QWEST CORP 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 2024, we were not exposed to any significant market risk from changes in interest rates, as we did not have variable rate long-term debt obligations, and we have immaterial exposure to fluctuations in certain foreign currencies. 44 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholder Qwest Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Qwest Corporation and subsidiaries (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations, cash flows, and stockholder’s equity for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to those charged with governance and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Testing of revenue As discussed in Note 3 to the consolidated financial statements, the Company recorded $5.5 billion of operating revenues for the year ended December 31, 2024. The processing and recording of revenue are reliant upon multiple information technology (IT) systems. We identified the evaluation of the sufficiency of audit evidence over revenue as a critical audit matter. Complex auditor judgment was required in evaluating the sufficiency of audit evidence over revenue due to the large volume of data and the number and complexity of the revenue accounting systems. Specialized skills and knowledge were needed to test the IT systems used for the processing and recording of revenue. 45 The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the processing and recording of revenue, including the IT systems tested. We evaluated the design and tested the operating effectiveness of certain internal controls related to the processing and recording of revenue. This included manual and automated controls over the IT systems used for the processing and recording of revenue. For a selection of transactions, we compared the amount of revenue recorded to a combination of Company internal data, executed contracts, and other relevant third-party data. In addition, we involved IT professionals with specialized skills and knowledge who assisted in the design and performance of audit procedures related to certain IT systems used by the Company for the processing and recording of revenue. We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the relevance and reliability of evidence obtained. /s/ KPMG LLP We have served as the Company’s auditor since 2002. Denver, Colorado February 20, 2025 46 QWEST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2024 2023 2022 (Dollars in millions) OPERATING REVENUE Operating revenue $ 3,259 3,756 4,155 Operating revenue - affiliates 2,249 2,159 2,294 Total operating revenue 5,508 5,915 6,449 OPERATING EXPENSES Cost of services and products (exclusive of depreciation and amortization) 1,505 1,608 1,646 Selling, general and administrative 438 478 454 Operating expenses - affiliates 761 796 734 Depreciation and amortization 753 823 860 Goodwill impairment — 2,405 — Total operating expenses 3,457 6,110 3,694 OPERATING INCOME (LOSS) 2,051 ( 195 ) 2,755 OTHER EXPENSE Interest expense ( 62 ) ( 95 ) ( 112 ) Interest income (expense) - affiliate, net 24 15 ( 60 ) Other income, net 1 5 7 Total other expense, net ( 37 ) ( 75 ) ( 165 ) INCOME (LOSS) BEFORE INCOME TAXES 2,014 ( 270 ) 2,590 Income tax expense 527 561 671 NET INCOME (LOSS) $ 1,487 ( 831 ) 1,919 See accompanying notes to consolidated financial statements. 47 QWEST CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2024 2023 (Dollars in millions) ASSETS CURRENT ASSETS Cash and cash equivalents $ 26 10 Accounts receivable, less allowance of $ 29 and $ 34 227 261 Advances to affiliates 902 — Other 152 144 Total current assets 1,307 415 Property, plant and equipment, net of accumulated depreciation of $ 8,910 and $ 8,239 8,865 8,700 GOODWILL AND OTHER ASSETS Goodwill 6,955 6,955 Other intangible assets, net 84 103 Other, net 151 164 Total goodwill and other assets 7,190 7,222 TOTAL ASSETS $ 17,362 16,337 LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 239 1 Accounts payable 221 362 Advances from affiliates — 61 Accrued expenses and other liabilities Salaries and benefits 130 130 Income and other taxes 106 96 Other 117 121 Current portion of deferred revenue 153 162 Total current liabilities 966 933 LONG-TERM DEBT 1,688 2,156 DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes, net 1,336 1,318 Affiliate obligations, net 444 495 Other 685 679 Total deferred credits and other liabilities 2,465 2,492 COMMITMENTS AND CONTINGENCIES (Note 14) STOCKHOLDER'S EQUITY Common stock - one share without par value, owned by Qwest Services Corporation 10,050 10,050 Retained earnings 2,193 706 Total stockholder's equity 12,243 10,756 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 17,362 16,337 See accompanying notes to consolidated financial statements. 48 QWEST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2024 2023 2022 (Dollars in millions) OPERATING ACTIVITIES Net income (loss) $ 1,487 ( 831 ) 1,919 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 753 823 860 Goodwill impairment — 2,405 — Deferred income taxes 37 22 20 Provision for uncollectible accounts 45 66 60 Accrued interest on affiliate note — — 28 Changes in current assets and liabilities: Accounts receivable ( 11 ) 20 ( 68 ) Accounts payable 14 14 ( 29 ) Accrued income and other taxes 10 7 ( 5 ) Other current assets and liabilities, net ( 49 ) ( 97 ) ( 26 ) Changes in other noncurrent assets and liabilities, net ( 8 ) 17 ( 28 ) Changes in affiliate obligations, net ( 55 ) ( 62 ) ( 90 ) Other, net ( 29 ) 5 ( 15 ) Net cash provided by operating activities 2,194 2,389 2,626 INVESTING ACTIVITIES Capital expenditures ( 1,047 ) ( 1,062 ) ( 849 ) Changes in advances to affiliates ( 902 ) 569 ( 576 ) Proceeds from sale of property, plant and equipment and other assets 58 27 76 Net cash used in investing activities ( 1,891 ) ( 466 ) ( 1,349 ) FINANCING ACTIVITIES Payment of note payable - affiliate — — ( 1,215 ) Payments of long-term debt ( 226 ) ( 2 ) ( 1 ) Dividends paid — ( 1,980 ) — Changes in advances from affiliates ( 61 ) 61 ( 55 ) Net cash used in financing activities ( 287 ) ( 1,921 ) ( 1,271 ) Net increase in cash, cash equivalents and restricted cash 16 2 6 Cash, cash equivalents and restricted cash at beginning of period 12 10 4 Cash, cash equivalents and restricted cash at end of period $ 28 12 10 Supplemental cash flow information: Income taxes paid, net $ ( 497 ) ( 509 ) ( 673 ) Interest paid, including affiliate interest (net of capitalized interest of $ 75 , $ 54 and $ 29 ) ( 63 ) ( 97 ) ( 113 ) Supplemental noncash information of financing activities: Dividend to parent in exchange for advances to affiliates $ — ( 1,980 ) — Cash, cash equivalents and restricted cash: Cash and cash equivalents $ 26 10 8 Restricted cash - noncurrent 2 2 2 Total $ 28 12 10 See accompanying notes to consolidated financial statements. 49 QWEST CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY Years Ended December 31, 2024 2023 2022 (Dollars in millions) COMMON STOCK Balance at beginning of period $ 10,050 10,050 10,050 Balance at end of period 10,050 10,050 10,050 RETAINED EARNINGS Balance at beginning of period 706 3,517 1,598 Net income (loss) 1,487 ( 831 ) 1,919 Dividends declared and paid to Qwest Services Corporation — ( 1,980 ) — Balance at end of period 2,193 706 3,517 TOTAL STOCKHOLDER'S EQUITY $ 12,243 10,756 13,567 See accompanying notes to consolidated financial statements. 50 QWEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS References in this report on Form 10-K, for all periods presented, to "QC," "Qwest," "we," "us," "the Company" and "our" refer to Qwest Corporation and its consolidated subsidiaries, unless the context otherwise requires. References to "Lumen Technologies" or "Lumen" refer to our ultimate parent company, Lumen Technologies, Inc. and its consolidated subsidiaries, including Level 3 Parent, LLC ("Level 3") and Level 3 Financing, Inc. ("Level 3 Financing"). Note 1—Background and Summary of Significant Accounting Policies General We are a networking company with the goal of connecting people, data, and applications quickly, securely and effortlessly. We are unleashing the world's digital potential by providing a broad array of integrated products and services to our domestic and global Business customers and our domestic Mass Markets customers. Our specific products and services are detailed in Note 3—Revenue Recognition of this report. We generate the majority of our total consolidated operating revenue from services provided in the 14 -state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area. Basis of Presentation The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. Transactions with our non-consolidated affiliates (Lumen Technologies and its other subsidiaries, referred to herein as affiliates) have not been eliminated. We reclassified certain prior period amounts to conform to the current period presentation, including our revenue by product and service categories. See Note 3—Revenue Recognition for additional information. These changes had no impact on total operating revenue, total operating expenses or net income (loss) for any period. Operating Expenses Our current definitions of operating expenses are as follows: • 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); facilities expenses (which include third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses (such as data integration and modem expenses); and other expenses directly related to our operations; and • Selling, general and administrative expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; property and other operating taxes and fees; external commissions; legal expenses associated with general matters; bad debt expense; and other selling, general and administrative expenses. These expense classifications may not be comparable to those of other companies. 51 Segments Our operations are integrated into and reported as part of Lumen Technologies. Lumen's CEO is our chief operating decision maker ("CODM") and reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the SEC. Our CODM assesses performance and allocates resources in conjunction with and based on the operations of Lumen Technologies. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we have one reportable segment. Summary of Significant Accounting Policies Use of Estimates Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we make when accounting for specific items and matters are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can materially affect the reported amounts of assets, liabilities and components of stockholder's equity as of the dates of the consolidated balance sheets, as well as the reported amounts of revenue, expenses and components of cash flows during the periods presented in our other consolidated financial statements. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 12—Income Taxes and Note 14—Commitments, Contingencies and Other Items for additional information. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable. For matters related to income taxes, if we determine the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. We do not recognize any portion of an uncertain tax position if the position has less than a 50% likelihood of being sustained. We recognize interest on the amount of unrecognized benefit from uncertain tax positions. For all of these and other matters, actual results could differ materially from our estimates. Revenue Recognition We earn most of our consolidated revenue from contracts with customers, primarily through the provision of communications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606. We also earn revenue from leasing arrangements (primarily fiber capacity agreements) and governmental subsidy payments, neither of which are accounted for under ASC 606. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model: • Identification of the contract with a customer; • Identification of the performance obligations in the contract; • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when, or as, we satisfy a performance obligation. 52 We provide an array of communications services to business and residential customers, including local voice, VPN, Ethernet, data, broadband, private line (including special access), network access, transport, voice, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global, enterprise, wholesale, government, and small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business. We recognize revenue for services when we provide the applicable service or when control of a product is transferred. Recognition of certain payments received in advance of services being provided is deferred. These advance payments may include design, planning, and engineering fees, as well as certain activation and installation charges. If these advance payments are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which typically ranges from one to five years depending on the service. In most cases, termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term. For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis. In certain cases, customers may be permitted to modify their contracts. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, as a termination of the existing contract and creation of a new contract, or as a change to the existing contract. Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The revenue associated with each performance obligation is then recognized as earned. We periodically sell transmission capacity on our network. These transactions are generally structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years. In most cases, we account for the cash consideration received on transfers of transmission capacity as ASC 606 revenue, which is adjusted for the time value of money and is recognized ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is accounted for as non-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our transmission capacity assets for other non-owned transmission capacity assets. In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods and services used to fulfill the performance obligations associated with the transaction. We have service level commitments pursuant to contracts with certain of our customers. To the extent that we determine that such service levels were not achieved or may not have been achieved, we estimate the amount of credits to be issued and record a corresponding reduction to revenue in the period that the service level commitment was not met or may not be met. Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis. We defer (or capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average contract life. Our deferred contract costs for our customers have average amortization periods of approximately 50 months for Mass Markets customers and 35 months for Business customers. These deferred costs are periodically monitored to reflect any significant change in assumptions. See Note 3—Revenue Recognition for additional information. 53 Affiliate Transactions We provide to our affiliates telecommunications services that we also provide to external customers. In addition, we provide to our affiliates application development and support services. Services provided by us to our affiliates are recognized as operating revenue-affiliates in our consolidated statements of operations. We also purchase services from our affiliates including telecommunications services, marketing and employee-related support services. Services provided to us from our affiliates are recognized as operating expenses-affiliates on our consolidated statements of operations. Because of the significance of the services we provide to our affiliates and our affiliates provide to us, the results of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented. We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates. For additional information, see Note 13—Affiliate Transactions. 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. 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 transferred on a daily basis for centralized management by Lumen's service company affiliate. From time to time, we may declare and pay dividends to 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. Dividends paid are reflected on our consolidated statements of stockholder's equity and the consolidated statements of cash flows reflects the changes in advances to affiliates as investing activities and changes in advances from affiliates as financing activities. Interest is assessed on advances to and from affiliates using the current interest rate for our note payable-affiliate. The affiliate obligations, net in current and noncurrent liabilities on our consolidated balance sheets primarily represents the cumulative allocation of expense, net of payments, associated with QCII’s pension plans and post-retirement benefits plans prior to the plan mergers. In 2015, we agreed to a plan to settle the outstanding affiliate obligations, net balance with QCII over a 30 year term. Under the plan, payments are scheduled to be made on a monthly basis. For the years ended December 31, 2024 and 2023, we made settlement payments of $ 52 million and $ 57 million, respectively, to QCII in accordance with the plan. Changes in the affiliate obligations, net are reflected in operating activities on our consolidated statements of cash flows. In the normal course of business, we transfer assets to and from various affiliates through our parent, QSC, which are recorded through our equity. It is our policy to record asset transfers based on carrying values. These transactions may reduce our capital resources for debt repayments and other purposes. On September 30, 2022, Qwest Corporation repaid the outstanding principal and interest on the Note Payable - Affiliate to an affiliate of our ultimate parent company, Lumen Technologies, Inc., under a revolving promissory note. For additional information, see "Note Payable - Affiliate" in Note 6—Long-Term Debt and Note Payable - Affiliate. Legal Costs In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on finance, regulatory, litigation and other matters. Subject to certain exceptions, we expense these costs as the related services are received. 54 Income Taxes Our results are included in the Lumen Technologies consolidated federal income tax return and certain combined state income tax returns. Lumen Technologies allocates income tax expense to us based upon a separate return method which results in income tax expense that approximates the expense that would result if we were a stand-alone entity. Our reported deferred tax assets and liabilities, as discussed below and in Note 12—Income Taxes, are primarily determined as a result of the application of the separate return method and therefore the settlement of these amounts is dependent upon our parent, Lumen Technologies, Inc., rather than tax authorities. The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods and adjustments to our liabilities for uncertain tax positions. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and the tax basis of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date. We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered. Each quarter we evaluate the need to retain all or a portion of the valuation allowance on our deferred tax assets. See Note 12—Income Taxes for additional information. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. Our cash collections are transferred to Lumen Technologies, Inc. on a daily basis and our ultimate parent funds our cash disbursement needs. The net cash transferred to Lumen Technologies, Inc. has been reflected as advances to affiliates in our consolidated balance sheets. Book overdrafts occur when we have issued checks but they have not yet been presented to our controlled disbursement bank accounts for payment. Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheets. This activity is included in the operating activities section in our consolidated statements of cash flows. There was less than $ 1 million and no book overdrafts included in accounts payable at December 31, 2024 or December 31, 2023, respectively. Restricted Cash Restricted cash consists primarily of cash and investments that serve to collateralize certain performance and operating obligations. Restricted cash is recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists. Accounts Receivable and Allowance for Credit Losses Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables less an allowance for credit losses. We use a loss rate method to estimate our allowance for credit losses. For more information on our methodology for estimating our allowance for credit losses, see Note 5—Credit Losses on Financial Instruments. We generally consider our accounts past due if they are outstanding over 30 days. Our past due accounts are written off against our allowance for credit losses and any recoveries of accounts previously written off are generally recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable, net of the allowance for credit losses, approximates fair value. 55 Property, Plant and Equipment As a result of our indirect acquisition by Lumen Technologies, Inc., property, plant and equipment acquired at the time of acquisition was recorded based on its estimated fair value as of the acquisition date. Subsequently purchased and constructed property, plant and equipment are recorded at cost, plus the estimated value of any associated legally or contractually required retirement obligations. Prior to January 1, 2024, we depreciated the majority of our property, plant and equipment using the straight-line group method over the estimated useful lives of groups of assets. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are pooled for purposes of depreciation and tracking. We used the equal life group procedure to establish each pool's average remaining useful life. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. Effective January 1, 2024, we re-established all of our assets individually, including accumulated depreciation, and began to depreciate all of our assets using the straight-line method over the estimated useful lives of the specific asset. A gain or loss is recognized in our consolidated statements of operations only if a disposal is unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as incurred. During the construction phase of network and other internal-use capital projects, we capitalize related employee and interest costs. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification. We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining useful life of our asset base. Our remaining useful life assessments evaluate the possible loss in service value of assets that may precede the physical retirement. Assets shared among many customers may lose service value as those customers reduce their use of the network. However, the asset is not retired until all customers no longer utilize the asset and we determine there is no alternative use for the asset. We review long-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For assessment purposes, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its estimated fair value. Recoverability of the asset group to be held and used is assessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not recoverable, we recognize an impairment charge for the amount by which the carrying amount of the asset group exceeds its estimated fair value. Goodwill and Other Intangible Assets We initially record intangible assets arising from business combinations, such as goodwill and capitalized software at estimated fair value. We amortize capitalized software using the straight-line method over estimated lives ranging up to seven years . Other intangible assets not arising from business combinations are initially recorded at cost. Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line method over its estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized software is included in other intangible assets, net, in our consolidated balance sheets. 56 We are required to assess our goodwill for impairment annually, or more frequently if an event occurs or circumstances change that would indicate an impairment may have occurred. We are required to write-down the value of goodwill of the reporting unit in periods in which the carrying amount of the reporting unit equity exceeds the estimated fair value of the equity of the reporting unit limited to the goodwill balance. The impairment assessment is performed at the reporting unit level. We have determined that our operations consist of one reporting unit, consistent with our determination that our business consists of one operating segment. See Note 2—Goodwill and Other Intangible Assets for additional information. Pension and Post-Retirement Benefits A substantial portion of our active and retired employees participate in the Lumen Combined Pension Plan. On December 31, 2014, the QCII pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, and the CenturyLink Retirement Plan is now named the Lumen Combined Pension Plan. Prior to the pension plan merger, the above-noted employees participated in the QCII pension plan. In addition, certain of our employees participate in Lumen's post-retirement health care and life insurance benefit plans. Lumen Technologies allocates service costs relating to pension and post-retirement health care and life insurance benefits to us and its other affiliates. The amounts contributed by us through Lumen Technologies are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of Lumen Technologies. The allocation of the service costs to us is based upon our employees who are currently earning benefits under the plans. For further information on qualified pension, post-retirement and other post-employment benefit plans, see 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, 2024. Change in Accounting Estimates Effective January 1, 2024, we changed our method of depreciation and amortization for incumbent local exchange carriers ("ILEC") fixed assets from the group method of depreciation to straight line by individual asset method. Historically, we have used the group method of depreciation for the property, plant and equipment and amortization of certain intangible capitalized software assets of our ILECs. Under the group method, all like kind assets were combined into common pools and depreciated under composite depreciation rates. We believe the straight-line depreciation method for individual assets is preferable to the group method as it will result in a more precise estimate of depreciation expense and will result in a consistent depreciation method for all our subsidiaries. This change in the method of depreciation and amortization is considered a change in accounting estimate inseparable from a change in accounting principle. The change in accounting estimate decreased depreciation and amortization expense $ 101 million, $ 77 million net of tax for the year ended December 31, 2024. Additionally, during the first quarter of 2024, we updated our analysis of economic lives of owned fiber network assets. As of January 1, 2024, we extended the estimated economic life and depreciation period of such assets from 25 years to 30 years to better reflect the physical life of the assets that we have experienced and absence of technological changes that would replace fiber. The change in accounting estimate decreased depreciation expense by approximately $ 24 million, $ 18 million net of tax for the year ended December 31, 2024. Recently Adopted Accounting Pronouncements Segments On January 1, 2024 we adopted Accounting Standards Update ("ASU") 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The ASU does not change how a public entity identifies its operating segments, aggregates them or applies quantitative thresholds to determine reportable segments. Public entities with a single reportable segment are required to provide the new disclosures and all the disclosures required under ASC 280, "Segment Reporting." We did not early adopt this standard. The adoption of this ASU did not have a material impact on our consolidated financial statements. 57 Government Assistance On January 1, 2022, we adopted ASU 2021-10 "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance." This ASU requires business entities to disclose information about certain types of government assistance they receive. Refer to Note 3—Revenue Recognition for more information on the impact of this ASU on our consolidated financial statements. Investments On January 1, 2024, we adopted ASU 2023-02, “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” This ASU allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The adoption of this ASU did not have any impact on our consolidated financial statements. On January 1, 2024, we adopted ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” This ASU clarifies that a contractual restriction on the sales of an investment in an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring its fair value. The adoption of this ASU did not have any impact on our consolidated financial statements. Leases On January 1, 2024, we adopted ASU 2023-01, “Leases (Topic 842): Common Control Arrangements.” This ASU requires all entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. The adoption of this ASU did not have any impact on our consolidated financial statements. On January 1, 2022, we adopted ASU 2021-05, “Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments.” This ASU (i) amends the lease classification requirements for lessors, (ii) provides criteria for lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease; and (iii) provides guidance with respect to net investments by lessors under operating leases and other related topics. The adoption of this ASU did not have a material impact on our consolidated financial statements. Reference Rate Reform In December 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-06, “Reference Rate Reform (Topic 848) – Deferral of the Sunset Date of Topic 848." This ASU, which was effective upon issuance, extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848, by deferring the sunset date from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. Based on our review of our key material contracts through December 31, 2024, this ASU does not have a material impact on our consolidated financial statements. Supplier Finance Programs On January 1, 2023, we adopted ASU 2022-04, “Liabilities-Supplier Finance Program (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” This ASU requires a company that uses a supplier finance program in connection with the purchase of goods or services to disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, program activity during the period, changes from period to period and the potential magnitude of program transactions. The adoption of this ASU did not have a material impact on our consolidated financial statements. 58 Credit Losses On January 1, 2023, we adopted ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures.” The ASU eliminates the TDR recognition and measurement guidance, enhances existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The adoption of this ASU did not have a material impact on our consolidated financial statements. Adoption of Other ASUs In July 2023, the FASB issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” This ASU became effective for us once the addition to the FASB Codification was made available in July 2023. This ASU amends or supersedes various SEC paragraphs within the applicable codification to conform to past SEC staff announcements. This ASU does not provide any new guidance. The adoption of this ASU did not have any impact on our consolidated financial statements. Recently Issued Accounting Pronouncements In November 2024, the FASB issued ASU 2024-04, "Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments." This ASU clarifies the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as induced conversions rather than as debt extinguishments. This standard is effective for the annual period of fiscal 2026, and early adoption is permitted. As of December 31, 2024, we do not hold convertible debt instruments and do not expect this ASU will have any impact on our consolidated financial statements. In November 2024, the FASB issued ASU 2024-03, "Disaggregation of Income Statement Expenses." This ASU requires additional footnote disclosure of the details of certain income statement expense line items as well as additional disclosure about selling expenses. This standard is effective for the annual period of fiscal 2027, and early adoption is permitted. The guidance is to be applied prospectively, with the option for retrospective application. We are currently evaluating the impact the adoption of this standard will have on our disclosures. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU requires that public business entities must annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). This ASU will become effective for us in the annual period of fiscal 2025 and early adoption is permitted. We have chosen not to early adopt this ASU and are currently evaluating its impact on our consolidated financial statements, including our annual disclosure within our Income Taxes footnote. In December 2023, the FASB issued ASU 2023-08, “Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets.” This ASU is intended to improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, contractual sale restrictions, and changes during the reporting period. This ASU will become effective for us in the first quarter of fiscal 2025 and early adoption is permitted. As of December 31, 2024, we do not hold crypto assets and do not expect this ASU to have any impact on our consolidated financial statements. 59 In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU incorporates certain SEC disclosure requirements into the FASB Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of FASB Codification topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the FASB Codification with the SEC’s regulations. This ASU will become effective for each amendment on the effective date of the SEC's corresponding disclosure rule changes. As of December 31, 2024, we do not expect this ASU to have any impact on our consolidated financial statements. In August 2023, the FASB issued ASU 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement.” This ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture). The amendments in the ASU require that a joint venture apply a new basis of accounting upon formation. This ASU will become effective for us in the first quarter of fiscal 2025 and early adoption is permitted. As of December 31, 2024, we do not expect this ASU to have any impact on our consolidated financial statements. Note 2—Goodwill and Other Intangible Assets Goodwill and other intangible assets consisted of the following: As of December 31, 2024 2023 (Dollars in millions) Goodwill, less accumulated impairment losses of $ 2,405 and $ 2,405 $ 6,955 6,955 Other intangible assets, less accumulated amortization of $ 1,841 and $ 1,966 $ 84 103 As of December 31, 2024 and 2023, the gross carrying amount of goodwill and other intangible assets was $ 8.9 billion and $ 9.0 billion, respectively. Substantially all of our goodwill was derived from Lumen's acquisition of us where the purchase price exceeded the fair value of the net assets acquired. We are required to assess our goodwill for impairment annually, or under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our assessment determines the carrying value of equity of our reporting unit exceeds its fair value. Our annual impairment assessment date for goodwill is October 31, at which date we assess goodwill at our reporting unit. In reviewing the criteria for reporting units, we have determined that we are one reporting unit. 2024 Goodwill Impairment Analysis As of October 31, 2024, we performed our annual impairment analysis of the goodwill of our one above-mentioned reporting unit by using a qualitative assessment to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying value. Factors considered in the qualitative assessment included, among other things, macroeconomic conditions, industry and market conditions, financial performance of the reporting unit and other relevant reporting unit considerations. We concluded the estimated fair value of our reporting unit was greater than our carrying value of equity as of our testing date. Therefore, we concluded no impairment existed as of our annual assessment date in the fourth quarter of 2024. 60 2023 Goodwill Impairment Analyses As of October 31, 2023, we performed our annual impairment analysis of our reporting unit. Given the continued decline in Lumen's share price, we determined our quantitative impairment analysis would estimate the fair value of our reporting unit using only the market approach. Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry which supported a range of fair values derived from annualized revenue and earnings before interest, tax, depreciation and amortization ("EBITDA") multiples between 1.5 x and 3.5 x and 4.8 x and 8.4 x, respectively. We selected a revenue multiple within and an EBITDA multiple below these comparable market multiples. Based on our assessment performed, we concluded that the estimated fair value of our reporting unit was less than their carrying value of equity at October 31, 2023. As a result, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $ 2.4 billion on October 31, 2023. During the second quarter of 2023, the Company determined circumstances existed indicating it was more likely than not that the carrying value of our reporting unit exceeded its fair value. Given the continued erosion in Lumen's market capitalization, we determined our quantitative impairment analysis would estimate the fair value of our reporting unit using only the market approach. Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry which supported a range of fair values derived from annualized revenue and EBITDA multiples between 1.5 x and 4.3 x and 4.6 x and 10.5 x, respectively. We selected a revenue multiple within and an EBITDA multiple below these comparable market multiples. Based on our assessment performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 11 % at June 30, 2023. We concluded that goodwill was not impaired as of June 30, 2023. The market approach that we used incorporated estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of certain strategic initiatives. In developing the market multiples, we considered observed trends of our industry participants. Our assessment included many factors that required significant judgment. Alternative interpretations of these factors could have resulted in different conclusions. 2022 Goodwill Impairment Analysis At October 31, 2022, we estimated the fair value of equity by considering both a market approach and a discounted cash flow method. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, equal to the present value of all normalized cash flows after the projection period. Based on our assessment performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 24 % at October 31, 2022. We concluded that goodwill was not impaired as of October 31, 2022. Our fair value estimates for evaluating goodwill incorporated significant judgments and assumptions including forecast revenues and expenses, cost of capital, and control premiums. In developing market multiples, we also considered observed trends of our industry participants and other qualitative factors that required significant judgment. Alternative estimates, judgments, and interpretations of these factors could have resulted in different conclusions regarding the need for an impairment charge. The following table shows the rollforward of goodwill from December 31, 2022 through December 31, 2024: (Dollars in millions) As of December 31, 2022 $ 9,360 Impairment ( 2,405 ) As of December 31, 2023 (1) 6,955 As of December 31, 2024 (1) $ 6,955 ______________________________________________________________________ (1) Goodwill at December 31, 2024 and December 31, 2023 is net of accumulated impairment losses of $ 2.4 billion. 61 We annually review the estimated lives and methods used to amortize our other intangible assets. The actual amounts of amortization expense may differ materially from our estimates, depending on the results of our annual reviews. As of December 31, 2024, the weighted average remaining useful life was three years for capitalized software. Total amortization expense for intangible assets for the years ended December 31, 2024, 2023 and 2022 was $ 41 million, $ 67 million and $ 79 million, respectively. We estimate that future total amortization expense for finite-lived intangible assets will be as follows: (Dollars in millions) 2025 $ 27 2026 17 2027 13 2028 10 2029 6 2030 and thereafter 11 Total finite-lived intangible assets future amortization expense $ 84 Note 3—Revenue Recognition We categorize our revenue derived from our operations serving our Mass Markets customers, primarily within the first three categories listed below, and our revenue derived from our operations servicing our Business customers, primarily in the 'Harvest', 'Nurture' and 'Grow' categories listed below: • Other Broadband , under which we provide primarily lower speed broadband services to residential and small business customers utilizing our copper-based network infrastructure; • Voice and Other, under which we derive revenues from (i) providing local and long-distance services, professional services, and other ancillary services, (ii) federal broadband and state support payments, and (iii) equipment, IT solutions and other services; • Fiber Broadband , under which we provide high speed broadband services to residential and small business customers utilizing our fiber-based network infrastructure; • Harvest , which includes our legacy services managed for cash flow, including Time Division Multiplexing voice and private line services; • Nurture , which includes our more mature offerings, including primarily ethernet; • Grow , which includes existing and emerging products and services in which we are significantly investing, including our dark fiber and wavelengths services; and • Affiliate Services , which are (i) communications services that we provide to our affiliates and also provide to external customers and (ii) application development and support services that we provide to our affiliates, as described further in Note 14—Affiliate Transactions. 62 Reconciliation of Total Revenue to Revenue from Contracts with Customers The following tables provide our total revenue by product and service category as well as the amount of revenue that is not subject to ASC 606, "Revenue from Contracts with Customers" ("ASC 606"), but is instead governed by other accounting standards: Year Ended December 31, 2024 Total Revenue Adjustments for Non-ASC 606 Revenue (1) Total Revenue from Contracts with Customers (Dollars in millions) Other Broadband $ 932 ( 79 ) 853 Voice and Other 521 ( 14 ) 507 Fiber Broadband 377 ( 12 ) 365 Harvest 939 ( 118 ) 821 Nurture 357 ( 8 ) 349 Grow 133 ( 6 ) 127 Affiliate Services 2,249 ( 48 ) 2,201 Total revenue $ 5,508 ( 285 ) 5,223 Timing of revenue Goods and services transferred at a point in time $ 13 Services performed over time 5,210 Total revenue from contracts with customers $ 5,223 Year Ended December 31, 2023 Total Revenue Adjustments for Non-ASC 606 Revenue (1) Total Revenue from Contracts with Customers (Dollars in millions) Other Broadband $ 1,111 ( 95 ) 1,016 Voice and Other 589 ( 16 ) 573 Fiber Broadband 473 ( 12 ) 461 Harvest 1,047 ( 139 ) 908 Nurture 393 ( 8 ) 385 Grow 143 — 143 Affiliate Services 2,159 ( 45 ) 2,114 Total revenue $ 5,915 ( 315 ) 5,600 Timing of revenue Goods and services transferred at a point in time $ 23 Services performed over time 5,577 Total revenue from contracts with customers $ 5,600 63 Year Ended December 31, 2022 Total Revenue Adjustments for Non-ASC 606 Revenue (1) Total Revenue from Contracts with Customers (Dollars in millions) Other Broadband $ 1,275 ( 106 ) 1,169 Voice and Other 691 ( 31 ) 660 Fiber Broadband 462 ( 12 ) 450 Harvest 1,134 ( 161 ) 973 Nurture 435 ( 9 ) 426 Grow 158 ( 9 ) 149 Affiliate Services 2,294 ( 45 ) 2,249 Total revenue $ 6,449 ( 373 ) 6,076 Timing of revenue Goods and services transferred at a point in time $ 28 Services performed over time 6,048 Total revenue from contracts with customers $ 6,076 _______________________________________________________________________________ (1) Includes regulatory revenue and lease revenue not within the scope of ASC 606. We do not have any single external customer that comprises more than 10% of our total consolidated operating revenue. Substantially all of our consolidated revenue comes from customers located in the United States. Customer Receivables and Contract Balances The following table provides balances of customer receivables, contract assets and contract liabilities: As of December 31, 2024 2023 (Dollars in millions) Customer receivables, less allowance of $ 23 million and $ 29 million $ 205 210 Contract assets — 7 Contract liabilities 244 269 Contract liabilities consist of consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets. During the years ended December 31, 2024 and December 31, 2023, we recognized $ 175 million and $ 169 million, respectively, of revenue that was included in contract liabilities of $ 269 million and $ 343 million as of January 1, 2024 and 2023, respectively. Performance Obligations As of December 31, 2024, we expect to recognize approximately $ 2.2 billion of revenue in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied. As of December 31, 2024, the transaction price related to unsatisfied performance obligations that are expected to be recognized in 2025, 2026 and thereafter was $ 944 million, $ 832 million, and $ 452 million, respectively. 64 These amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), and (ii) contracts that are classified as leasing arrangements that are not subject to ASC 606 . Contract Costs The following tables provide changes in our contract acquisition costs and fulfillment costs: Year Ended December 31, 2024 Acquisition Costs Fulfillment Costs (Dollars in millions) Beginning of period balance $ 58 46 Costs incurred 32 34 Amortization ( 39 ) ( 34 ) End of period balance $ 51 46 Year Ended December 31, 2023 Acquisition Costs Fulfillment Costs (Dollars in millions) Beginning of period balance $ 61 46 Costs incurred 43 38 Amortization ( 46 ) ( 38 ) End of period balance $ 58 46 Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of communications services to customers, including labor and materials consumed for these activities. We amortize deferred acquisition and fulfillment costs based on the transfer of services on a straight-line basis over the average contract life of 50 months for Mass Markets customers and average contract life of 35 months for Business customers. We include amortized fulfillment costs in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. We include the amount of these deferred costs that are anticipated to be amortized in the next 12 months in other current assets on our consolidated balance sheets. We include the amount of deferred costs expected to be amortized beyond the next 12 months in other non-current assets on our consolidated balance sheets. We assess deferred acquisition and fulfillment costs for impairment on a quarterly basis. 65 Governmental Funding Lumen participates in various U.S. federal and state programs under which government support payments are received to offset costs associated with providing services in targeted locations such as unserved or underserved high-cost or rural areas, or for certain types of customers, including non-profit organizations, educational institutions and local governmental bodies. In certain instances, support payments are conditioned on specified infrastructure buildouts by milestone deadlines or provision of services at specified locations and speed requirements. Commitments may be made annually, on a multi-year basis ranging from one to 10 years or be on-going subject to periodic change or termination. Consistent with customary practice and as referenced in ASC 832 Government Assistance , Lumen applies a grant model of accounting by which it accounts for these transactions as non-ASC 606 revenue over the periods in which the costs for which the funding is intended to compensate are incurred. This non-ASC 606 revenue is included in operating revenue in our consolidated statements of operations. Corresponding receivables are recorded when services have been provided to the customers and costs incurred, but the cash has not been received. These amounts are included in our accounts receivable, less allowance in our consolidated balance sheets. Certain programs are subject to audits of compliance with program commitments and, subject to the outcomes of those assessments, Lumen may be required to reimburse the government entity for cash previously received, or, in some cases, pay a penalty. Lumen evaluates each program and establishes a liability under the principles of ASC 450 if it is probable support payments will be recaptured or a penalty will be imposed. For the year ended December 31, 2024 and 2023, we recorded non-customer revenue of $ 31 million and $ 36 million, respectively, under government assistance programs, of which 29 % and 24 %, respectively, was associated with state universal service fund support programs. Between 2015 and 2021, Lumen received approximately $ 500 million annually through the Federal Communications Commission (the "FCC")'s Connect America Fund II ("CAF II"), a program that ended on December 31, 2021. Our share of this CAF 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 II program based upon our final buildout and filing submissions. The government has the right to audit our compliance with the CAF II program and the ultimate outcome of any remaining examinations is unknown, but could result in a liability to us in excess of our accruals established for these matters. In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”) program, a federal support program designed to fund broadband deployment in rural America. For the first phase of this program, RDOF Phase I, the FCC ultimately awarded $ 6.4 billion in support payments to be paid in equal monthly installments over 10 years. In the third quarter of 2024, we relinquished rights to develop certain RDOF census blocks in four states, which resulted in (i) a reduction of our anticipated RDOF Phase I support payments and (ii) an expectation of payment to the federal government. These impacts are expected to be immaterial. We participate in multiple state sponsored programs for broadband deployment in unserved and underserved areas for which the states have state universal service funds sourced from fees levied on telecommunications providers and passed on to consumers. During the year ended December 31, 2024, we participated in these types of programs primarily in the states of Nebraska and New Mexico. During the year ended December 31, 2023, we participated in these types of programs primarily in the states of Nebraska, New Mexico, and Minnesota . Note 4—Leases We primarily lease various office facilities, colocation facilities and equipment to or from third parties. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheets; we recognize lease expense for these leases on a straight-line basis over the lease term. 66 We determine if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease at the commencement date. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rates. As part of the present value calculation for the lease liabilities, we use an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on our unsecured rates, adjusted to approximate the rates at which we could borrow on a collateralized basis over a term similar to the recognized lease term. We apply the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Operating lease assets are included in Other, net under goodwill and other assets on our consolidated balance sheets. Current operating lease liabilities are included in Other under accrued expenses and other liabilities on our consolidated balance sheets. Noncurrent operating lease liabilities are included in Other under deferred credits and other liabilities on our consolidated balance sheets. Some of our lease arrangements contain lease components, non-lease components (including common-area maintenance costs) and executory costs (including real estate taxes and insurance costs). We generally account for each component separately based on the estimated standalone price of each component. For colocation leases, we account for the lease and non-lease components as a single lease component. Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless we determine that we are reasonably certain of renewing the lease. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. Our lease agreements do not generally contain any material residual value guarantees or material restrictive covenants. Lease expense consisted of the following: Years Ended December 31, 2024 2023 2022 (Dollars in millions) Operating and short-term lease cost $ 23 26 25 Finance lease cost: Amortization of right-of-use assets 1 1 1 Total finance lease cost 1 1 1 Total lease cost $ 24 27 26 We lease various equipment, office facilities, retail outlets, and other network sites from third parties. These leases, with few exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initial non-cancelable term plus any term under renewal options that are reasonably assured. For the years ended December 31, 2024, 2023 and 2022, our gross rental expense was $ 24 million, $ 27 million and $ 26 million, respectively. We also received sublease rental income for the years ended December 31, 2024, 2023 and 2022 of $ 9 million, $ 8 million and $ 9 million, respectively. 67 Supplemental consolidated balance sheet information and other information related to leases is included below: As of December 31, Leases (Dollars in millions) Classification on the Balance Sheet 2024 2023 Assets Operating lease assets Other, net $ 64 65 Finance lease assets Property, plant and equipment, net of accumulated depreciation 6 7 Total leased assets $ 70 72 Liabilities Current Operating Other $ 15 20 Finance Current maturities of long-term debt — 1 Noncurrent Operating Other 49 47 Finance Long-term debt 3 3 Total lease liabilities $ 67 71 Weighted-average remaining lease term (years) Operating leases 5.4 4.9 Finance leases 8.4 7.7 Weighted-average discount rate Operating leases 10.52 % 4.83 % Finance leases 5.05 % 5.89 % Supplemental consolidated cash flow statement information related to leases is included below: Years Ended December 31, 2024 2023 (Dollars in millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 24 35 Financing cash flows for finance leases 1 2 Supplemental lease cash flow disclosures Operating lease right-of-use assets obtained in exchange for new operating lease liabilities $ 20 15 Right-of-use assets obtained in exchange for new finance lease liabilities — 3 68 As of December 31, 2024, maturities of lease liabilities were as follows: Operating Leases Finance Leases (Dollars in millions) 2025 $ 20 1 2026 17 1 2027 15 1 2028 11 — 2029 7 — Thereafter 14 1 Total lease payments 84 4 Less: interest ( 20 ) ( 1 ) Total 64 3 Less: current portion ( 15 ) — Long-term portion $ 49 3 As of December 31, 2024, we had no material operating or finance leases that had not yet commenced. Operating Lease Revenue We lease various data transmission capacity, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations. See "Revenue Recognition" in Note 1—Background and Summary of Significant Accounting Policies. For the years ended December 31, 2024 , 2023 and 2022, our gross rental income was $ 273 million, $ 304 million and $ 346 million, respectively which represents 5 % of our operating revenue for each of the years ended December 31, 2024, 2023 and 2022, respectively. Note 5—Credit Losses on Financial Instruments To assess our expected credit losses on financial instruments, we aggregate financial assets with similar risk characteristics to monitor their credit quality or deterioration over the life of such assets. We periodically monitor certain risk characteristics within our aggregated financial assets and revise their composition accordingly, to the extent internal and external risk factors change. We separately evaluate financial assets that do not share risk characteristics with other financial assets. Our financial assets measured at amortized cost primarily consist of accounts receivable. We use a loss rate method to estimate our allowance for credit losses. Our determination of the current expected credit loss rate begins with our review of historical loss experience as a percentage of accounts receivable. We measure our historical loss period based on the average days to recognize accounts receivable as credit losses. When asset specific characteristics and current conditions change from those in the historical period, due to changes in our credit and collections strategy, certain classes of aged balances, or credit loss and recovery policies, we perform a qualitative and quantitative assessment to adjust our historical loss rate. We use regression analysis to develop an expected loss rate using historical experience and economic data over a forecast period. We measure our forecast period based on the average days to collect payment on billed accounts receivable. To determine our current allowance for credit losses, we combine the historical and expected credit loss rates and apply them to our period end accounts receivable. If there is an unexpected deterioration of a customer's financial condition or an unexpected change in economic conditions, including macroeconomic events, we assess the need to adjust the allowance for credit losses. Any such resulting adjustments would affect earnings in the period that adjustments are made. 69 The assessment of the correlation between historical observed default rates, current conditions and forecasted economic conditions requires judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding our allowance for credit losses. The amount of credit loss is sensitive to changes in circumstances and forecasted economic conditions. Our historical credit loss experience, current conditions and forecast of economic conditions may also not be representative of the customers' actual default experience in the future, and we may use methodologies that differ from those used by other companies. The following table presents the activity of our allowance for credit losses by accounts receivable portfolio: Business Mass Markets Total (Dollars in millions) Balance at December 31, 2021 $ 19 19 38 Provision for expected losses 13 47 60 Write-offs charged against the allowance ( 14 ) ( 50 ) ( 64 ) Recoveries collected 2 — 2 Balance at December 31, 2022 20 16 36 Provision for expected losses 20 46 66 Write-offs charged against the allowance ( 26 ) ( 43 ) ( 69 ) Recoveries collected — 1 1 Balance at December 31, 2023 14 20 34 Provision for expected losses 9 36 45 Write-offs charged against the allowance ( 10 ) ( 42 ) ( 52 ) Recoveries collected — 2 2 Balance at December 31, 2024 $ 13 16 29 Note 6—Long-Term Debt and Note Payable - Affiliate The following chart reflects (i) the consolidated long-term debt of Qwest Corporation and its subsidiaries, including finance lease and other obligations, unamortized premiums, net, unamortized debt issuance costs and (ii) note payable-affiliate: As of December 31, Interest Rates (1) Maturities (1) 2024 2023 (Dollars in millions) Senior notes 6.500 % - 7.750 % 2025 - 2057 $ 1,973 1,986 Former term loan (2) N/A N/A — 215 Finance lease and other Various Various 3 4 Unamortized premiums, net 1 4 Unamortized debt issuance costs ( 50 ) ( 52 ) Total long-term debt 1,927 2,157 Less current maturities ( 239 ) ( 1 ) Long-term debt, excluding current maturities $ 1,688 2,156 _______________________________________________________________________________ N/A - Not applicable (1) As of December 31, 2024. (2) Qwest Corporation's Term Loan was due in 2027 and had an interest rate of 7.970 % as of December 31, 2023, prior to being cancelled on the TSA Effective Date (as defined below). 70 Long-Term Debt Maturities Set forth below is the aggregate principal amount of our long-term debt as of December 31, 2024 (excluding unamortized premiums, net, unamortized debt issuance costs) maturing during the following years: (Dollars in millions) 2025 $ 239 2026 1 2027 1 2028 — 2029 — 2030 and thereafter 1,735 Total long-term debt $ 1,976 2024 Debt Transactions Transaction Support Agreement Transactions On March 22, 2024 (the "TSA Effective Date"), Lumen Technologies, Level 3 Financing, Qwest Corporation and a group of creditors holding a majority of our consolidated debt completed transactions contemplated under the amended and restated transaction support agreement ("TSA") that such parties entered into on January 22, 2024 (the "TSA Transactions"), including (i) the repayment of our term loan maturing 2027 and (ii) the termination, repayment or exchange of previous commitments and debt of our affiliates and the issuance of new term loan facilities, notes, and revolving credit facilities by our affiliates. Repurchases of Outstanding Notes During 2024, we repurchased approximately $ 13 million aggregate principal amount of our senior notes maturing in 2025. These transactions resulted in an immaterial net loss which was recognized in Other income, net in our consolidated statement of operations for the year ended December 31, 2024. Qwest Guarantees of Lumen Debt Lumen’s obligations under its new credit agreements entered into on March 22, 2024 and its new superpriority secured senior notes issued on and after March 22, 2024 are unsecured, but Qwest Corporation and certain of its subsidiaries have provided an unconditional unsecured guarantee of payment of Lumen’s obligations under these agreements and senior notes. Note Payable - Affiliate On June 30, 2022, Qwest Corporation entered into an amended and restated revolving promissory note ("Note Payable - Affiliate") with an affiliate of our ultimate parent company, Lumen Technologies, Inc. ("Lender"), that replaces the previous revolving promissory agreement that was scheduled to mature on June 30, 2022 ("Prior Note Payable - Affiliate"). The Note Payable - Affiliate, as amended, enables Qwest Corporation to borrow from Lumen up to $ 2.0 billion. Any outstanding principal balance owed by Qwest Corporation 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 12 -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. In accordance with the terms of the amended Note Payable - Affiliate, interest is assessed every six months ending on June 30 th and December 31 st (an "Interest Period") and is payable within 30 days of the end of the respective Interest Period. Interest is accrued on the outstanding principal balance during the respective Interest Period using a weighted average per annum interest rate on the consolidated outstanding debt of Lumen Technologies, Inc. and its subsidiaries. 71 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. Since such payment, Qwest Corporation has not owed any amounts under the Note Payable - Affiliate. Interest Expense Interest expense includes interest on total long-term debt. The following table presents the amount of gross interest expense, net of capitalized interest and interest expense-affiliates, net: Years Ended December 31, 2024 2023 2022 (Dollars in millions) Interest expense: Gross interest expense $ 137 149 141 Capitalized interest ( 75 ) ( 54 ) ( 29 ) Total interest expense $ 62 95 112 Interest (income) expense-affiliates, net $ ( 24 ) ( 15 ) 60 Covenants The senior notes of Qwest Corporation were issued under indentures dated April 15, 1990 and October 15, 1999. These indentures contain restrictions on the incurrence of liens and the consummation of certain transactions substantially similar to the above-described covenants in the indentures governing Lumen’s senior unsecured notes (but contain no mandatory repurchase provisions). The senior notes of Qwest Capital Funding, Inc. were issued under an indenture dated June 29, 1998 containing terms substantially similar to those set forth in Qwest Corporation's indentures. None of our long-term debt is secured or guaranteed by other companies. Compliance As of December 31, 2024, we believe we were in compliance with the financial covenants contained in our material debt agreements in all material respects. Note 7—Accounts Receivable The following table presents details of our accounts receivable balances: As of December 31, 2024 2023 (Dollars in millions) Trade and purchased receivables $ 295 287 Earned and unbilled (credits) receivables ( 67 ) ( 15 ) Other 28 23 Total accounts receivable 256 295 Less: allowance for credit losses ( 29 ) ( 34 ) Accounts receivable, less allowance $ 227 261 We are exposed to concentrations of credit risk from our customers. We generally do not require collateral to secure our receivable balances. We have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other telecommunications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables. 72 Note 8—Property, Plant and Equipment Net property, plant and equipment is composed of the following: Depreciable Lives As of December 31, 2024 2023 (Dollars in millions) Property, plant and equipment: Land N/A $ 329 334 Fiber, conduit and other outside plant (1) 15 - 45 years 8,246 7,126 Central office and other network electronics (2) 7 - 10 years 5,792 5,488 Support assets (3) 3 - 30 years 2,878 2,845 Construction in progress (4) N/A 530 1,146 Gross property, plant and equipment 17,775 16,939 Accumulated depreciation ( 8,910 ) ( 8,239 ) Net property, plant and equipment $ 8,865 8,700 _______________________________________________________________________________ (1) Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures. (2) Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers. (3) Support assets consist of buildings, computers and other administrative and support equipment. (4) Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still under construction. We recorded depreciation expense of $ 712 million, $ 756 million and $ 781 million for the years ended December 31, 2024, 2023 and 2022, respectively. Note 9—Severance Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from the progression or completion of our post-acquisition integration plans, increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workloads due to reduced demand for certain services. During April 2024, we reduced our workforce by approximately 3 % as a part of our efforts to change our workforce composition to reflect our ongoing transformation and cost reduction opportunities that align with our shapeshifting and focus on our strategic priorities. As a result of this plan, we incurred severance and related costs of approximately $ 25 million. We have not incurred, and do not expect to incur, material impairment or exit costs related to this workforce reduction. Changes in our accrued liabilities for severance expenses were as follows: Years Ended December 31, 2024 2023 (Dollars in millions) Balance at beginning of period $ 1 $ 3 Accrued to expense 32 17 Payments, net ( 29 ) ( 19 ) Balance at end of period $ 4 $ 1 73 Note 10—Employee Benefits Pension and Post-Retirement Benefits QCII's post-retirement benefit plans were merged into Lumen's post-retirement benefit plans on January 1, 2012, and on December 31, 2014, QCII's qualified pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, which is now named the Lumen Combined Pension Plan (the "LCPP"). Based on current laws and circumstances, (i) Lumen Technologies was not required to make a cash contribution to the LCPP in 2024 and (ii) Lumen Technologies does not expect it will be required to make a contribution in 2025. The amount of required contributions to the LCPP in 2025 and beyond will depend on earnings on plan investments, prevailing discount rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. Lumen Technologies occasionally makes voluntary contributions in addition to required contributions. Lumen Technologies made a voluntary contribution of $ 170 million to the LCPP in 2024. Lumen Technologies did no t make a voluntary contribution to the LCPP in 2023. The unfunded status of Lumen's qualified and non-qualified pension plans for accounting purposes was approximately $ 645 million and $ 769 million as of December 31, 2024 and 2023, which includes the merged QCII qualified pension plan. The unfunded status of Lumen's post-retirement benefit plans for accounting purposes was $ 1.7 billion and $ 1.9 billion as of December 31, 2024 and 2023, respectively. Lumen Technologies allocates current service costs to subsidiaries relative to employees who are currently earning benefits under the pension and post-retirement benefit plans. The net cost allocated to us is paid on a monthly basis through Lumen's intercompany cash management process. The affiliate obligations, net in current and noncurrent liabilities on the consolidated balance sheets primarily represents the cumulative allocation of expense, net of payments, associated with QCII's pension plans and post-retirement benefits plans prior to the plan mergers. In 2015, we agreed to a plan to settle the outstanding pension and post-retirement affiliate obligations, net balance with QCII over a 30 year term. Under the plan, payments are scheduled to be made on a monthly basis. For the years ended December 31, 2024 and 2023, we made settlement payments in the aggregate of $ 52 million and $ 57 million, respectively, to QCII under the plan. Changes in the affiliate obligations, net are reflected in operating activities on our consolidated statements of cash flows. We are allocated a portion of Lumen's pension and post-retirement services costs. The combined net pension and post-retirement service costs is included in cost of services and products and selling, general and administrative expenses on our consolidated statement of operations, in the amounts for the respective periods presented in the table below: Years Ended December 31, 2024 2023 2022 (Dollars in millions) Allocated pension service costs $ 20 22 31 Allocated post-retirement service costs 4 4 7 % of Lumen's total pension and post-retirement service costs 86 % 87 % 72 % Lumen Technologies sponsors a noncontributory qualified defined benefit pension plan that covers certain participants. The LCPP also provides survivor and disability benefits to certain participants. In November 2009, and prior to the plan merger, the pension plan was amended to no longer provide pension benefit accruals for active non-represented employees after December 31, 2009. In addition, non-represented employees hired after January 1, 2009 are not eligible to participate in the plans. Active non-represented employees who participate in these plans retain their accrued pension benefit earned as of December 31, 2009 and certain participants will continue to earn interest credits on their benefit after December 31, 2009. Employees are eligible to receive their vested accrued benefit when they separate from Lumen Technologies. The plans also provided a death benefit for eligible beneficiaries of certain retirees; however, the plan was amended to eliminate this benefit effective March 1, 2010 for retirees who retired prior to January 1, 2004 and whose deaths occur after February 28, 2010 and eliminate the death benefit for eligible beneficiaries of certain retirees who retired after December 31, 2003. 74 Lumen Technologies maintains post-retirement benefit plans that provide health care and life insurance benefits primarily for certain eligible retirees. The QCII post-retirement benefit plans were merged into Lumen's post-retirement benefit plans on January 1, 2012. The benefit obligation for the occupational health care and life insurance post-retirement plans is estimated based on the terms of benefit plans. In calculating this obligation, Lumen Technologies considers numerous assumptions, estimates and judgments, including but not limited to, discount rates, health care cost trend rates and plan amendments. Effective January 1, 2024, new represented employees are not eligible for benefits as a result of new collective bargaining agreements. New non-represented employees are also not eligible for benefits under the plan. The terms of the post-retirement health care and life insurance plans between Lumen Technologies and its eligible non-represented employees and its eligible post-1990 non-represented retirees are established by Lumen Technologies and are subject to change at its discretion. Lumen Technologies has a practice of sharing some of the cost of providing health care benefits with its non-represented employees and post-1990 non-represented retirees. The benefit obligation for the non-represented post-retirement health care benefits is based on the terms of the current written plan documents and is adjusted for anticipated continued cost sharing with non-represented employees and post-1990 non-represented retirees. However, Lumen's contribution under its post-1990 non-represented retirees' health care plan is capped at a specific dollar amount. Medicare Prescription Drug, Improvement and Modernization Act of 2003 Lumen Technologies sponsors post-retirement health care plans with several benefit options that provide prescription drug benefits that Lumen Technologies deems actuarially equivalent to or exceeding Medicare Part D. Lumen Technologies recognizes the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of its post-retirement benefit obligation and net periodic post-retirement benefit expense. Other Benefit Plans Health Care and Life Insurance We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our health care benefit expense for current employees was $ 99 million, $ 101 million and $ 99 million for the years ended December 31, 2024, 2023 and 2022, respectively. Employees' group basic life insurance plans are fully insured and the premiums are paid by Lumen Technologies. 401(k) Plans Lumen Technologies sponsors a qualified defined contribution plan covering substantially all of our employees. Under this plan, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the plan and by the Internal Revenue Service ("IRS"). Currently, we match a percentage of our employees' contributions in cash. We recognized $ 25 million, $ 27 million and $ 27 million in expense related to this plan for the years ended December 31, 2024, 2023 and 2022, respectively. Note 11—Fair Value of Financial Instruments Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, advances to and from affiliates, accounts payable, note payable-affiliate and long-term debt, excluding finance lease and other obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, advances to and from affiliates, accounts payable and note payable-affiliate approximate their fair values. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs using the below-described fair value hierarchy. We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on inputs other than quoted market prices in active markets that are either directly or indirectly observable such as discounted future cash flows using current market interest rates. 75 The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows: Input Level Description of Input Level 1 Observable inputs such as quoted market prices in active markets. Level 2 Inputs other than quoted prices in active markets that are either directly or indirectly observable. Level 3 Unobservable inputs in which little or no market data exists. The following table presents the carrying amounts and estimated fair values of our financial liabilities as of December 31, 2024 and 2023, as well as the input level used to determine the fair values indicated below: As of December 31, 2024 As of December 31, 2023 Input Level Carrying Amount Fair Value Carrying Amount Fair Value (Dollars in millions) Liabilities-Long-term debt (excluding finance lease and other obligations) 2 $ 1,924 1,462 2,153 1,162 Note 12—Income Taxes The components of the income tax expense from continuing operations are as follows: Years Ended December 31, 2024 2023 2022 (Dollars in millions) Income tax expense: Federal and foreign Current $ 396 432 514 Deferred 34 19 6 State and local Current 94 107 137 Deferred 3 3 14 Income tax expense $ 527 561 671 The effective income tax rate for continuing operations differs from the statutory tax rate as follows: Years Ended December 31, 2024 2023 2022 (Percentage of pre-tax income (loss)) Effective income tax rate: Federal statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes-net of federal effect 3.7 % ( 31.3 ) % 4.3 % Goodwill impairment — % ( 187.2 ) % — % Change in liability for unrecognized tax position 1.5 % ( 8.9 ) % 0.6 % Other — % ( 1.4 ) % — % Effective income tax rate 26.2 % ( 207.8 ) % 25.9 % For the years ended December 31, 2024 and 2023, our effective income tax rate was 26.2 % and ( 207.8 )%, respectively. The effective tax rate for the year ended December 31, 2023 includes a $ 505 million unfavorable aggregate impact of non-deductible goodwill impairment. 76 The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows: As of December 31, 2024 2023 (Dollars in millions) Deferred tax liabilities: Property, plant and equipment $ ( 1,524 ) ( 1,464 ) Intangible assets ( 83 ) ( 95 ) Other ( 40 ) ( 50 ) Total deferred tax liabilities ( 1,647 ) ( 1,609 ) Deferred tax assets: Payable to affiliate due to post-retirement benefit plan participation 312 292 Other 1 — Gross deferred tax assets 313 292 Net deferred tax assets 313 292 Net deferred tax liabilities $ ( 1,334 ) ( 1,317 ) As of December 31, 2024 and 2023, we had no established valuation allowance based on our assessment of whether it is more likely than not that our deferred tax assets will be realized. As of December 31, 2024 and 2023, the $ 1.3 billion net deferred tax liabilities are included in long-term liabilities on our consolidated balance sheet. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2016. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available. A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) for the years ended December 31, 2024 and 2023 are as follows: Years ended December 31, 2024 2023 (Dollars in millions) Unrecognized tax benefits at beginning of period $ 317 332 Decrease due to tax positions taken in a prior year ( 11 ) ( 1 ) Decrease due to tax positions taken in a current year ( 13 ) ( 14 ) Unrecognized tax benefits at end of period $ 293 317 As of December 31, 2024, the total amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate is immaterial . The unrecognized tax benefits also includes tax positions that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes, that would not impact the effective tax rate but could impact cash tax amounts payable to taxing authorities. Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $ 160 million and $ 125 million as of December 31, 2024 and 2023, respectively. 77 Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may not change in the next 12 months . The actual amount of changes, if any, will depend on future developments and events, many of which are outside our control. We paid $ 497 million, $ 509 million, and $ 673 million related to income taxes for the years ended December 31, 2024, 2023, and 2022, respectively. In August 2022, the Inflation Reduction Act was signed into law and which, among other things, implemented a corporate alternative minimum tax (“CAMT”) on adjusted financial statement income effective for tax periods occurring after December 31, 2022. The CAMT had no material impact on our financial results as of December 31, 2024. In addition, in 2021, the Organization for Economic Co-operation and Development (“OECD”) issued Pillar Two model rules introducing a new global minimum corporate tax of 15% and the OECD and the majority of its participating countries continue to work toward the enactment of such tax. While the U.S. has not adopted Pillar Two legislation, various other governments around the world have enacted such legislation that is effective for tax periods after December 31, 2023. These global minimum tax rules have increased our administrative and compliance burdens, but the impact to our financial statements for the year ended December 31, 2024 was immaterial. We anticipate further legislative activity and administrative guidance throughout 2025 and continue to monitor evolving global tax legislation. Note 13—Affiliate Transactions We provide incumbent local exchange carrier telecommunications services to our affiliates that we also provide to external customers. We periodically review and update our prices for affiliate network services to align with regulated rates, where applicable, or competitive market-based rates charged to external customers, taking into consideration the average third party customer contract term those affiliate services pertain to. These services are billed directly to our affiliates and recognized as affiliate revenue on our consolidated statements of operations. We also provide to our affiliates shared services in the form of application development and support services, as well as network support and technical services, and administrative and corporate support. In this regard, we function as a service company to other Lumen affiliates, and correspondingly recognize affiliate revenue based on the costs for the services that we provide to those affiliates. Whenever possible, costs for shared services are incurred directly by our affiliates for the services they use. When these shared costs are not directly incurred, they are allocated among all affiliates based upon what we determine to be the most reasonable method, first using cost causative measures, or, if no cost causative measure is available, using a general allocator. From time to time, we may adjust the basis for allocating the costs of a shared service among affiliates. Any such changes in allocation methodologies are applied prospectively. The following table provides details of affiliate revenue: Years Ended December 31, 2024 2023 2022 (Dollars in millions) Direct affiliate revenue $ 1,665 1,622 1,697 Allocated affiliate revenue 584 537 597 Total affiliate revenue $ 2,249 2,159 2,294 We also purchase services from our affiliates including telecommunication services, insurance, flight services and other support services such as legal, regulatory, finance administration and executive support. Our affiliates charge us for these services using the allocation methodology described above. 78 Note 14—Commitments, Contingencies and Other Items We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Subject to these limitations, at December 31, 2024 and December 31, 2023, we had accrued $ 17 million and $ 15 million, respectively, in the aggregate for our litigation and non-income tax contingencies, which are included in Other under Current Liabilities or Other under Deferred Credits and Other Liabilities in our consolidated balance sheets as of such dates. We cannot at this time estimate the reasonably possible loss or range of loss, if any in excess of this $ 17 million accrual due to the inherent uncertainties and speculative nature of contested proceedings. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows. In this Note, a reference to a "putative" class action means a class has been alleged, but not certified, in that matter. Principal Proceedings Environmental Litigation Parish of St. Mary. On July 9, 2024, a putative class action complaint was filed in the 16th Judicial District Court for the Parish of St. Mary, State of Louisiana, Case 138575 asserting claims on behalf of all parishes, municipalities, and citizens owning real properties in the State of Louisiana that have been affected by lead-sheathed telecommunications cables installed by AT&T and Lumen or their predecessors. The complaint seeks damages and injunctive relief under Louisiana state law. The case was removed to the United States District Court Western District of Louisiana Lafayette Division, Case 6:24-CV-01001-RRS-DJA. On December 6, 2024, the plaintiffs voluntarily dismissed the class action complaint without prejudice. On December 13, 2024, St. Mary’s Parish along with other parishes, municipalities, and two individuals served a notice of intent to file citizen suit under the Louisiana Environmental Quality Act, asserting claims identical to the class action which the plaintiffs voluntarily dismissed. Blum . On November 6, 2023, a putative class action complaint was filed in the 16th Judicial District Court for the Parish of St. Mary, State of Louisiana, Case 137935 asserting claims on behalf of all citizens owning real properties in the State of Louisiana that have been affected by lead-sheathed telecommunications cables installed by AT&T, BellSouth, Verizon, and Lumen or their predecessors. The complaint seeks damages and injunctive relief under Louisiana state law. The case has been removed to Federal Court in the United States District Court Western District of Louisiana Lafayette Division, Case 6:23-CV-01748. FCRA Litigation In November 2014, a putative class action complaint captioned Bultemeyer v. CenturyLink, Inc. was filed in the United States District Court for the District of Arizona, Case CV-14-02530-PHX-SPL, alleging violations of the Fair Credit Reporting Act (the "FCRA"). In February 2017, the case was dismissed for lack of standing. The plaintiff appealed and the 9th Circuit reversed and remanded. Class certification was contested and ultimately granted in 2023. The 9th Circuit denied Lumen’s request to appeal the class certification ruling. A jury trial was conducted in September 2024. The jury found that CenturyLink willfully violated the FCRA and awarded each class member $ 500 for statutory damages and $ 2,000 for punitive damages. If the verdict is not set aside in connection with post-trial motion practice, Lumen will appeal to the 9th Circuit. We have not accrued a contingent liability for this matter. While liability is possible, we have not determined it to be probable, and damages exposure, if any, is uncertain. 79 Billing Practices Suits In June 2017, a former employee of a Lumen Technologies subsidiary filed an employment lawsuit against Lumen Technologies (at the time named CenturyLink, Inc.) claiming that she was wrongfully terminated for alleging that Lumen charged some of its retail customers for products and services they did not authorize. Thereafter, based in part on the allegations made by the former employee, several legal proceedings were filed, including consumer class actions in federal and state courts, a series of securities investor class actions in federal courts, and several shareholder derivative actions in federal and Louisiana state courts. The derivative cases were brought on behalf of CenturyLink, Inc. against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties. We have settled the consumer and securities investor class actions, and the derivative actions. Qwest has engaged in discussions regarding related claims with a number of state attorneys general, and has entered into agreements settling certain of the consumer practices claims asserted by several state attorneys general. Huawei Network Deployment Investigations Qwest has received requests from the following federal agencies for information relating to the use of equipment manufactured by Huawei Technologies Company ("Huawei") in networks operated by Lumen and Qwest. • DOJ. Lumen has received a civil investigative demand from the U.S. Department of Justice in the course of a False Claims Act investigation alleging that Lumen Technologies, Inc. and Lumen Technologies Government Solutions, Inc. failed to comply with certain specified requirements in federal contracts concerning their use of Huawei equipment.  • FCC. The FCC’s Enforcement Bureau issued a Letter of Inquiry to Lumen Technologies, Inc. regarding its written certifications to the FCC that Lumen has complied with FCC rules governing the use of resources derived from the High Cost Program, Lifeline Program, Rural Health Care Program, E-Rate Program, Emergency Broadband Benefit Program, and the Affordable Connectivity Program. Under these programs federal, funds may not be used to facilitate the deployment or maintenance of equipment or services provided by Huawei, a company the FCC has determined poses a national security threat to the integrity of U.S. communications networks or the communications supply chain. • Team Telecom. The Committee for the Assessment of Foreign Participation in the United States Telecommunications Service Sector (comprised of the U.S. Attorney General, and the Secretaries of the Department of Homeland Security, and the Department of Defense), commonly referred to as Team Telecom, issued questions and requests for information relating to Lumen’s FCC licenses and its use of Huawei equipment. Marshall Fire Litigation. On December 30, 2021, a wildfire referred to as the Marshall Fire ignited near Boulder, Colorado. The Marshall Fire killed two people, and it burned thousands of acres, including entire neighborhoods. Approximately 300 lawsuits naming various defendants and asserting various claims for relief have been filed. To date, three of those name Qwest Corporation as being at fault: Allstate Fire and Casualty Insurance Company, et al., v. Qwest Corp., et al., Case 2023-cv-3048, and Wallace, et al., v, Qwest Corp., et al., Case 2023-cv-30488, both of which have been consolidated with Kupfner, et al., v. Public Service Company of Colorado, et al. Case 2022-cv-30195. The consolidated proceeding is pending in Colorado District Court, Boulder, Colorado, Preliminary estimates of potential damage claims exceed $ 2 billion. 80 911 Surcharge In June 2021, the Company was served with a complaint filed in the Santa Fe County District Court by Phone Recovery Services, LLC (“PRS”), acting on behalf of the State of New Mexico. The complaint claims Qwest Corporation and CenturyTel of the Southwest have violated the New Mexico Fraud Against Taxpayers Act since 2004 by failing to bill, collect and remit certain 911 surcharges from customers. Through pre-trial proceedings, the Court has narrowed the issues to be resolved by jury. On August 21, 2024, a jury decided the remaining issues, and consequently all claims asserted, in Lumen's favor. The plaintiff has filed a Notice of Appeal and Lumen submitted a cross-appeal as to the original motion to dismiss and motion for summary judgment. Other Proceedings, Disputes and Contingencies From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, regulatory hearings relating primarily to our rates or services, actions relating to employee claims, tax issues, or environmental law issues, grievance hearings before labor regulatory agencies, miscellaneous third-party tort actions or commercial disputes. We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, which are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial within the next twelve months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. We are subject to various federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $ 300,000 in fines and penalties. In addition, in the past we acquired companies that had installed lead-sheathed cables several decades earlier, or had operated certain manufacturing companies in the first part of the 1900s. Under applicable environmental laws, we could be named as a potentially responsible party for a share of the remediation of environmental conditions arising from the historical operations of our predecessors. The outcomes of these other proceedings described under this heading are not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on us. The matters listed in this Note do not reflect all of our contingencies. The ultimate outcome of the above-described matters may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing above in this Note, and proceedings we currently consider immaterial may ultimately affect us materially. Right-of-Way At December 31, 2024, our future rental commitments and Right-of-Way ("ROW") agreements were as follows: (Dollars in millions) 2025 $ 29 2026 7 2027 7 2028 4 2029 4 2030 and thereafter 43 Total future minimum payments $ 94 81 Purchase Commitments We have several commitments to a variety of vendors for services to be used in the ordinary course of business totaling $ 87 million at December 31, 2024. Of this amount, we expect to purchase $ 9 million in 2025, $ 18 million in 2026 through 2027, $ 19 million in 2028 through 2029 and $ 41 million in 2030 and thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are the contractually committed party as of December 31, 2024. In addition to our above-described contractual obligations, our ultimate parent company Lumen Technologies is contractually committed to purchase additional services under arrangements from which we may purchase in the future. Note 15—Other Financial Information Other Current Assets The following table presents details of other current assets in our consolidated balance sheets: As of December 31, 2024 2023 (Dollars in millions) Prepaid expenses $ 98 48 Contract acquisition costs 26 34 Contract fulfillment costs 26 28 Assets held for sale — 29 Other 2 5 Total other current assets $ 152 144 Other Current Liabilities The following table presents details of other current liabilities in our consolidated balance sheets: As of December 31, 2024 2023 (Dollars in millions) Current affiliate obligation $ 48 52 Current operating lease liability 15 20 Other 54 49 Total other current liabilities $ 117 121 Included in accounts payable at December 31, 2024 and 2023 were $ 57 million and $ 116 million, respectively, associated with capital expenditures. 82 Other Noncurrent Liabilities The following table presents details of other noncurrent liabilities in our consolidated balance sheets: As of December 31, 2024 2023 (Dollars in millions) Unrecognized tax benefits $ 453 442 Deferred revenue 97 109 Noncurrent operating lease liability 49 47 Other 86 81 Total other noncurrent liabilities $ 685 679 Note 16—Labor Union Contracts As of December 31, 2024, approximately 42 % of our employees were represented by the Communication Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW"). 1 % of our represented employees are subject to collective bargaining agreements that are scheduled to expire within the 12 month period ending December 31, 2025. Note 17—Stockholder's Equity Common Stock All of our outstanding capital stock is owned by QSC. In addition, in the normal course of business, we transfer assets and liabilities to and from QSC and its affiliates, which are recorded through our equity. It is our policy to record these asset transfers based on carrying values. Dividends We declared and paid the following cash dividend to QSC: Years Ended December 31, 2024 2023 2022 (Dollars in millions) Cash dividend declared to QSC $ — 1,980 — Cash dividend paid to QSC (1) — 1,980 — ______________________________________________________________________ (1) In 2023, we declared a dividend of advances to affiliate to our parent. The timing of cash payments for declared dividends to QSC is at our discretion in consultation with QSC. We may declare and pay dividends to QSC in excess of our earnings to the extent permitted by applicable law. Our debt covenants do not limit the amount of dividends we can pay to QSC. Dividends paid are reflected on our consolidated statement of cash flows as financing activities. 83 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.