What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-24 · 112 added, 116 removed, 201 unchanged (53% of the section changed)

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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 facilities-based communications company engaged primarily in providing an array of communications products and services to our business and mass markets customers.

We are an integrated facilities-based communications company focused on providing our business and mass markets customers with a broad array of communications products and services.

Our specific products and services are detailed in Note 3—Revenue Recognition and below under the heading "Operations - Products and Services" in Item 1 of Part I of this report.

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.

As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates.

As part of these cash management or loan 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.

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• Voice and Other , which include primarily local voice services, private line, and other legacy services.

This category also includes CAF II support payments and other operating revenue.

These support payments are government subsidies designed to compensate us for providing certain broadband and telecommunications services in high-cost areas or at discounts to low-income, educational, and healthcare customers.

During the twelve months ended December 31, 2021, we recorded approximately $145 million of revenue from the CAF II program that ended December 31, 2021.

• Fiber Infrastructure Services , which include high speed fiber-based and lower speed DSL-based broadband services, and optical network services;

This category also includes federal and state support payments.

These support payments are government subsidies designed to compensate us for providing certain broadband and communications services in high-cost areas or at discounts to low-income, educational, and healthcare customers.

This revenue included the FCC's Connect America Fund Phase II ("CAF II") support payments, which we received through December 31, 2021, when the program ended;

• Fiber Infrastructure Services , which include high speed, fiber-based and lower speed DSL-based broadband services to residential and small business customers, and optical network services;

• IP and Data Services , which consist primarily of Ethernet services;

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In addition, we provide to our affiliates application 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.

From time to time, we may change the categorization of our products and services.

Trends Impacting Our Operations

Our consolidated operations have been, and are expected to continue to be, impacted by the following company-wide trends:

Our consolidated operations have been, and will continue to be, impacted by the following company-wide trends:

• Customers' demand for automated products and services and competitive pressures will require that we continue to invest in new technologies and automated processes to improve the customer experience and reduce our operating expenses.

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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 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.

• Changes in customer preferences and in the regulatory, technological and competitive environment are (i) significantly reducing demand for our more mature service offerings, commoditizing certain of our other offerings, or resulting in volume or rate reductions for other of our offerings and (ii) also creating certain opportunities for us arising out of increased demand for lower latency provided by Edge computing and for faster and more secure data transmissions.

• 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.

• Declines in our traditional wireline services and other more mature offerings have necessitated right-sizing our cost structures to remain competitive.

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.

To date, 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 mass markets 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, beginning in the second half of 2020 and continuing into early 2022, we have rationalized our leased footprint and ceased the use of 6 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 ability to sublease the properties.

As a result, we incurred accelerated lease costs of approximately $1 million and $31 million for the years ended December 31, 2021 and 2020, respectively.

In conjunction with our plans to improve long-term profitability, we expect to continue our real estate rationalization efforts and incur additional costs during 2022.

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, (iv) operational challenges resulting from shortages of semiconductors and certain other supplies that we use in our business, and (v) delays in our cost transformation initiatives.

We have also experienced delayed decision-making by certain of our customers.

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

However, we continue to monitor global disruptions and work with our vendors to mitigate supply chain risks.

We intend to reopen our offices in 2022 under a "hybrid" working environment, which will permit some of our employees the flexibility to work remotely at least some of the time for the foreseeable future.

The amount of support payments we receive from governmental agencies has decreased substantially since December 31, 2021.

Inflation during 2021 and 2022 placed downward pressure on our margins and likely contributed to delayed decision-making by certain of our customers, which are trends that will likely continue to impact us as long as inflation rates remain elevated.

These and other developments and trends impacting our operations are discussed elsewhere in this Item 7.

Impact of COVID-19 Pandemic and the Macroeconomic Environment

Societal, governmental and macroeconomic changes arising out of the COVID-19 pandemic have impacted us, our customers and our business in several ways since March 2020.

Beginning in the second half of 2020 and continuing into 2022, we rationalized our leased footprint and ceased using 6 leased property locations that were underutilized.

We did not further rationalize our lease footprint or incur material accelerated lease costs during the year ended December 31, 2022.

However, in conjunction with our plans to continue to reduce costs, we expect to continue our real estate rationalization efforts and expect to incur additional accelerated lease costs in future periods.

Additionally, as discussed further elsewhere herein, the pandemic and macroeconomic changes arising therefrom have resulted in (i) increases in certain revenue streams and decreases in others, (ii) increases in overtime expenses during 2020 and 2021, (iii) operational challenges resulting from shortages of certain components and other supplies that we use in our business, (iv) delays in our cost transformation initiatives, and (v) delayed decision-making by certain of our customers.

None of these effects, individually or in the aggregate, have to date materially impacted our financial performance or financial position.

The COVID-19 pandemic and other factors have led to increased fiber construction demand combined with increased construction labor rates that have reduced the number of fiber buildout projects that met our internal payback requirement.

Thus far, we believe these factors have contributed to a delay in our Quantum Fiber buildouts, but otherwise have not had a significant impact on our business results.

We reopened our offices in April 2022 under a "hybrid" working environment, which will permit some of our employees the flexibility to work remotely at least some of the time for the foreseeable future.

If any of the above-listed factors intensify, our financial results could be materially impacted in a variety of ways, including by increasing our expenses, decreasing our revenues, further delaying our network expansion plans or otherwise interfering with our ability to deliver products and services.

For additional information on the impacts of the pandemic, see Item 1A of this report.

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Operating income 2,755 3,108

Other expense, net (292) (409)

Total other expense, net (165) (292)

Income before income taxes 2,590 2,816

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Total operating revenue decreased by $502 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

The decrease in operating revenue was primarily driven by decreases in our voice, traditional broadband, Ethernet and private line services, slightly offset by growth in fiber broadband services.

The decrease was primarily due to (i) decreases in our voice, traditional broadband, and Ethernet services and (ii) a $132 million reduction in CAF II program revenue for the year ended December 31, 2022 compared to 2021 due to the conclusion of the CAF II program on December 31, 2021.

These decreases were slightly offset by growth in fiber broadband revenues.

Affiliate services revenue also decreased due to a reduction in the number of employees providing services to our affiliates.

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Selling, general and administrative

354 564 (37) %

Operating expenses-affiliates

734 758 (3) %

Depreciation and amortization

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Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers.

These expenses include:

employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees);

These expenses include employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees);

facilities expenses (which include third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers);

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equipment expenses (such as modem 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.

costs incurred in connection with our participation in 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);

and certain legal and other expenses directly related to our operations.

Cost of services and products (exclusive of depreciation and amortization) decreased by $76 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

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, lower network expenses and lower real estate and accelerated lease expenses.

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.

Selling, General and Administrative

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and other selling, general and administrative expenses.

Selling, general and administrative expenses decreased by $210 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to a $75 million gain on the sale of land in the third quarter 2021.

Additionally, the decrease in expense was driven by lower bad debt expense, lower marketing and advertising costs and lower property taxes.

Selling, general and administrative expenses increased by $100 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to a gain on sale of assets during the year ended December 31, 2021 and an increase during 2022 in bad debt expense, partially offset by lower property taxes.

Operating Expenses-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 increased by $30 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to an increase in the level of services provided to us by our affiliates.

Operating expenses-affiliates decreased by $24 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to a decrease in the level of services provided to us by our affiliates.

Depreciation and Amortization

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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 $1 million, for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Depreciation expense decreased by $37 million from the impact of annual rate depreciable life changes, which were offset primarily due to an increase of $32 million due to net growth in depreciable assets.

Amortization expense decreased by $305 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to a decrease of $292 million as a result of certain customer relationship intangible assets becoming fully amortized at the end of the first quarter of 2021 and a $10 million decrease associated with annual rate amortizable life changes of software for the period.

Depreciation expense decreased by $52 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a decrease of $90 million resulting from the early retirement of certain copper-based infrastructure during the fourth quarter of 2021.

This decrease was partially offset by an increase of $31 million due to net growth in depreciable assets and an increase of $6 million resulting from annual rate depreciable life changes.

Amortization expense decreased by $97 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a decrease of $88 million resulting from customer relationships becoming fully amortized at the end of the first quarter of 2021 and a decrease of $10 million resulting from annual rate depreciable life changes.

Other Consolidated Results

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Interest expense $ (112) (181) (38) %

Interest expense - affiliates, net (105) (74) 42 %

Other (expense) income, net (6) (56) (89) %

Interest expense - affiliate, net (60) (105) (43) %

Other income (expense), net 7 (6) nm

Total other expense, net

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Income tax expense $ 671 709 (5) %

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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.

Interest Expense

Interest expense decreased by $69 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

This decrease was primarily due to the decrease in average long-term debt from $4.6 billion to $2.7 billion, and the decrease in our average interest rate from 6.56% to 6.37%.

This decrease was primarily due to the decrease in average long-term debt from $2.7 billion to $2.2 billion, which was slightly offset by the increase in our average interest rate from 6.37% to 6.50%.

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

Interest expense - affiliates, net increased by $31 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

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

These outstanding advances from our affiliates were settled prior to the end of the third quarter 2021.

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

Interest Expense - Affiliate, Net

Interest expense - affiliate, net decreased by $45 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

The decrease in interest expense - affiliate, net was primarily due to the repayment of the outstanding principal and interest on the Note Payable - Affiliate on September 30, 2022.

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

Other (Expense) Income, Net

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Years Ended December 31,

2021 2020 % Change

(Dollars in millions)

Loss on debt extinguishment $ — (8)

Interest income, affiliate — 1 nm

Other 2 6 (67) %

Total other (expense) income, net $ (6) (56) (89) %

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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 in both periods relates to the senior note redemptions discussed in Note 6—Long-Term Debt and Note Payable - Affiliate.

Total other income (expense), net $ 7 (6)

The loss on debt extinguishment for the year ended December 31,2021 relates to the senior note redemptions discussed in Note 6—Long-Term Debt and Note Payable - Affiliate.

Income Tax Expense

Income tax expense for the year ended December 31, 2021, was $709 million, or an effective tax rate of 25.2%, compared to $595 million, or an effective tax rate of 25.8%, for the year ended December 31, 2020.

For the years ended December 31, 2022 and 2021, our effective income tax rate was 25.9% and 25.2%, respectively.

For additional information on income taxes, see Note 12—Income Taxes.

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These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions or estimates.

We believe that the estimates, judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time they were made.

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

We believe that our estimates, judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time they were made.

However, actual results may differ from those estimates, and these differences may be material.

Affiliate Transactions

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As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates.

As part of these cash management or loan 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.

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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.

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 to the extent permitted under applicable debt covenants, 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 and improve our service offerings.

Lumen Technologies 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 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.

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

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, regulatory considerations (such governmentally mandated infrastructure buildout requirements), and the availability of requisite supplies, labor and permits.

Our capital expenditures continue to be focused on enhancing network operating efficiencies, supporting new service developments, and expanding our fiber network, including our Quantum Fiber buildout plan.

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

As of December 31, 2021, we owed a face amount of approximately $2.2 billion aggregate outstanding indebtedness, excluding (i) finance leases, unamortized premiums, net, and unamortized debt issuance costs, and (ii) our note payable-affiliate.

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

As of December 31, 2022, we had a face amount of approximately $2.2 billion aggregate outstanding indebtedness (excluding finance leases, unamortized premiums, net, unamortized debt issuance costs, and Note Payable - Affiliate).

None of our outstanding debt is due in the next 12 months (excluding finance lease obligations).

Subject to market conditions, and to the extent permitted under applicable debt covenants, Qwest Corporation may issue debt securities 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:

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

Agency Credit Ratings

Standard & Poor's BBB-

Standard & Poor's BB

Moody's Investors Service, Inc.

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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.

Any future changes in the senior unsecured or secured debt ratings of us or our subsidiaries could impact our access to capital or borrowing costs.

With the recent downgrade of our credit ratings we may find it more difficult to borrow on favorable terms, or at all.

See "Risk Factors—Financial Risks" in Item 1A of Part I of this report.

From time to time over the past couple of years, we have engaged in various refinancings, redemptions, tender offers, open market purchases and other transactions designed to reduce our consolidated indebtedness, lower our interest costs, improve our financial flexibility or otherwise enhance our debt profile.

We plan to continue to pursue similar transactions in the future.

Whether and when we implement any additional such transactions depends on a wide variety of factors, including without limitation market conditions, our upcoming debt maturities, and our cash requirements.

There is no guarantee that we will be successful in implementing any such transactions or attaining our stated objectives.

We may not disclose these transactions in advance, unless required by applicable law or material in nature or amount.

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 additional information.

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.

The Note Payable - Affiliate (as defined in Note 6—Long-Term Debt and Note Payable - Affiliate) between Qwest Corporation and an affiliate of our ultimate parent company, Lumen Technologies, Inc.

("Lender"), was amended and restated on June 30, 2022.

The Note Payable - Affiliate, as amended, provides Qwest Corporation with a funding commitment of up to $2.0 billion.

Any outstanding principal balance owed by us under the Note Payable - Affiliate and the accrued interest thereon is due and payable on demand, but if no demand is made, then on the maturity date.

The Note Payable - Affiliate has an initial maturity date of June 30, 2027, but will automatically renew for an unlimited number of successive twelve month periods unless the Lender provides notice of its intent not to renew at least 30 days prior to the initial maturity date or each subsequent maturity date.

Interest on the Note Payable - Affiliate 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, 2021, the weighted average interest rate was 4.800%.

As of December 31, 2021 and December 31, 2020, the Intercompany Note is reflected on our consolidated balance sheets as a current liability under note payable - affiliate.

As of December 31, 2021 and 2020, $29 million and $28 million of accrued interest are reflected in other current liabilities on our consolidated balance sheets, respectively.

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

The Note Payable - Affiliate is reflected on our consolidated balance sheets as a current liability.

On September 30, 2022, Qwest Corporation repaid the outstanding principal and interest on the Note Payable - Affiliate of approximately $1.2 billion and $43 million, respectively.

As of December 31, 2022, there was no outstanding principal or accrued interest under the Note Payable - Affiliate.

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

Future Contractual Obligations

Our estimated future obligations as of December 31, 2022 include both current and long term obligations.

Related to debt, as noted in Note 6—Long-Term Debt And Note Payable - Affiliate, we have long-term obligation of $2.2 billion, with no current maturities and $1.2 billion of obligations related to note payable - affiliate, as discussed above, all of which is classified as current.

Under our operating leases as noted in Note 4—Leases, we have a current obligation of $36 million and a long-term obligation of $68 million.

Related to debt, as noted in Note 6—Long-Term Debt and Note Payable - Affiliate, we have long-term obligations of $2.2 billion, with $2 million of current maturities and no obligations related to note payable - affiliate, as discussed above.

Under our operating leases as noted in Note 4—Leases, we have a current obligation, including interest, of $24 million and a long-term obligation of $66 million.

As noted in Note 14—Commitments, Contingencies and Other Items, we have a current obligation related to right-of-way agreements and purchase commitments of $59 million and a long-term obligation of $139 million.

Additionally, we have a current obligation for asset retirement obligations of $6 million and a long-term obligation of $26 million.

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

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

For additional information, see (i) our consolidated statements of cash flows and stockholder's equity and (ii) Note 17—Stockholder's Equity.

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

At December 31, 2021, the accounting unfunded status of Lumen's qualified and non-qualified defined benefit pension plans and qualified post-retirement benefit plans was approximately $1.1 billion and $2.8 billion, respectively.

See Note 9—Employee Benefits and Note 9—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, 2021 for additional information about our and Lumen's pension and post-retirement benefit arrangements.

At December 31, 2022, the accounting unfunded status of Lumen's qualified and non-qualified defined benefit pension plans and qualified post-retirement benefit plans was approximately $615 million and $2.0 billion, respectively.

See Note 9—Employee Benefits to the 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 Lumen's annual report on Form 10-K for the year ended December 31, 2022 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.

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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.

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.

The affiliate obligations, net in other within current liabilities 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.

Under the plan, payments are scheduled to be made on a monthly basis.

For the year ended December 31, 2021, we made settlement payments of $46 million to QCII in accordance with the plan.

For the year ended December 31, 2022, we made net settlement payments of $61 million to QCII in accordance with the plan.

Changes in the affiliate obligations, net are reflected in operating activities on our consolidated statements of cash flows.

For the year ended 2023, we expect to make aggregate settlement payments of $57 million to QCII under the plan.

For 2021, Lumen's expected annual long-term rate of return on the pension plan assets, net of administrative expenses was 5.5%.

For 2022, Lumen's expected annual long-term rate of return on these assets are 5.5%.

For 2022, Lumen's expected annual long-term rate of return on pension plan assets, net of administrative expenses was 5.5%.

For 2023, Lumen's expected annual long-term rate of return on these assets is 6.5%.

However, actual returns could be substantially different.

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 approximately $500 million annually through Phase II of the CAF, a program that ended for Lumen on December 31, 2021.

To receive this CAF funding, we were required to meet certain specified infrastructure buildout requirements in 13 states by the end of 2021 which required substantial capital expenditures.

In early 2020, the FCC created the RDOF which is a new federal support program designed to replace the CAF Phase II program.

Federal Broadband Support Programs

Between 2015 and 2021, Lumen received approximately $500 million annually through CAF Phase II, a program that ended on December 31, 2021.

Our share of this CAF Phase II funding was approximately $145 million annually.

In connection with the CAF II funding, we were required to meet certain specified infrastructure buildout requirements in 13 states by the end of 2021, which required substantial capital expenditures.

In the first quarter of 2022, we recognized $13 million of previously deferred revenue related to the conclusion of the CAF program based upon our final buildout and filing submissions.

The government has the right to audit our compliance with the CAF program and the ultimate outcome of any remaining examinations is unknown, but could result in a liability to us in excess of our reserve accruals established for these matters.

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.

We expect our support payments under the RDOF Phase I program will begin soon after receipt of the FCC's anticipated approval of our pending application.

Federal officials have proposed changes to the current programs and laws that could impact us, including proposals designed to increase broadband access, increase competition among broadband providers, lower broadband costs and re-adopt "net neutrality" rules similar to those adopted under the Obama Administration.

In November of 2021, the U.S.

Congress enacted legislation that appropriated $65 billion to improve broadband affordability and access, primarily through federally funded state grants.

As of the date of this report, U.S.

Department of Commerce is still developing guidance regarding these grants, so it is premature to speculate on the potential impact of this legislation on us.

Lumen Technologies started receiving support payments under this program in the second quarter of 2022, but our share of these payments is not material.

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, Change

Federal officials have proposed changes to current programs and laws that could impact us, including proposals designed to increase broadband access, increase competition among broadband providers, lower broadband costs and re-adopt "net neutrality" rules similar to those adopted under the Obama Administration.

In November 2021, the U.S.

Congress enacted legislation that appropriated $65 billion to improve broadband affordability and access, primarily through federally funded state grants.

As of the date of this report, various state and federal agencies are continuing to take steps to make this funding available to eligible applicants, including us.

It remains premature to speculate on the potential impact of this legislation on us.

Cash Flow Activities

The following table summarizes our consolidated cash flow activities:

Years Ended December 31, (Decrease) / Increase

(Dollars in millions)

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$ 2,626 3,033 (407)

Net cash (used in) provided by investing activities (751) 754 (1,505)

Net cash used in investing activities (1,349) (751) 598

Net cash used in financing activities

1 unchanged sentence

Operating Activities

Net cash provided by operating activities decreased by $38 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to lower collections on accounts receivable.

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.

Net cash provided by operating activities decreased by $407 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to lower net income adjusted for non-cash items and partially offset by increases related to changes in working capital.

Cash provided by operating activities is subject to variability period over period as a result of timing differences, including with respect to collection of receivables and payments of interest expense, accounts payable and bonuses.

For additional information about our operating results, see "Results of Operations" above.

Investing Activities

Net cash (used in) provided by investing activities changed by $1.5 billion for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to funds received from affiliates during 2020 that were used to repay a portion of our senior notes, which in turn reduced our advances to affiliates balance during 2020.

Additionally, an increase to our advances to affiliates balance in 2021 resulted in a further increase to net cash used in investing activities.

This activity was slightly offset by decreased capital expenditures.

Net cash used in investing activities increased by $598 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to an increase in advances to affiliates and an increase in capital expenditures.

Financing Activities

Net cash used in financing activities decreased by $1.5 billion for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to lower repayments of long-term debt and lower dividends paid to our parent, partially offset by an increase in net repayments of advances from affiliates.

Net cash used in financing activities decreased by $1.0 billion for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to a decrease in dividends paid to our parent and a decrease in repayments of advances from affiliates and third-party debt.

The decreases were partially offset by our repayment of the Note Payable - Affiliate.

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

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As of December 31, 2022, 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.

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) 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, 2021, we had no such instruments outstanding.

We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities.

As of December 31, 2021, we did not hold or issue derivative financial instruments for trading or speculative purposes.

At December 31, 2022, we had approximately $2.0 billion (excluding finance lease and other obligations) of long-term debt outstanding which bears interest at fixed rates and is therefore not exposed to interest rate risk.

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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, 2021, we had approximately $1.2 billion in debt, which was owed to an affiliate of our ultimate parent, Lumen Technologies, Inc.

At December 31, 2022, we had no debt which was owed to an affiliate of our ultimate parent, Lumen Technologies, Inc under the note payable-affiliate.

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.

3 unchanged sentences

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