositions and components of net periodic pension and post-retirement benefit costs.

Other income, net increased by $22 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 that was primarily due to the $34 million loss on debt redemption during the third quarter of 2018.

Interest expense - affiliates, net increased by $12 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The increase in interest expense - affiliates, net was primarily due to the increase in outstanding advances from our affiliates, which incur interest at the same rate as the note payable to our affiliate.

See Note 6—Long-Term Debt and Note Payable - Affiliate.

Other (Expense) Income, Net

The following table summarizes our total other (expense) income, net:

Years Ended December 31,

2020 2019 % Change

(Dollars in millions)

Loss on debt extinguishment $ (63) — nm

Interest income, affiliate 1 21 (95) %

Other 6 5 20 %

Total other (expense) income, net $ (56) 26 nm

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nm Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.

The loss on debt extinguishment relates to the senior note redemptions discussed in Note 6—Long-Term Debt and Note Payable - Affiliate.

The decrease in interest income, affiliate is due to the reduction of the advances to affiliates.

Income Tax Expense

Income tax expense for the year ended December 31, 2020, was $595 million, or an effective tax rate of 25.8%, compared to $641 million, or an effective tax rate of 26.0%, for the year ended December 31, 2019.

For tax year ended December 31, 2018, our tax rate is primarily driven by the lower federal statutory rate of 21%.

Additionally, for the tax year ended December 31, 2018, the rate was also favorably impacted by a tax benefit of $83 million generated by filing tax accounting method changes that accelerated significant tax deductions.

For additional information on income taxes, see Note 12—Income Taxes to our consolidated financial statements in Item 8 of Part II of this report.

For additional information on income taxes, see Note 13—Income Taxes.

Critical Accounting Policies and Estimates

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However, there can be no assurance that actual results will not differ from those estimates.

Property, Plant and Equipment

As a result of our indirect acquisition by CenturyLink, property, plant and equipment owned at the time of acquisition was recorded based on its estimated fair value as of the acquisition date.

Subsequently purchased and constructed property, plant and equipment are recorded at cost.

Renewals and betterments of plant and equipment are capitalized while repairs, as well as renewals of minor items, are charged to operating expense.

Depreciation of property, plant and equipment is provided on the straight-line method using class or overall group rates.

The group method provides for the recognition of the remaining net investment, less anticipated net salvage value, over the remaining useful life of the assets.

This method requires the periodic revision of depreciation rates.

Normal retirements of property, plant and equipment are charged against accumulated depreciation, with no gain or loss recognized.

We depreciate such property on the straight-line method over estimated service lives ranging from 5 to 45 years.

We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment.

Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining life of our asset base.

Due to rapid changes in technology and the competitive environment, determining the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment.

We regularly review data on utilization of equipment, asset retirements and salvage values to determine adjustments to our depreciation rates.

The effect of a hypothetical one-year increase or decrease in the estimated remaining useful lives of our property, plant and equipment would have decreased depreciation expense by approximately $90 million annually or increased depreciation expense by approximately $110 million annually, respectively.

Affiliate Transactions

We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates.

Regulatory rules require certain expenses to be recorded at market price or fully distributed cost.

Our compliance with regulations is subject to review by regulators.

Adjustments to intercompany charges that result from these reviews are recorded in the period they become known.

Pricing between affiliates currently uses market based, volume discounted rates.

Because of the significance of the services we provide to our affiliates and our other affiliate transactions, the results of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.

See Note 14—Affiliate Transactions to our consolidated financial statements in Item 8 of Part II of this report for additional information.

We are included in the consolidated federal income tax return of CenturyLink.

Under CenturyLink's tax allocation policy, CenturyLink treats our consolidated results as if we were a separate taxpayer.

See Note 15—Affiliate Transactions for additional information.

We are included in the consolidated federal income tax return of Lumen Technologies.

Under Lumen's tax allocation policy, Lumen treats our consolidated results as if we were a separate taxpayer.

The policy requires us to settle our tax liabilities through a change in our general intercompany obligation based upon our separate return taxable income.

We are also included in the combined state tax returns filed by CenturyLink and the same payment and allocation policy applies.

Our reported deferred tax assets and liabilities are primarily determined as a result of the application of the separate return allocation method and therefore the settlement of these amounts is dependent upon our parent, CenturyLink, rather than tax authorities.

CenturyLink does have the right to change their policy regarding settlement of these assets and liabilities at any time.

We are also included in the combined state tax returns filed by Lumen and the same payment and allocation policy applies.

Lumen does have the right to change their policy regarding settlement of these assets and liabilities at any time.

Our provision for income taxes includes amounts for tax consequences deferred to future periods.

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Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.

See Note 12—Income Taxes to our consolidated financial statements in Item 8 of Part II of this report for additional information.

See Note 13—Income Taxes for additional information.

Liquidity and Capital Resources

We are an indirectly wholly-owned subsidiary of CenturyLink.

As such, factors relating to, or affecting, CenturyLink's liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market's perception of us.

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

We are an indirectly wholly-owned subsidiary of Lumen Technologies, Inc.

As such, factors relating to, or affecting, Lumen's liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market's perception of us.

Lumen Technologies has cash management arrangements with a majority of its subsidiaries that include lines of credit, affiliate advances and 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.

Under these arrangements, the majority of our cash balance is advanced on a daily basis for centralized management by Lumen's service company affiliate.

From time to time we may declare and pay dividends to our stockholder, QSC, sometimes in excess of our earnings to the extent permitted by applicable law, using cash owed to us under these advances, which has the net effect of reducing the amount of these advances.

Our debt covenants do not currently limit the amount of dividends we can pay to QSC.

Given our cash management arrangement with our ultimate parent, CenturyLink, and the resulting amounts due to us from CenturyLink, a significant component of our liquidity is dependent upon CenturyLink's ability to repay its obligation to us.

We anticipate that our future liquidity needs will be met through (i) our cash provided by our operating activities, (ii) amounts due to us from CenturyLink, (iii) our ability to refinance Qwest Corporation's debt securities at maturity and (iv) capital contributions, advances or loans from CenturyLink or its affiliates if and to the extent they have available funds or access to available funds that they are willing and able to contribute, advance or loan.

Given our cash management arrangement with our ultimate parent, Lumen Technologies, Inc., and the resulting amounts due to us from Lumen Technologies, Inc., a significant component of our liquidity is dependent upon Lumen's ability to repay its obligation to us.

We anticipate that our future liquidity needs will be met through (i) our cash provided by our operating activities, (ii) amounts due to us from Lumen Technologies, (iii) our ability to refinance QC's debt securities at maturity and (iv) capital contributions, advances or loans from Lumen Technologies or its affiliates if and to the extent they have available funds or access to available funds that they are willing and able to contribute, advance or loan.

Capital Expenditures

We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand our service offerings.

CenturyLink evaluates capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment.

The amount of CenturyLink's consolidated capital investment is influenced by, among other things, demand for CenturyLink's services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations (such as our CAF II infrastructure buildout requirements).

For more information on CenturyLink's total capital expenditures, please see its annual and quarterly reports filed with the SEC.

We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand and improve our service offerings.

Our parent, Lumen Technologies, and we evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment.

The amount of Lumen’s consolidated capital investment, and our portion thereof, is influenced by, among other things, demand for Lumen’s services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations (such as Lumen's CAF Phase II or RDOF infrastructure buildout requirements).

For more information on Lumen’s total capital expenditures, please see its annual and quarterly reports filed with the SEC.

For more information on our capital spending, see "Business" and "Risk Factors" in Items 1 and 1A, respectively, of Part I of this report.

Debt and Other Financing Arrangements

Subject to market conditions, and to the extent feasible, we may continue to issue debt securities, under Qwest Corporation, from time to time in the future to refinance a substantial portion of our maturing debt.

As of December 31, 2020, we owed a face amount of approximately $3.4 billion aggregate outstanding indebtedness (excluding finance leases, unamortized premiums, net and unamortized debt issuance costs), which includes our $215 million term loan.

Subject to market conditions, and to the extent feasible, we may issue debt securities, under Qwest Corporation, from time to time in the future primarily to refinance a portion of our maturing debt.

The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned to Qwest Corporation by credit rating agencies, among other factors.

As of the date of this report, the credit ratings for Qwest Corporation's senior unsecured debt were as follows:

Credit Ratings

Standard & Poor's

Agency Credit Ratings

Standard & Poor's BBB-

Moody's Investors Service, Inc.

Fitch Ratings

CenturyLink, Inc.'s and Qwest Corporation's credit ratings are reviewed and adjusted from time to time by the rating agencies.

For additional information regarding CenturyLink's and Qwest Corporation's funding arrangements, see "Risk Factors—Risk Related to CenturyLink's Acquisition of Level 3" and "Risks Affecting Liquidity and Capital Resources" in Item 1A of Part I of this report.

In 2015, Qwest Corporation entered into a term loan in the amount of $100 million with CoBank, ACB.

The outstanding unpaid principal amount of this term loan plus any accrued and unpaid interest is due on February 20, 2025.

Interest is paid at least quarterly based upon either the London Interbank Offered Rate (“LIBOR”) or the base rate (as defined in the credit agreement) plus an applicable margin between 1.50% to 2.50% per annum for LIBOR loans and 0.50% to 1.50% per annum for base rate loans depending on our then current senior unsecured long-term debt rating.

At both December 31, 2019 and 2018 , the outstanding principal balance on this term loan was $100 million .

Revolving Promissory Note

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 of this new revolving promissory note and the accrued interest thereon shall be 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.

Fitch Ratings BB+

Lumen's and Qwest Corporation's credit ratings are reviewed and adjusted from time to time by the rating agencies.

See Note 6—Long-Term Debt And Note Payable - Affiliate for additional information about our term loan and senior note indebtedness.

Note Payable - Affiliate

The Intercompany Note (defined in Note 6—Long-Term Debt and Note Payable - Affiliate) was entered into between Qwest Corporation and an affiliate of our ultimate parent company, Lumen Technologies, Inc., in the amount of $965 million.

The outstanding principal balance owed by us under the Intercompany Note and the accrued interest thereon is due and payable on demand, but if no demand is made, then on June 30, 2022.

Interest is accrued on the outstanding balance during an interest period using a weighted average per annum interest rate on the consolidated outstanding debt of Lumen Technologies, Inc.

and its subsidiaries.

As of December 31, 2020, the weighted average interest rate was 4.974%.

As of December 31, 2019 and December 31, 2018 , the amended and restated revolving promissory note and the original revolving promissory note, respectively, are reflected on our consolidated balance sheets as a current liability under note payable - affiliate.

As of December 31, 2020 and December 31, 2019, the Intercompany Note is reflected on our consolidated balance sheets as a current liability under note payable - affiliate.

As of December 31, 2020 and 2019, $28 million and $31 million of accrued interest are reflected in other current liabilities on our consolidated balance sheets, respectively.

We periodically pay dividends to our direct parent company.

See Note 19—Stockholder's Equity to our consolidated financial statements in Item 8 of Part II of this report.

For additional information about our indebtedness, see Note 6—Long-Term Debt And Note Payable - Affiliate.

Future Contractual Obligations

The following table summarizes our estimated future contractual obligations as of December 31, 2019 :

2025 and thereafter

(Dollars in millions)

Long-term debt (1)(2)

Interest on long-term debt and finance leases (2)

Note payable-affiliate

Interest on note payable-affiliate

Operating leases

Right-of-way agreements

Purchase commitments (3)

Affiliate obligations, net (4)

Total future contractual obligations (5)

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Includes current maturities and finance lease obligations, but excludes unamortized discounts, net and unamortized debt issuance costs and excludes note payable-affiliate.

Actual principal and interest paid in all years may differ due to future refinancing of outstanding debt or issuance of new debt.

We have various long-term, non-cancelable purchase commitments for advertising and promotion services, including advertising and marketing at sports arenas and other venues and events.

We also have service-related commitments with various vendors for data processing, technical and software support services.

Future payments under certain service contracts will vary depending on our actual usage.

In the table above, we estimated payments for these service contracts based on estimates of the level of services we expect to receive.

The affiliate obligations, net primarily represents the cumulative allocation of expense attributable to our employees, net of payments, associated with QCII’s pension plans and post-retirement benefit plans prior to the plans being merged into CenturyLink's benefit plans.

See additional information on CenturyLink’s employee benefit plans in Note 11 — Employee Benefits to the consolidated financial statements in Item 8 of Part II of CenturyLink’s annual report on Form 10-K for the year ended December 31, 2019 ;

The table is limited solely to contractual payment obligations and does not include:

contingent liabilities;

our open purchase orders as of December 31, 2019 .

These purchase orders are generally issued at fair value, and are generally cancelable without penalty;

other long-term liabilities, such as accruals for legal matters and other taxes that are not contractual obligations by nature.

We cannot determine with any degree of reliability the years in which these liabilities might ultimately settle;

contract termination fees.

These fees are non-recurring payments, the timing and payment of which, if any, is uncertain.

In the ordinary course of business and to optimize our cost structure, we enter into contracts with terms greater than one year to purchase other goods and services.

In the normal course of business, we do not believe payment of these fees is likely;

service level commitments to our customers, the violation of which typically results in service credits rather than cash payments;

potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business.

The nature and terms of these arrangements vary.

Our estimated future obligations as of December 31, 2020 include both current and long term obligations.

Related to debt, as noted in Note 6—Long-Term Debt And Note Payable - Affiliate, we have current maturities of $951 million and a long-term obligation of $2.4 billion.

Under our operating leases as noted in Note 4—Leases, we have a current obligation of $32 million and a long-term obligation of $84 million.

As noted in Note 16—Commitments, Contingencies and Other Items, we have a current obligation related to right-of-way agreements and purchase commitments of $34 million and a long-term obligation of $46 million.

Additionally, we have a current obligation for asset retirement obligations of $3 million and a long-term obligation of $27 million.

We periodically pay dividends to our direct parent company, which reduce our capital resources for debt repayments and other purposes.

See Note 19—Stockholder's Equity.

Pension and Post-retirement Benefit Obligations

CenturyLink is subject to material obligations under its existing defined benefit pension plans and post-retirement benefit plans.

At December 31, 2019 , the accounting unfunded status of CenturyLink's qualified and non-qualified defined benefit pension plans and qualified post-retirement benefit plans was $1.8 billion and $3.0 billion , respectively.

See Note 9—Employee Benefits to our consolidated financial statements in Item 8 of Part II of this report and Note 11—Employee Benefits to the consolidated financial statements in Item 8 of Part II of CenturyLink's annual report on Form 10-K for the year ended December 31, 2019 , for additional information about our and CenturyLink's pension and post-retirement benefit arrangements.

A substantial portion of our active and retired employees participate in CenturyLink's qualified pension and post-retirement benefit plans.

On December 31, 2014, the QCII pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, which was renamed the CenturyLink Combined Pension Plan.

Lumen Technologies is subject to material obligations under its existing defined benefit pension plans and post-retirement benefit plans.

At December 31, 2020, the accounting unfunded status of Lumen's qualified and non-qualified defined benefit pension plans and qualified post-retirement benefit plans was approximately $1.7 billion and $3.0 billion, respectively.

See Note 10—Employee Benefits and Note 10—Employee Benefits to the consolidated financial statements in Item 8 of Part II of Lumen's annual report on Form 10-K for the year ended December 31, 2020 for additional information about our and Lumen's pension and post-retirement benefit arrangements.

A substantial portion of our active and retired employees participate in Lumen's qualified pension plan and post-retirement benefit plans.

On December 31, 2014, the Qwest Communications International Inc.

("QCII") pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, which is now named the Lumen Combined Pension Plan.

Our contributions are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of our affiliates.

Prior to the pension plan merger, the above-noted employees participated in the QCII pension plan.

Benefits paid by CenturyLink's qualified pension plan are paid through a trust that holds all of the plan's assets.

Based on current laws and circumstances, CenturyLink does not expect any contributions to be required for their qualified pension plan during 2020 .

The amount of required contributions to CenturyLink's qualified pension plan in 2021 and beyond will depend on a variety of factors, most of which are beyond their control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations.

CenturyLink occasionally makes voluntary contributions in addition to required contributions.

CenturyLink does not currently expect to make a voluntary contribution to the trust for its qualified pension plan in 2020.

Substantially all of CenturyLink's post-retirement health care and life insurance benefits plans are unfunded.

Several trusts hold assets that have been used to help cover the health care costs of certain retirees.

As of December 31, 2019 , assets in the post-retirement trusts had been substantially depleted and had a fair value of $13 million (a portion of which was comprised of investments with restricted liquidity), which has significantly limited CenturyLink's ability to continue paying benefits from the trusts;

however, CenturyLink plans to continue paying certain benefits from the trusts.

Benefits not paid through the trusts are expected to be paid directly by CenturyLink with available cash.

The affiliate obligations, net in current and noncurrent liabilities on our consolidated balance sheets primarily represents the cumulative allocation of expense, net of payments, associated with QCII’s pension plans and post-retirement benefits plans prior to the plan mergers.

Benefits paid by Lumen's qualified pension plan are paid through a trust that holds all of the plan's assets.

Based on current laws and circumstances, Lumen Technologies does not expect any contributions to be required for their qualified pension plan during 2021.

The amount of required contributions to Lumen's qualified pension plan will depend on a variety of factors, most of which are beyond their control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations.

Lumen Technologies occasionally makes voluntary contributions in addition to required contributions.

Although Lumen Technologies believes it is not required to make contributions to the pension plan in 2021 based on current laws and circumstances, it could make voluntary contributions.

Substantially all of Lumen's post-retirement health care and life insurance benefits plans are unfunded and are paid by Lumen Technologies with available cash, In the past Lumen Technologies has maintained several trusts that helped cover some of these costs, but the trust funds are almost completely depleted and currently cover an immaterial amount of Lumen's annual plan costs.

The affiliate obligations, net in current and noncurrent liabilities on our consolidated balance sheets primarily represents the cumulative allocation of expenses, net of payments, associated with QCII's pension plans and post-retirement benefits plans prior to the plan mergers.

In 2015, we agreed to a plan to settle the outstanding pension and post-retirement affiliate obligations, net balance with QCII over a 30 year term.

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For the year ended 2021, we expect to make aggregate settlement payments of $66 million to QCII under the plan.

For 2019, CenturyLink's estimated annual long-term rates of return were 6.5% and 4% for the pension plan trust assets and post-retirement plans' trust assets based on the assets held and net of expected fees and administrative costs.

For 2020, Lumen's expected annual long-term rates of return were 6.0% and 4.0% for the pension plan trust assets and post-retirement plans' trust assets based on the assets held and net of expected fees and administrative costs.

For 2021, our expected annual long-term rates on these assets are 5.5% and 4.0%, respectively.

However, actual returns could be substantially different.

For additional information, see "Risk Factors—Risks Affecting Our Liquidity and Capital Resources—Adverse changes in the value of assets or obligations associated with CenturyLink's qualified pension plan could negatively impact CenturyLink's liquidity, which may in turn affect our business and liquidity" in Item 1A of Part I of this report.

Connect America Fund

As a result of accepting CAF II support payments, we are receiving substantial support payments under a program that will soon lapse.

Moreover, we must meet certain specified infrastructure buildout requirements in 13 states.

In order to meet these specified infrastructure buildout requirements, we may be obligated to make substantial capital expenditures.

See "Capital Expenditures" above.

For additional information on the FCC's CAF program and a proposed replacement program, see "Business—Regulation" in Item 1 of Part I of this report.

Historical Information

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

Connect America Fund & Rural Digital Opportunity Fund

Since 2015, Lumen has been receiving over $500 million annually through Phase II of the CAF, a program that will end this year.

In connection with CAF funding, we and Lumen must meet certain specified infrastructure buildout requirements in 13 states which requires substantial capital expenditures.

While we are on track to meet the requirement this year, we cannot provide any assurances that we will be able to timely meet our mandated buildout requirements.

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

In early 2020, the FCC created 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 on these programs, see "Business—Regulation" in Item 1 of Part I of this report and see "Risk Factors—Financial Risks" in Item 1A of Part I of this report.

Historical Cash Flow Information

The following tables summarize our consolidated cash flow activities:

Years Ended December 31,

Years Ended December 31, Change

(Dollars in millions)

Net cash provided by operating activities

Net cash used in investing activities

$ 3,071 3,332 (261)

Net cash provided by (used in) investing activities 754 (1,723) 2,477

Net cash used in financing activities

(3,814) (1,612) 2,202

Operating Activities

Net cash provided by operating activities decreased by $459 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to a decrease in other long-term liabilities and accounts payable.

Net cash provided by operating activities decreased by $261 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to a decrease in other current liabilities and reductions of other noncurrent liabilities.

Cash provided by operating activities is subject to variability period over period as a result of the timing of the collection of receivables and payments related to interest expense, accounts payable, and payroll and bonuses.

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Investing Activities

Net cash used in investing activities increased by $570 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to an increase in advances to affiliates.

Net cash provided by (used in) investing activities changed by $2.5 billion for the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to funds received from affiliates, used to repay our senior notes, which in turn reduced our advances to affiliates balance.

Financing Activities

Net cash used in financing activities decreased by $1.0 billion for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to the decrease in payments of debt and partially offset with an increase in dividends paid to QSC in the amount of $325 million.

In the third quarter of 2018, Qwest Corporation redeemed $1.3 billion of notes payable.

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 outstanding debt securities.

Net cash used in financing activities increased by $2.2 billion for the year ended December 31, 2020 as compared to the year ended December 31, 2019 primarily due to higher repayments of long-term debt partially offset by advances from affiliates.

See Note 6—Long-Term Debt and Note Payable - Affiliate for additional information on our outstanding debt securities and financing activities.

Other Matters

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See Note 16—Commitments, Contingencies and Other Items for additional information.

CenturyLink and its affiliates are involved in several legal proceedings to which we are not a party that, if resolved against them, could have a material adverse effect on their business and financial condition.

As a wholly-owned subsidiary of CenturyLink, our business and financial condition could be similarly affected.

You can find descriptions of these legal proceedings in CenturyLink's quarterly and annual reports filed with the SEC.

Lumen Technologies is involved in several legal proceedings to which we are not a party that, if resolved against it, could have a material adverse effect on its business and financial condition.

As a wholly owned subsidiary of Lumen Technologies, our business and financial condition could be similarly affected.

You can find descriptions of these legal proceedings in Lumen's quarterly and annual reports filed with the SEC.

Because we are not a party to any of the matters, we have not accrued any liabilities for these matters as of December 31, 2020.

As of December 31, 2019 , we are exposed to market risk from changes in interest rates on our variable rate term loan and amended and restated revolving promissory note.

As of December 31, 2020, we were exposed to market risk from changes in interest rates on our variable rate long-term debt obligations, amended and restated revolving promissory note and fluctuations in certain foreign currencies.

We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.

Management periodically reviews our exposure to interest rate fluctuations and periodically implements strategies to manage the exposure.

From time to time, we have used derivative instruments to (i) lock-in or swap our exposure to changing variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates.

From time to time, we have used derivative instruments to (i) swap our exposure to changing or variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates.

As of December 31, 2020, we had no such instruments outstanding.

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A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease our annual pre-tax earnings by $2 million.

At December 31, 2019 , we had approximately $1.069 billion in debt, which was owed to an affiliate of our ultimate parent, CenturyLink.

The note payable-affiliate bears interest at a variable rate, which is based on a weighted average per annum interest rate of CenturyLink's outstanding borrowings for the interest period and therefore is exposed to potential interest rate risk.

At December 31, 2020, we had approximately $1.13 billion in debt, which was owed to an affiliate of our ultimate parent, Lumen Technologies, Inc.

The note payable-affiliate bears interest at a variable rate, which is based on a weighted average per annum interest rate of Lumen's outstanding borrowings for the interest period and therefore is exposed to potential interest rate risk.

Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks.

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These analyses only incorporate the risk exposures that existed at December 31, 2020.

Off-Balance Sheet Arrangements

As of the date of this report, we have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we do not engage in leasing, hedging or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the consolidated financial statements, (ii) disclosed in Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report, or in the Future Contractual Obligations table included in this Item 7 of Part II above, or (iii) discussed under the heading "Market Risk" above.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis