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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-03 compared with 2020-03-05 · 411 added, 332 removed, 698 unchanged (52% of the section changed)

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generally accepted accounting principles.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the presentation of taxes assessed by a governmental authority as of January 1, 2020.

Basis for Opinion

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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 $7.3 billion of operating revenues for the year ended December 31, 2020.

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.

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.

We have served as the Company’s auditor since 2002.

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Years Ended December 31,

2020 2019 2018

(Dollars in millions)

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

1,995 2,333 2,669

Selling, general and administrative 564 659 799

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Interest expense - affiliates, net ( 74 ) ( 62 ) ( 57 )

Other income, net

Other (expense) income, net ( 56 ) 26 4

Total other expense, net ( 409 ) ( 416 ) ( 501 )

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Income tax expense 595 641 494

NET INCOME $ 1,707 1,827 1,665

See accompanying notes to consolidated financial statements.

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Advances to affiliates — 1,842

Other 122 128

Total current assets 500 2,486

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GOODWILL AND OTHER ASSETS

Operating lease assets

Customer relationships, net

Goodwill 9,360 9,360

Other intangible assets, net 343 779

Other, net 147 204

Total goodwill and other assets 9,850 10,343

TOTAL ASSETS $ 18,659 20,999

LIABILITIES AND STOCKHOLDER'S EQUITY

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Accounts payable 292 403

Advances from affiliates 592 —

Note payable - affiliate 1,130 1,069

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Income and other taxes 95 94

Current affiliate obligations, net

Other 186 261

Current portion of deferred revenue 183 201

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DEFERRED CREDITS AND OTHER LIABILITIES

Deferred revenue

Deferred income taxes, net 1,249 1,198

Noncurrent operating lease liabilities

Affiliate obligations, net 637 717

Other 685 712

Total deferred credits and other liabilities 2,571 2,627

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Common stock - one share without par value, owned by Qwest Services Corporation

Retained earnings (accumulated deficit)

10,050 10,050

Retained earnings 48 67

Total stockholder's equity 10,098 10,117

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Years Ended December 31,

2020 2019 2018

(Dollars in millions)

OPERATING ACTIVITIES

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

Adjustments to reconcile net income to net cash provided by operating activities:

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Other current assets and liabilities, net

( 220 ) 60 40

Other current assets and liabilities - affiliates, net

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Changes in affiliate obligations, net

( 70 ) ( 49 ) ( 105 )

Other, net 25 17 18

Net cash provided by operating activities 3,071 3,332 3,791

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Capital expenditures

( 1,091 ) ( 1,055 ) ( 1,040 )

Changes in advances to affiliates 1,842 ( 694 ) ( 119 )

Proceeds from sale of property, plant and equipment and other assets 3 26 6

Cash paid for acquisition

Net cash used in investing activities

Net cash provided by (used in) investing activities 754 ( 1,723 ) ( 1,153 )

FINANCING ACTIVITIES

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Payments of long-term debt ( 2,796 ) ( 12 ) ( 1,359 )

Dividends paid to Qwest Services Corporation

Dividends paid ( 1,725 ) ( 1,600 ) ( 1,275 )

Changes in advances from affiliates 592 — —

Net cash used in financing activities ( 3,814 ) ( 1,612 ) ( 2,634 )

Net (decrease) increase in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash 11 ( 3 ) 4

Cash, cash equivalents and restricted cash at beginning of period 4 7 3

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Interest paid (net of capitalized interest of $ 29 , $ 27 and $ 24 )

$ ( 310 ) ( 378 ) ( 466 )

Cash, cash equivalents and restricted cash:

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Restricted cash - noncurrent 1 2 2

Total $ 15 4 7

See accompanying notes to consolidated financial statements.

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Years Ended December 31,

2020 2019 2018

(Dollars in millions)

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Balance at beginning of period 67 ( 182 ) ( 713 )

Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $—, ($49), and $— taxes

Cumulative effect of adoption of ASU 2016-13, Measurement of Credit losses , net $( 1 ) tax

Cumulative net effect of adoption of ASU 2016-02, Leases

Dividends declared to Qwest Services Corporation

Dividend of equity interest in limited liability company to Qwest Services Corporation

Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers , net of $( 49 ) taxes

Net income 1,707 1,827 1,665

Dividends ( 1,725 ) ( 1,600 ) ( 1,275 )

Other ( 4 ) — —

Balance at end of period 48 67 ( 182 )

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unless the context requires otherwise, references in this report to "QC" refer to Qwest Corporation, references to "Qwest," "we," "us," and "our" refer to Qwest Corporation and its consolidated subsidiaries, references to "QSC" refer to our direct parent company, Qwest Services Corporation, and its consolidated subsidiaries, references to "QCII" refer to QSC's direct parent company and our indirect parent company, Qwest Communications International Inc., and its consolidated subsidiaries, and references to "CenturyLink" refer to QCII's direct parent company and our ultimate parent company, CenturyLink, Inc., and its consolidated subsidiaries.

Unless the context requires otherwise, references in this report to "QC" refer to Qwest Corporation, references to "Qwest," "we," "us," and "our" refer to Qwest Corporation and its consolidated subsidiaries, references to "QSC" refer to our direct parent company, Qwest Services Corporation, and its consolidated subsidiaries, references to "QCII" refer to QSC's direct parent company and our indirect parent company, Qwest Communications International Inc., and its consolidated subsidiaries, and references to "Lumen" or "Lumen Technologies" refer to QCII's direct parent company and our ultimate parent company, Lumen Technologies, Inc., and its consolidated subsidiaries.

(1) Background and Summary of Significant Accounting Policies

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We refer to this region as our local service area.

On April 1, 2011, our indirect parent QCII became a wholly-owned subsidiary of CenturyLink, Inc.

On April 1, 2011, our indirect parent QCII became a wholly-owned subsidiary of Lumen Technologies, Inc.

in a tax-free, stock-for-stock transaction.

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These changes had no impact on total operating revenue, total operating expenses or net income for any period presented.

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.

Our operations are integrated into and reported as part of Lumen Technologies.

Lumen's chief operating decision maker ("CODM") is our CODM but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the SEC.

Consequently, we do not provide our discrete financial information to the CODM on a regular basis.

As such, we have one reportable segment.

Summary of Significant Accounting Policies

Change in Accounting Policy

During the first quarter of 2020, we elected to change the presentation for taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, including federal and certain state Universal Service Fund ("USF") regulatory fees, to present all such taxes on a net basis in our statement of operations.

Prior to the first quarter of 2020, we assessed whether we were the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business.

The previous policy resulted in presenting such USF fees on a gross basis within operating revenue and cost of services and products, and all other significant taxes on a net basis.

We applied this change in accounting policy retrospectively during the first quarter of 2020.

As a result, we have decreased both operating revenue and cost of services and products by $ 105 million, $ 105 million and $ 98 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The change had no impact on operating income or net income in our consolidated statements of operations.

Refer to our Form 8-K filing dated May 7, 2020 for further information.

We changed our policy to present such taxes on the net basis and believe the new policy is preferable because of the historical and potential future regulatory rate changes outside of our control resulting in significant variability in tax and fee revenue that are not indicative of our operating performance.

We believe that net presentation provides the most useful and transparent financial information and improves comparability and consistency of financial results.

Use of Estimates

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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, including, but not limited to, revenue recognition, revenue reserves, network access costs, network access cost dispute reserves, investments, long-term contracts, customer retention patterns, allowance for doubtful accounts, depreciation, amortization, asset valuations, rates used for affiliate cost allocations, internal labor capitalization rates, recoverability of assets (including deferred tax assets), impairment assessments, taxes, certain liabilities and other provisions and contingencies, are reasonable, based on information available at the time they are made.

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.

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These advance payments include certain activation and certain installation charges.

If the activation and installation charges are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which ranges from one year 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.

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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.

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Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis.

We defer (i.e.

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 30 months for consumer and up to 49 months for business.

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 30 months for consumer and 29 months for business.

These deferred costs are monitored every period to reflect any significant change in assumptions.

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

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

Our compliance with regulations is subject to review by regulators.

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

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

As part of these cash management arrangements, an affiliate provides 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 CenturyLink and most affiliate transactions are deemed to be settled at the time the transactions are recorded in our accounting records, with the resulting net balance at the end of each period reflected as advances to affiliates on the accompanying consolidated balance sheets.

From time to time we declare and pay dividends to our parent, QSC, which are settled through the advances to affiliates, which has the net effect of reducing the amount of these advances.

Dividends declared 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 the advances to/from affiliates on either the three-month U.S T-bill rate (for advances to affiliates) or CenturyLink’s weighted average borrowing rate (for advances from affiliates).

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

Our ultimate parent company, Lumen Technologies, Inc.

has cash management arrangements with a majority of its income-generating subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends.

Under these arrangements, the majority of our cash balance is transferred on a daily basis for centralized management by Lumen Technologies, Inc.

and most affiliate transactions are deemed to be settled at the time the transactions are recorded in our accounting records.

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

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

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

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.

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It is our policy to record asset transfers based on carrying values.

USF Surcharges, Gross Receipts Taxes and Other Surcharges

In determining whether to include in our revenue and expenses the taxes and surcharges collected from customers and remitted to government authorities, including USF surcharges, sales, use, value added and some excise taxes, we assess, among other things, whether we are the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business.

In jurisdictions where we determine that we are the principal taxpayer, we record the surcharges on a gross basis and include them in our revenue and costs of services and products.

In jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and do not include them in our revenue and costs of services and products.

Qwest Corporation is currently indebted 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.

Advertising Costs

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We expense these costs as the related services are received.

Our results are included in the CenturyLink consolidated federal income tax return and certain combined state income tax returns.

CenturyLink allocates income tax expense to us based upon a separate return allocation 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 allocation method and therefore the settlement of these amounts is dependent upon our parent, CenturyLink, rather than tax authorities.

Our current expectation is that the vast majority of deferred tax assets and liabilities will be settled through our general intercompany obligation based upon the current CenturyLink policy.

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

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 allocation 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 13—Income Taxes, are primarily determined as a result of the application of the separate return allocation method and therefore the settlement of these amounts is dependent upon our parent, Lumen Technologies, Inc., rather than tax authorities.

Our current expectation is that the vast majority of deferred tax assets and liabilities will be settled through our general intercompany obligation based upon the current Lumen Technologies, Inc.

Lumen Technologies, Inc.

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

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.

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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 CenturyLink on a daily basis and our ultimate parent funds our cash disbursement needs.

The net cash transferred to CenturyLink has been reflected as advances to affiliates in our consolidated balance sheets.

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 checks have been issued but have not been presented to our controlled disbursement bank accounts for payment.

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This activity is included in the operating activities section in our consolidated statements of cash flows.

Restricted Cash and Securities

Restricted cash and securities consists primarily of cash and investments that serve to collateralize certain performance and operating obligations.

Restricted cash and securities are recorded as current and non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists.

Restricted securities are stated at cost which approximates fair value as of December 31, 2019 and 2018 .

Accounts Receivable and Allowance for Doubtful Accounts

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 doubtful accounts.

The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence.

There were no book overdrafts included in accounts payable at December 31, 2020 or December 31, 2019.

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.

Prior to the adoption of ASU 2016-13, the allowance for credit losses receivable reflected our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence.

We implemented the new standard effective January 1, 2020, as discussed in the Recently Adopted Accounting Pronouncements - "Measurement of Credit Losses on Financial Instruments", below.

For more information, see Note 5—Credit Losses on Financial Instruments.

We generally consider our accounts past due if they are outstanding over 30 days.

Our collection process varies by the customer segment, amount of the receivable, and our evaluation of the customer's credit risk.

Our past due accounts are written off against our allowance for doubtful accounts when collection is considered to be not probable.

Our past due accounts are written off against our allowance for credit losses when collection is considered to be not probable.

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 doubtful accounts, approximates fair value.

The carrying value of accounts receivable, net of the allowance for credit losses, approximates fair value.

Property, Plant and Equipment

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

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.

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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 assess the possible loss in service value of assets that may precede the physical retirement.

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.

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Pension and Post-Retirement Benefits

A substantial portion of our active and retired employees participate in the CenturyLink 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.

The CenturyLink Retirement Plan was renamed the CenturyLink Combined Pension Plan.

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, 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 CenturyLink's post-retirement health care and life insurance benefit plans.

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

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 CenturyLink's annual report on Form 10-K for the year ended December 31, 2019 .

For further information on qualified pension, post-retirement and other post-employment benefit plans, see Lumen's annual report on Form 10-K for the year ended December 31, 2020.

Recently Adopted Accounting Pronouncements

During 2019, we adopted Accounting Standards Update ("ASU") 2016-02, "Leases (ASC 842").

In 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” , ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” and ASU 2017-04, "Simplifying the Test for Goodwill Impairment" .

During 2020, we adopted Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments." During 2019, we adopted ASU 2016-02, "Leases (ASC 842)".

In 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers”.

Each of these is described further below.

Measurement of Credit Losses on Financial Instruments

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13.

The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires us to estimate the total credit losses expected on the portfolio of financial instruments.

We adopted ASU 2016-13, "Measurement of Credit Losses on Financial instruments" ("ASU 2016-13") on January 1, 2020, and recognized a cumulative adjustment to our retained earnings as of the date of adoption of $ 3 million, net of tax effect.

Please refer to Note 5—Credit Losses On Financial Instruments for more information.

We adopted Accounting Standards Update ("ASU") 2016-02, "Leases (ASC 842)" , as of January 1, 2019, using the non-comparative transition option pursuant to ASU 2018-11.

Therefore, we have not restated comparative period financial information for the effects of ASC 842, and we will not make the new required lease disclosures for comparative periods beginning before January 1, 2019.

Therefore, we have not restated comparative period financial information for the effects of ASC 842, and we have not made the new required lease disclosures for comparative periods beginning before January 1, 2019.

Instead, we recognized ASC 842's cumulative effect transition adjustment (discussed below) as of January 1, 2019.

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We did not elect the hindsight practical expedient regarding the likelihood of exercising a lessee purchase option or assessing any impairment of right-of-use assets for existing leases.

On March 5, 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-01, "Leases (ASC 842):

On March 5, 2019, the FASB issued ASU 2019-01, "Leases (ASC 842):

Codification Improvements" , effective for public companies for fiscal years beginning after December 15, 2019.

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Adoption of the new standards resulted in the recording of operating lease assets and operating lease liabilities of approximately $ 126 million and $ 133 million, respectively, as of January 1, 2019.

The standards did not materially impact our consolidated net earnings and had no material impact on cash flows.

In addition, we recorded a $ 22 million cumulative adjustment to accumulated deficit as of January 1, 2019, for the impact of the new accounting standards.

Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new guidance, as discussed above, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2014-09 which replaces virtually all existing generally accepted accounting principles on revenue recognition with a principles-based approach for determining revenue recognition using a new five step model.

In May 2014, the FASB issued Accounting Standards Update ("ASU") ASU 2014-09 which replaces virtually all existing generally accepted accounting principles on revenue recognition with a principles-based approach for determining revenue recognition using a new five step model.

The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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See Note 3—Revenue Recognition for additional information.

In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” ("ASU 2016-16").

ASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among our subsidiaries.

After adoption of ASU 2016-16, the income tax effects associated with these asset transfers, except for the transfer of inventory, will be recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to a third party or over the remaining useful life of the asset.

We adopted ASU 2016-16 on January 1, 2018.

The adoption of ASU 2016-16 did not have a material impact to our consolidated financial statements.

Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).

ASU 2017-04 simplifies the impairment testing for goodwill by changing the measurement for goodwill impairment.

Under current rules, we are required to compute the fair value of goodwill to measure the impairment amount if the carrying value of a reporting unit exceeds its fair value.

Under ASU 2017-04, the goodwill impairment charge will equal the excess of the reporting unit carrying value above fair value, limited to the amount of goodwill assigned to the reporting unit.

We elected to early adopt the provisions of ASU 2017-04 as of October 1, 2018.

Recently Issued Accounting Pronouncements

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, " Measurement of Credit Losses on Financial Instruments ".

The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments.

We are in the process of implementing the model for the recognition of credit losses related to our financial instruments, new processes and internal controls to assist us in the application of the new standard.

The cumulative effect of initially applying the new standard on January 1, 2020 is not material.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740 ).

ASU 2019-12 removes certain exceptions for investments, intra-period allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes.

ASU 2019-12 will become effective for us in the first quarter of fiscal 2021 and early adoption is permitted.

We do not believe the adoption will have a significant impact on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting , designed to ease the burden of accounting for contract modifications related to the global market-wide reference rate transition period.

Subject to certain criteria, ASU 2020-04 provides qualifying entities the option to apply expedients and exceptions to contract modifications and hedging accounting relationships made until December 31, 2022.

We are evaluating ASU 2020-04's applicability to relevant transactions referencing the London Inter-bank Offering Rate ("LIBOR") or another reference rate expected to be discontinued and the resulting impact on our consolidated financial statements.

In October 2020, the FASB issued ASU 2020-09, "Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No.

33-10762” (“ASU 2020-09”).

This ASU amends and supersedes various SEC paragraphs to reflect SEC Release No.

33-10762, which includes amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees.

The cumulative effect of initially applying ASU 2020-09 on January 4, 2021 will not have material impact to our consolidated financial statements.

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

(2) Goodwill, Customer Relationships and Other Intangible Assets

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(Dollars in millions)

Goodwill $ 9,360 9,360

Customer relationships, less accumulated amortization of $ 5,611 and $ 5,231

Other intangible assets subject to amortization:

Capitalized software, less accumulated amortization of $1,780 and $1,712

As of December 31, 2019 , the gross carrying amount of goodwill, customer relationships and other intangible assets was $ 17.2 billion .

Total amortization expense for intangible assets was as follows:

Years Ended December 31,

(Dollars in millions)

Amortization expense for intangible assets

We estimate that total amortization expense for intangible assets for the years ending December 31, 2020 through 2024 will be as follows:

(Dollars in millions)

Year ending December 31,

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.

Substantially, all of our goodwill was derived from CenturyLink's acquisition of us where the purchase price exceeded the fair value of the net assets acquired.

We 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.

Other intangible assets, less accumulated amortization of $ 1,831 and $ 1,780

Total other intangible assets, net $ 343 779

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 assess our goodwill for impairment annually as of October 31,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 in periods in which the carrying value of equity exceeds the estimated fair value of equity, limited to the amount of goodwill.

Our annual impairment assessment date for goodwill is October 31, at which date we assessed goodwill at our reporting unit.

In reviewing the criteria for reporting units, we have determined that we are one reporting unit.

At October 31, 2019 , we estimated the fair value of our equity by considering both a market approach and a discounted cash flow method.

Goodwill is evaluated for impairment at the reporting unit level, and we have determined that we have one reporting unit.

At October 31, 2020 and 2019, we estimated the fair value of our 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, which represents the expected normalized cash flows of the reporting unit beyond the cash flows from the discrete projection period.

Based on our assessment performed with respect to our reporting unit as described above, we concluded that our goodwill was not impaired as of that date.

The decline in CenturyLink’s stock price triggered impairment testing in the first quarter of 2019.

Consequently, we evaluated our goodwill as of March 31, 2019.

Because CenturyLink's low stock price was a trigger for impairment testing, we estimated the fair value of our operations using only the market approach in the quarter ended March 31, 2019.

Based on our assessment performed with respect to our reporting unit as described above, we concluded that the estimated fair value of our equity exceeded the carrying value by 48 % and 65 % at October 31, 2020 and 2019, respectively.

Therefore no impairment was recorded in either period.

Lumen’s stock price declined significantly in the first quarter of 2019 causing us to evaluate our goodwill for impairment as of March 31, 2019.

Because Lumen's low stock price indicated the carrying value of our reporting unit was more likely than not in excess of its fair value, we estimated the fair value of our operations using only the market approach.

Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry.

As of March 31, 2019, based on our assessments performed as described above, we concluded that our goodwill was not impaired as of that date.

The market multiples approach that we used in the quarter ended March 31, 2019 incorporated significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of certain cost synergies.

In developing the market multiple, we also considered observed trends of our industry participants.

Our assessment included many qualitative factors that required significant judgment.

Alternative interpretations of these factors could have resulted in different conclusions regarding the size of our impairments.

As of October 31, 2018, based on our assessments performed, we concluded that our goodwill was not impaired as of that date.

Revenue Recognition

The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:

Year Ended December 31, 2018

Reported Balances

Impact of ASC 606

Historical Adjusted Amount

As of March 31, 2019, based on our assessments performed as described above, we concluded that our goodwill was not impaired.

Our fair value estimates for evaluating goodwill incorporated significant judgements 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, judgements, and interpretations of these factors could have resulted in different conclusions regarding the need for an impairment charge.

As of December 31, 2020, the gross carrying amount of goodwill, customer relationships and other intangible assets was $ 17.1 billion.

Total amortization expense for intangible assets for the years ended December 31, 2020, 2019 and 2018 was $ 481 million, $ 533 million and $ 581 million, respectively.

We estimate that total amortization expense for intangible assets for the years ending December 31, 2021 through 2025 will be as follows:

(Dollars in millions)

Operating revenue

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

Selling, general and administrative

Income tax expense

Year ending December 31,

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.

(3) Revenue Recognition

Reconciliation of Total Revenue to Revenue from Contracts with Customers

2 unchanged sentences

Year Ended December 31, 2020

Total Revenue

Adjustments for Non-ASC 606 Revenue (7)

Total Revenue Adjustments for Non-ASC 606 Revenue (7)

Total Revenue from Contracts with Customers

2 unchanged sentences

Transport and infrastructure (2)

2,604 ( 297 ) 2,307

Voice and collaboration (3)

1,517 — 1,517

IT and managed services (4)

Regulatory revenue (5)

179 ( 179 ) —

Affiliate revenue (6)

2,487 ( 3 ) 2,484

Total revenue $ 7,313 ( 479 ) 6,834

4 unchanged sentences

Year Ended December 31, 2019

Total Revenue Adjustments for Non-ASC 606 Revenue (7)

Total Revenue from Contracts with Customers

(Dollars in millions)

IP and data services (1)

Transport and infrastructure (2)

2,773 ( 308 ) 2,465

Voice and collaboration (3)

1,618 — 1,618

IT and managed services (4)

Regulatory revenue (5)

189 ( 189 ) —

Affiliate revenue (6)

2,873 — 2,873

Total revenue $ 8,052 ( 497 ) 7,555

Adjustments for Non-ASC 606 Revenue (7)

Timing of revenue

Goods and services transferred at a point in time $ 54

Services performed over time 7,501

Total revenue from contracts with customers $ 7,555

Year Ended December 31, 2018

Total Revenue Adjustments for Non-ASC 606 Revenue (7)

Total Revenue from Contracts with Customers

(Dollars in millions)

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Transport and infrastructure (2)

2,870 ( 317 ) 2,553

Voice and collaboration (3)

1,783 — 1,783

IT and managed services (4)

Regulatory revenue (5)

214 ( 214 ) —

Affiliate revenue (6)

2,935 — 2,935

Total revenue $ 8,395 ( 531 ) 7,864

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(6) Includes telecommunications and data services we bill to our affiliates.

Includes regulatory revenue, lease revenue, sublease rental income, which are not within the scope of ASC 606.

(7) Includes regulatory revenue and lease revenue not within the scope of ASC 606.

Customer Receivables and Contract Balances

The following table provides balances of customer receivables, contract assets and contract liabilities as of December 31, 2020 and December 31, 2019:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(Dollars in millions)

Customer receivables (1)

Contract liabilities

Contract assets 13 18

Gross customer receivables of $ 462 million and $ 554 million , net of allowance for doubtful accounts of $ 32 million and $ 36 million , at December 31, 2019 and December 31, 2018 , respectively.

Contract liabilities are consideration we have received from our customers or billed in advance of providing goods and services promised in the future.

Contract liabilities 300 338

(1) Gross customer receivables, including gross affiliate receivables, of $ 396 million and $ 462 million, net of allowance for credit losses of $ 50 million and $ 32 million, at December 31, 2020 and December 31, 2019, respectively.

Contract liabilities are 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 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 typically ranges from one to five years depending on the service.

Contract liabilities are included within deferred revenue in our consolidated balance sheet.

During the years ended December 31, 2019 and December 31, 2018 , we recognized $ 273 million and $ 42 million , respectively, of revenue that was included in contract liabilities as of January 1, 2019 and January 1, 2018, respectively.

During the years ended December 31, 2020, December 31, 2019 and December 31, 2018, we recognized $ 223 million, $ 273 million and $ 42 million, respectively, of revenue that was included in contract liabilities as of January 1, 2020, January 1, 2019 and January 1, 2018, respectively.

Performance Obligations

As of December 31, 2019 , our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts that are unsatisfied (or partially satisfied) is approximately $ 162 million .

As of December 31, 2020, our estimated revenue expected to be recognized in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied is approximately $ 173 million.

We expect to recognize approximately 99 % of this revenue through 2023, with the balance recognized thereafter.

We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), or contracts that are classified as leasing arrangements that are not subject to ASC 606.

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

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Year Ended December 31, 2020

Acquisition Costs

Fulfillment Costs

Acquisition Costs Fulfillment Costs

(Dollars in millions)

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Costs incurred 49 23

Amortization ( 62 ) ( 33 )

End of period balance $ 73 54

Year Ended December 31, 2019

Acquisition Costs

Fulfillment Costs

Acquisition Costs Fulfillment Costs

(Dollars in millions)

1 unchanged sentence

Costs incurred 60 39

Amortization ( 64 ) ( 32 )

End of period balance $ 86 64

Acquisition costs include commissions paid to employees as a result of obtaining contracts.

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 telecommunications services to customers, including labor and materials consumed for these activities.

Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average contract life of 30 months for consumer customers and up to 49 months for business customers and amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations.

The amount of acquisition costs included in these deferred costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets.

The amount of deferred costs expected to be amortized beyond the next twelve months is included in other non-current assets on our consolidated balance sheets.

Amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations.

The amount of these deferred costs that are anticipated to be amortized in the next 12 months are included in other current assets on our consolidated balance sheets.

The amount of deferred costs expected to be amortized beyond the next 12 months is included in other non-current assets on our consolidated balance sheets.

Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.

Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new accounting guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance, as discussed in Note 1—Background And Summary Of Significant Accounting Policies.

We primarily lease various office facilities, switching and colocation facilities, equipment and dark fiber.

We primarily lease to or from third parties various office facilities, colocation facilities and equipment.

Leases with an initial term of 12 months or less are not recorded on the balance sheet;

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Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

Some of our lease arrangements contain lease components (including fixed payments, such as, rent, real estate taxes and insurance costs) and non-lease components (including common-area maintenance costs).

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.

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Lease expense consisted of the following:

Year Ended December 31, 2019

Years Ended December 31,

(Dollars in millions)

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Total lease cost $ 72 53

We lease various equipment, office facilities, retail outlets, switching facilities and other network sites.

We lease various equipment, office facilities, retail outlets, and other network sites.

These leases, with few exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index.

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Supplemental consolidated balance sheet information and other information related to leases:

Leases (millions)

Classification on the Balance Sheet

December 31, 2019

Operating lease assets

Finance lease assets

Property, plant and equipment, net of accumulated depreciation

As of December 31,

Leases (Dollars in millions) Classification on the Balance Sheet 2020 2019

Operating lease assets Other noncurrent assets $ 67 105

Finance lease assets Property, plant and equipment, net of accumulated depreciation 8 14

Total leased assets $ 75 119

Other current liabilities

Current portion of long-term debt

Noncurrent operating lease liabilities

Long-term debt

Operating Other current liabilities $ 28 29

Finance Current maturities of long-term debt 1 5

Operating Other noncurrent liabilities 76 89

Finance Long-term debt 4 5

Total lease liabilities $ 109 128

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Supplemental consolidated cash flow statement information related to leases:

Year Ended December 31, 2019

Years Ended December 31,

(Dollars in millions)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Operating cash flows from financing leases

Financing cash flows from finance leases

Operating cash flows for operating leases $ 32 35

Operating cash flows for financing leases 5 1

Financing cash flows for finance leases — 10

Supplemental lease cash flow disclosures

Operating lease right-of-use assets obtained in exchange for new operating lease liabilities $ 19 21

Right-of-use assets obtained in exchange for new finance lease liabilities

As of December 31, 2020, maturities of lease liabilities were as follows:

Operating Leases

Finance Leases

Operating Leases Finance Leases

(Dollars in millions)

Thereafter 10 1

Total lease payments 116 6

interest ( 12 ) ( 1 )

current portion ( 28 ) ( 1 )

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Operating Lease Income

Qwest leases various data transmission capacity, office facilities, switching facilities and other network sites to third parties under operating leases.

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.

For the years ended December 31, 2020 , 2019 and 2018, our gross rental income was $ 312 million, $ 320 million and $ 522 million, respectively which represents 4 %, 4 % and 6 %, respectively, of our operating revenue for the years ended December 31, 2020, 2019 and 2018.

Disclosures under ASC 840

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

The future annual minimum payments under capital lease agreements as of December 31, 2018 were as follows:

Capital Lease Obligations

(Dollars in millions)

2024 and thereafter

Total minimum payments

amount representing interest and executory costs

Present value of minimum payments

current portion

Long-term portion

At December 31, 2018, our future rental commitments for operating leases were as follows:

Operating Leases

(5) Credit Losses on Financial Instruments

In accordance with ASC 326, "Financial Instruments - Credit Losses", we aggregate financial assets with similar risk characteristics to align our expected credit losses with the credit quality or deterioration over the life of such assets.

We monitor certain risk characteristics within our aggregated financial assets and revise their composition accordingly, to the extent internal and external risk factors change each reporting period.

Financial assets that do not share risk characteristics with other financial assets are evaluated separately.

Our financial assets measured at amortized cost primarily consist of accounts receivable.

In developing our accounts receivable portfolio, we pooled certain assets with similar credit risk characteristics based on the nature of our customers, their industry, policies used to grant credit terms and their historical and expected credit loss patterns.

Prior to the adoption of the new credit loss standard, the allowance for doubtful accounts receivable reflected our best estimate of probable losses inherent in our receivable portfolio determined based on historical experience, specific allowances for known troubled accounts, and other currently available evidence.

We implemented the new standard effective January 1, 2020, using a loss rate method to estimate our allowance for credit losses.

Our determination of the current expected credit loss rate begins with our use 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 update our current loss rate, which as noted below has increased due to an increase in historic loss experience and weakening economic forecasts.

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 allowance for credit losses, we combine the historical, current, and expected credit loss rates and apply them to our period end accounts receivable.

If there is a deterioration of a customer's financial condition or if future default rates in general differ from currently anticipated default rates (including changes caused by COVID-19), we may need to adjust the allowance for credit losses, which would affect earnings in the period that adjustments are made.

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 the 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.

The following table presents the activity of our allowance for credit losses for our accounts receivable portfolio:

Business Consumer Total

(Dollars in millions)

2024 and thereafter

Total future minimum payments (1)

Beginning balance at January 1, 2020 (1)

Provision for expected losses 30 36 66

Write-offs charged against the allowance ( 22 ) ( 26 ) ( 48 )

Recoveries collected 4 4 8

Ending balance at December 31, 2020

______________________________________________________________________

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

Long-Term Debt and Revolving Promissory Note

Long-term debt, including unamortized premiums and discounts, unamortized debt issuance costs and note payable-affiliate, were as follows:

(1) The beginning balance includes the cumulative effect of the adoption of the new credit loss standard.

For the year ended December 31, 2020, we increased our allowance for credit losses for our business and consumer accounts receivable portfolio due to an increase in historical and expected loss experience, which we believe were predominantly attributable to the COVID-19 induced economic slowdown.

We believe that decreased write-offs (net of recoveries) driven by COVID-19 regulations and programs have further contributed to an increase in our allowance for credit losses.

(6) Long-Term Debt and Note Payable - Affiliate

The following chart reflects our consolidated l ong-term debt, including unamortized premiums and discounts, unamortized debt issuance costs and note payable-affiliate:

As of December 31,

Interest Rates (2)

Maturities (2)

(Dollars in millions)

Senior notes 6.500 % - 7.750 %

$ 3,170 5,956

1 unchanged sentence

LIBOR + 2.00 %

Finance leases

Unamortized (discounts) premiums, net

Finance leases Various Various 6 10

Unamortized premiums, net 5 —

Unamortized debt issuance costs ( 62 ) ( 115 )

4 unchanged sentences

$ 1,130 1,069

_______________________________________________________________________________

(1) Qwest Corporation's Term Loan had an interest rate of 2.150 % as of December 31, 2020 and 3.800 % as of December 31, 2019.

(2) As of December 31, 2020.

Redemption of Senior Notes

On December 14, 2020, Qwest Corporation redeemed in full all $ 775 million aggregate principal amount of its outstanding 6.125 % Notes due 2053 (the " 6.125 % Notes").

On October 26, 2020, Qwest Corporation redeemed the remaining $ 160 million aggregate principal amount of its outstanding 6.625 % Notes due 2055 (the " 6.625 % Notes").

Following this redemption, there were no bonds outstanding for the 6.625 % Notes.

On September 16, 2020, Qwest Corporation partially redeemed $ 250 million aggregate principal amount of its outstanding 6.625 % Notes.

On August 7, 2020, Qwest Corporation redeemed all of the remaining $ 300 million aggregate principal amount of its outstanding 6.875 % Notes due 2054 (the " 6.875 % Notes").

Following this redemption, there were no bonds outstanding for the 6.875 % Notes.

On June 29, 2020, Qwest Corporation partially redeemed $ 200 million aggregate principal amount of its outstanding 6.875 % Notes.

On January 15, 2020, Qwest Corporation redeemed in full (i) all $ 850 million aggregate principal amount of its outstanding 6.875 % senior notes due 2033, and (ii) all $ 250 million aggregate principal amount of its outstanding 7.125 % senior notes due 2043.

For the year ended December 31, 2020, redemptions of notes resulted in a loss of $ 63 million.

During 2019, we did no t repay any of our long-term debt.

During 2018, we retired approximately $ 1.3 billion in debt securities including approximately $ 164 million of Qwest Corporation 7.5 % Notes due 2051, $ 925 million of Qwest Corporation 7.0 % Notes due 2052, and $ 250 million of Qwest Corporation 7.25 % Notes due 2035 and we recognized a loss of $ 34 million .

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

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

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

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

Aggregate Maturities of Long-Term Debt

Set forth below is the aggregate principal amount of our long-term debt (excluding unamortized premiums and discounts and unamortized debt issuance costs and excluding note payable-affiliate) maturing during the following years:

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

On October 23, 2020, we borrowed $ 215 million under a variable-rate term loan with CoBank ACB and used the resulting net proceeds to pay off its previous $ 100 million term loan with CoBank ACB.

Additionally, on October 26, 2020, we used the remaining net proceeds to partially facilitate the above-mentioned redemption of our remaining 6.625 % Notes.

The outstanding unpaid principal amount of this new term loan plus any accrued and unpaid interest is due on October 23, 2027.

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

At December 31, 2020, and 2019, the outstanding principal balance owed under the new term loan and its predecessor was $ 215 million and $ 100 million, respectively.

Long-Term Debt Maturities

Set forth below is the aggregate principal amount of our long-term debt as of December 31, 2020 (excluding unamortized premiums, net, unamortized debt issuance costs and note payable-affiliate) maturing during the following years:

(Dollars in millions)

1 unchanged sentence

Total long-term debt $ 3,391

_______________________________________________________________________________

(1) Actual principal paid in any year may differ due to the possible future refinancing of outstanding debt or the issuance of new debt,

see subsequent event.

Revolving Promissory Note

On September 30, 2017, Qwest Corporation entered into an amended and restated revolving promissory note in the amount of $ 965 million with an affiliate of our ultimate parent company, CenturyLink, Inc.

This note replaced and amended the original $ 1.0 billion revolving promissory note Qwest Corporation entered into on April 18, 2012 with the same affiliate.

The outstanding principal balance of this new revolving promissory note and the accrued interest thereon shall be due and payable on demand, but if no demand is made, then on June 30, 2022.

Interest is accrued on the outstanding balance during an interest period using a weighted average per annum interest rate on the consolidated outstanding debt of CenturyLink and its subsidiaries.

As of December 31, 2019 , the amended and restated revolving promissory note had an outstanding balance of $ 1.069 billion and bore interest at a weighted-average interest rate of 5.843 % .

As of December 31, 2019 and 2018 , the amended and restated revolving promissory note is reflected on our consolidated balance sheet as a current liability under “Note payable - affiliate”.

In accordance with the terms of the amended and restated revolving promissory note, interest shall be assessed on June 30th and December 31st (an "Interest Period").

Any assessed interest for an Interest Period that remains unpaid on the last day of the subsequent Interest Period is capitalized on such date and begins accruing interest.

Through December 31, 2019 , $ 104 million of such interest has been capitalized.

As of December 31, 2019 and 2018 , $ 31 million and $ 30 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet.

Note Payable - Affiliate

Qwest Corporation is currently indebted to an affiliate of our ultimate parent company, Lumen Technologies, Inc., under a revolving promissory note that provides Qwest Corporation with a funding commitment of up to $ 965 million in aggregate principal amount (the "Intercompany Note").

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

Interest is accrued on the outstanding 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.

As of December 31, 2020, the Intercompany Note had an outstanding balance of $ 1.13 billion and bore interest at a weighted-average interest rate of 4.974 %.

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

In accordance with the terms of the Intercompany Note, interest shall be assessed on June 30th and December 31st (an "Interest Period").

Any assessed interest for an Interest Period that remains unpaid on the last day of the subsequent Interest Period is to be capitalized on such date and is to begin accruing interest.

Through December 31, 2020, $ 166 million of such interest has been capitalized since entering into the Intercompany Note.

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

Interest Expense

2 unchanged sentences

Years Ended December 31,

2020 2019 2018

(Dollars in millions)

11 unchanged sentences

Except for a limited number of series of our notes, we generally can redeem our senior notes, at our option, typically at a fixed price.

Under the Qwest Corporation term loan, Qwest Corporation must maintain a debt to EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in CenturyLink's Credit Facility) ratio of not more than 2.85 :1.0, as of the last day of each fiscal quarter for the four quarters then ended.

Under our term loan, we must maintain a debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of not more than 2.85 :1.0, as determined and calculated in the manner described in the term loan documentation.

The term loan also contains a negative pledge covenant, which generally requires us to secure equally and ratably any advances under the term loan if we pledge assets or permit liens on our property for the benefit of other debtholders.

4 unchanged sentences

None of our long-term debt is secured or guaranteed by other companies.

At December 31, 2019 and 2018 , we believe we were in compliance with the financial covenants contained in our debt agreements in all material respects.

At December 31, 2020 and 2019, we believe we were in compliance with the financial covenants contained in our material debt agreements in all material respects.

Subsequent Event

On January 15, 2020, Qwest Corporation fully redeemed all $ 850 million aggregate principal amount of its outstanding 6.875 % senior notes due 2033 and all $ 250 million aggregate principal amount of its outstanding 7.125 % senior notes due 2043.

On February 16, 2021, we fully redeemed all $ 235 million aggregate principal amount of our outstanding 7.000 % Senior Notes due 2056.

(7) Accounts Receivable

5 unchanged sentences

Total accounts receivable 425 553

allowance for doubtful accounts

allowance for credit losses ( 61 ) ( 39 )

Accounts receivable, less allowance $ 364 514

We are exposed to concentrations of credit risk from residential and business customers within our local service area and from other telecommunications service providers.

No customers individually represented more than 10% of our accounts receivable for all periods presented herein.

We are exposed to concentrations of credit risk from our customers.

We generally do not require collateral to secure our receivable balances.

2 unchanged sentences

We have not experienced any significant loss associated with these purchased receivables.

The following table presents details of our allowance for doubtful accounts:

The following table presents details of our allowance for credit losses:

Balance Additions Deductions Ending

(Dollars in millions)

2020 $ 39 66 ( 44 ) 61

2019 $ 41 51 ( 53 ) 39

2018 $ 47 60 ( 66 ) 41

_______________________________________________________________________________

(1) On January 1, 2020, we adopted ASU 2016-13 "Measurement of Credit Losses on Financial Instruments" and recognized a cumulative adjustment to our accumulated deficit as of the date of adoption of $ 3 million, net of $ 1 million tax effect.

This adjustment is included within "Deductions".

Please refer to Note 5—Credit Losses on Financial Instruments for more information.

(8) Property, Plant and Equipment

Net property, plant and equipment is composed of the following:

As of December 31,

Lives As of December 31,

(Dollars in millions)

Property, plant and equipment:

Land N/A $ 332 332

Fiber, conduit and other outside plant (1)

15 - 45 years

Central office and other network electronics (2)

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We recorded depreciation expense of $ 834 million, $ 831 million and $ 855 million for the years ended December 31, 2020, 2019 and 2018, respectively.

(9) Severance

Periodically, we reduce our workforce and accrue liabilities for the related severance costs.

These workforce reductions result primarily from the increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workload demands due to the loss of customers purchasing certain services.

We report severance liabilities within accrued expenses and other liabilities-salaries and benefits in our consolidated balance sheets and report severance expenses in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations.

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Pension and Post-Retirement Benefits

QCII's post-retirement benefit plans were merged into CenturyLink'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 was renamed the CenturyLink Combined Pension Plan.

Based on current laws and circumstances, (i) CenturyLink was not required to make a cash contribution to the CenturyLink Combined Pension Plan in 2019 and (ii) CenturyLink does not expect it will be required to make a contribution in 2020.

The amount of required contributions to the CenturyLink Combined Pension Plan in 2020 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.

CenturyLink occasionally makes voluntary contributions in addition to required contributions, and CenturyLink made such voluntary cash contributions of $ 500 million to the CenturyLink Combined Pension Plan during 2018 .

CenturyLink did no t make a voluntary contribution in 2019 and does not currently expect to make a voluntary contribution in 2020 .

The unfunded status of CenturyLink's qualified pension plan for accounting purposes was $ 1.7 billion and $ 1.6 billion as of December 31, 2019 and 2018 , respectively, which includes the merged QCII qualified pension plan.

The unfunded status of CenturyLink's post-retirement benefit plans for accounting purposes was $ 3.0 billion for both periods as of December 31, 2019 and 2018 .

CenturyLink 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 CenturyLink’s intercompany cash management process.

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.

Based on current laws and circumstances, (i) Lumen Technologies was not required to make a cash contribution to the Lumen Combined Pension Plan in 2020 and (ii) Lumen Technologies does not expect it will be required to make a contribution in 2021.

The amount of required contributions to the Lumen Combined Pension Plan in 2021 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, and Lumen Technologies made such voluntary cash contributions of $ 500 million to the Lumen Combined Pension Plan during 2018.

Lumen Technologies did no t make a voluntary contribution in 2019 or 2020.

The unfunded status of Lumen's qualified pension plan for accounting purposes was $ 1.7 billion as of December 31, 2020 and 2019, which includes the merged QCII qualified pension plan.

The unfunded status of Lumen's post-retirement benefit plans for accounting purposes was $ 3.0 billion as of December 31, 2020 and 2019.

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.

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

We were allocated $ 40 million of pension service costs and $ 11 million of post-retirement service costs during the year ended December 31, 2019 , which represented 70 % of CenturyLink's total pension and post-retirement service costs for the year.

We were allocated $ 41 million of pension service costs and $ 10 million of post-retirement service costs during the year ended December 31, 2020, which represented 70 % of Lumen's total pension and post-retirement service costs for the year.

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 for the year ended December 31, 2020.

We were allocated $ 46 million of pension service costs and $ 11 million of post-retirement service costs during the year ended December 31, 2018 , which represented 70 % of CenturyLink's total pension and post-retirement service costs for the year.

We were allocated $ 40 million of pension service costs and $ 11 million of post-retirement service costs during the year ended December 31, 2019, which represented 70 % of Lumen's total pension and post-retirement service costs for the year.

We were allocated $ 44 million of pension service costs and $ 12 million of post-retirement service costs during the year ended December 31, 2017 , which represented 70 % of CenturyLink's total pension and post-retirement service costs for the year.

We were allocated $ 46 million of pension service costs and $ 11 million of post-retirement service costs during the year ended December 31, 2018, which represented 70 % of Lumen's total pension and post-retirement service costs for the year.

CenturyLink sponsors a noncontributory qualified defined benefit pension plan that covers certain of our eligible employees.

Lumen Technologies sponsors a noncontributory qualified defined benefit pension plan that covers certain of our eligible employees.

The CenturyLink Combined Pension Plan also provides survivor and disability benefits to certain employees.

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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 CenturyLink.

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.

CenturyLink maintains post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees.

The QCII post-retirement benefit plans were merged into CenturyLink's post-retirement benefit plans on January 1, 2012.

Lumen Technologies maintains post-retirement benefit plans that provide health care and life insurance benefits 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, CenturyLink considers numerous assumptions, estimates and judgments, including but not limited to, discount rates, health care cost trend rates and plan amendments.

During the third quarter of 2019, we renewed a collective bargaining agreement for three years which covers approximately 7,500 of our unionized employees.

Effective with the renewal, there were no significant changes to the existing benefits for the approximately 7,500 active employees and eligible post-1990 retirees who are former represented employees.

This agreement expires in April 2023.

The terms of the post-retirement health care and life insurance plans between CenturyLink and its eligible non-represented employees and its eligible post-1990 non-represented retirees are established by CenturyLink and are subject to change at its discretion.

CenturyLink 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.

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.

During the third quarter of 2019, we renewed a collective bargaining agreement which covers our unionized employees.

The terms of the new agreement had no material impact on the post-retirement benefit plans.

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, CenturyLink's contribution under its post-1990 non-represented retirees' health care plan is capped at a specific dollar amount.

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

CenturyLink sponsors post-retirement health care plans with several benefit options that provide prescription drug benefits that CenturyLink deems actuarially equivalent to or exceeding Medicare Part D.

CenturyLink 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.

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

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Our health care benefit expense for current employees was $ 132 million, $ 171 million and $ 211 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Employees' group basic life insurance plans are fully insured and the premiums are paid by CenturyLink.

CenturyLink sponsors qualified defined contribution plans covering substantially all of our employees.

Under these plans, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the plans and by the Internal Revenue Service ("IRS").

Employees' group basic life insurance plans are fully insured and the premiums are paid by Lumen Technologies.

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 $ 46 million , $ 45 million and $ 42 million in expense related to these plans for the years ended December 31, 2019 , 2018 and 2017 , respectively.

We recognized $ 34 million, $ 46 million and $ 45 million in expense related to this plan for the years ended December 31, 2020, 2019 and 2018, respectively.

(11) Share-based Compensation

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We recognized an income tax benefit from our compensation expense of approximately $ 5 million, $ 6 million and $ 6 million during the years ended December 31, 2020, 2019 and 2018, respectively.

Fair Value Disclosure

(12) Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable, note payable-affiliate and long-term debt, excluding finance lease and other obligations.

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The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:

Description of Input

Observable inputs such as quoted market prices in active markets.

Inputs other than quoted prices in active markets that are either directly or indirectly observable.

Unobservable inputs in which little or no market data exists.

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 long-term debt, excluding finance lease and other obligations, as well as the input levels used to determine the fair values:

As of December 31, 2019

As of December 31, 2018

As of December 31, 2020 As of December 31, 2019

Level Carrying

Value Carrying

(Dollars in millions)

Liabilities-Long-term debt (excluding finance lease and other obligations)

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law.

The Act reduces the U.S.

corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S.

taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.

As a result of the reduction in the U.S.

corporate income tax rate from 35% to 21% , we re-measured our net deferred tax liabilities at December 31, 2017 and recognized a provisional tax benefit of $ 555 million in our consolidated statement of operations for the year ended December 31, 2017.

Upon completion of our re-measurement during 2018 there was no material change to the provisional amount recorded in 2017.

The components of the income tax expense (benefit) from continuing operations are as follows:

2 $ 3,328 3,532 5,941 6,258

(13) Income Taxes

The components of the income tax expense from continuing operations are as follows:

Years Ended December 31,

2020 2019 2018

(Dollars in millions)

Income tax expense (benefit):

Federal and foreign

State and local

Total current

Income tax expense:

Federal and foreign

Current $ 425 415 ( 39 )

Deferred 40 95 408

State and local

Total deferred

Current 128 126 31

Deferred 2 5 94

Income tax expense $ 595 641 494

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Years Ended December 31,

2020 2019 2018

Effective income tax rate:

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Accounting method changes — % — % ( 3.9 ) %

Other 0.4 % 0.9 % ( 0.3 ) %

Effective income tax rate 25.8 % 26.0 % 22.9 %

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

The effective tax rate for the year ended December 31, 2017 reflects the benefit of $ 555 million from the re-measurement of deferred taxes as noted above.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:

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(Dollars in millions)

Deferred tax assets and liabilities:

Deferred tax liabilities:

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At December 31, 2020, we have established a valuation allowance of $ 8 million as it is not more likely than not that this amount of deferred tax assets will be realized.

As of December 31, 2020, the $ 1.2 billion net deferred tax liability is reflected as a $ 1.2 billion long-term liability and $ 2 million is reflected as a noncurrent deferred tax asset in other, net on our consolidated balance sheets.

As of December 31, 2019, the entire net deferred tax liability is reflected as a long-term liability.

With few exceptions, we are no longer subject to U.S.

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A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2020 and 2019 are as follows:

Years ended December 31,

(Dollars in millions)

Unrecognized tax benefits at January 1,

Unrecognized tax benefits at beginning of period $ 414 433

Increase due to tax positions taken in a prior year — —

Decrease due to tax positions taken in a prior year ( 26 ) ( 19 )

Unrecognized tax benefits at December 31,

Unrecognized tax benefits at end of period $ 388 414

The total amount of unrecognized tax benefits (including interest and net of federal benefit) that, if recognized, would impact the effective income tax rate was $ 422 million and $ 432 million as of December 31, 2020 and 2019, respectively.

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We categorize our products, services and revenue among the following six categories:

IP and Data Services , which include primarily VPN data networks, Ethernet, IP and other ancillary services;

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

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

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These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from our customers;

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

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

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

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Years Ended December 31,

2020 2019 2018

(Dollars in millions)

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Substantially all of our consolidated revenue comes from customers located in the United States.

We recognize revenue in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers.

Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies.

The USF surcharges are assigned to the products and services categories based on the underlying revenue.

We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.

The following table provides the amount of USF surcharges and transaction taxes:

Years Ended December 31,

(Dollars in millions)

USF surcharges and transaction taxes

Our operations are integrated into and reported as part of the consolidated segment data of CenturyLink.

CenturyLink's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission.

Our operations are integrated into and reported as part of the consolidated segment data of Lumen Technologies.

Lumen's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission.

Consequently, we do not provide our discrete financial information to the CODM on a regular basis.

As such, we believe we have one reportable segment.

As such, we determined that we have one reportable segment.

(15) Affiliate Transactions

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

We provide telecommunications service to our affiliates that we also provide to external customers.

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

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Our affiliates charge us for these services based on FDC.

Quarterly Financial Data (Unaudited)

(Dollars in millions)

Operating revenue

Operating income

(Dollars in millions)

Operating revenue

Operating income

Qwest Corporation is currently indebted to an affiliate of our ultimate parent company, Lumen Technologies, under a revolving promissory note.

For additional information, see "Note Payable - Affiliate" in Note 6—Long-Term Debt And Note Payable - Affiliate.

(16) Commitments, Contingencies and Other Items

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Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.

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

Switched Access Disputes

Subsidiaries of CenturyLink, Inc., including us, are among hundreds of companies involved in an industry-wide dispute, raised in nearly 100 federal lawsuits (filed between 2014 and 2016) that have been consolidated in the United States District Court for the Northern District of Texas for pretrial procedures.

The disputes relate to switched access charges that local exchange carriers ("LECs") collect from interexchange carriers ("IXCs") for IXCs' use of LEC's access services.

In the lawsuits, IXCs, including Sprint Communications Company L.P.

("Sprint") and various affiliates of Verizon Communications Inc.

("Verizon"), assert that federal and state laws bar LECs from collecting access charges when IXCs exchange certain types of calls between mobile and wireline devices that are routed through an IXC.

Some of these IXCs have asserted claims seeking refunds of payments for access charges previously paid and relief from future access charges.

In November 2015, the federal court agreed with the LECs and rejected the IXCs' contention that federal law prohibits these particular access charges.

Final judgments have been entered in the consolidated lawsuits and the IXCs are pursuing an appeal.

Separately, some of the defendants, including us, have petitioned the FCC to address these issues on an industry-wide basis.

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

Principal Proceedings

Billing Practices Suits

In June 2017, a former employee of CenturyLink filed an employment lawsuit against CenturyLink claiming that she was wrongfully terminated for alleging that CenturyLink charged some of its retail customers for products and services they did not authorize.

Starting shortly thereafter and continuing since then, and based in part on the allegations made by the former employee, several legal proceedings have been filed.

In June 2017, a former employee of a Lumen Technologies subsidiary filed an employment lawsuit against Lumen Technologies (at the time known as 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.

In June 2017, McLeod v.

CenturyLink, a putative consumer class action, was filed against CenturyLink in the U.S.

District Court for the Central District of California alleging that it charged some of its retail customers for products and services they did not authorize.

A number of other complaints asserting similar claims have been filed in other federal and state courts, as well.

CenturyLink, a consumer class action, was filed against Lumen Technologies in the U.S.

District Court for the Central District of California alleging that Lumen Technologies charged some of its retail customers for products and services they did not authorize.

Other complaints asserting similar claims have been filed in other federal and state courts, as well.

The lawsuits assert claims including fraud, unfair competition, and unjust enrichment.

Also, in June 2017, Craig.

CenturyLink, Inc., et al., a putative securities investor class action, was filed in U.S.

District Court for the Southern District of New York, alleging that it failed to disclose material information regarding improper sales practices, and asserting federal securities law claims.

CenturyLink, Inc., et al., a securities investor class action, was filed in U.S.

District Court for the Southern District of New York, alleging that Lumen Technologies failed to disclose material information regarding improper sales practices, and asserting federal securities law claims.

A number of other cases asserting similar claims have also been filed.

Beginning June 2017, CenturyLink received several shareholder derivative demands addressing related topics.

In August 2017, CenturyLink's Board of Directors formed a special litigation committee of outside directors to address the allegations of impropriety contained in the shareholder derivative demands.

Beginning June 2017, Lumen Technologies received several shareholder derivative demands addressing related topics.

In August 2017, Lumen Technologies' Board of Directors formed a special litigation committee of outside directors to address the allegations of impropriety contained in the shareholder derivative demands.

In April 2018, the special litigation committee concluded its review of the derivative demands and declined to take further action.

Since then, derivative cases were filed.

Two of these cases, Castagna v.

Post and Pinsly v.

Post, were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita.

The remaining derivative cases were filed in federal court in Louisiana and Minnesota.

These cases have been brought on behalf of CenturyLink against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.

The consumer putative class actions, the securities investor putative class actions, and the federal derivative actions have been transferred to the U.S.

Since then, derivative cases were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita and in federal court in Louisiana and Minnesota.

These cases have been brought on behalf of Lumen Technologies against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.

The consumer class actions, the securities investor class actions, and the federal derivative actions were transferred to the U.S.

District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings as In Re:

CenturyLink Sales Practices and Securities Litigation.

Subject to confirmatory discovery and court approval, CenturyLink agreed to settle the consumer putative class actions for payments of $ 15.5 million to compensate class members and of up to $ 3.5 million for administrative costs.

CenturyLink has accrued a contingent liability for those amounts.

Certain class members may elect to opt out of the class settlement and pursue the resolution of their individual claims against us on these issues through various dispute resolution processes, including individual arbitration.

One law firm claims to represent more than 22,000 potential class members.

To the extent that a substantial number of class members, including many of the law firm’s alleged clients, meet the contractual requirements to arbitrate, elect to opt out of the settlement (or otherwise successfully exclude their individual claims), and actually pursue arbitrations, CenturyLink and we could incur a material amount of filing and other arbitrations fees in relation to the administration of those claims.

In July 2017, the Minnesota state attorney general filed State of Minnesota v.

CenturyTel Broadband Services LLC, et al.

in the Anoka County Minnesota District Court, alleging claims of fraud and deceptive trade practices relating to improper consumer sales practices.

CenturyLink has engaged in discussions regarding potential resolutions of these claims with a number of state attorneys general, and have entered into agreements settling the Minnesota suit and certain of the consumer practices claims asserted by state attorneys general.

While CenturyLink does not agree with allegations raised in these matters, it has been willing to consider reasonable settlements where appropriate.

In 2019, we recorded a charge of approximately $ 33 million with respect to the above-described settlements and other consumer litigation related matters.

Lumen Technologies received final approval of the settlement of the consumer class actions for payments totaling $ 15.5 million plus certain notice and administration costs.

Approximately 12,000 potential class members elected to opt out of the class settlement and may elect to pursue their individual claims against Lumen Technologies on these issues through various dispute resolution processes, including individual arbitration.

Subject to certain conditions, Lumen Technologies has agreed to settle the claims of approximately 11,000 such class members asserted by one law firm.

Additionally, Lumen Technologies has reached an agreement settling the securities investor class actions for payment of $ 55 million, which Lumen expects to be paid by its insurers.

The settlement of the securities class claims is subject to court approval.

Lumen 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 state attorneys general.

While Lumen Technologies does not agree with allegations raised in these matters, it has been willing to consider reasonable settlements where appropriate.

Locate Service Investigations

In June 2019, Minnesota and Arizona initiated investigations related to the timeliness of responses by certain of our vendors to requests for marking the location of underground telecommunications facilities.

We, along with CenturyLink and its other subsidiaries are cooperating with the investigations.

We, along with Lumen and its other subsidiaries are cooperating with the investigations.

In February 2020, the Minnesota claims were settled.

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Other Proceedings, Disputes and Contingencies

From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third-party tort actions.

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, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third-party tort actions.

We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of which are seeking substantial recoveries.

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We have several commitments primarily for marketing activities and support services from a variety of vendors to be used in the ordinary course of business totaling $ 18 million at December 31, 2020.

Of this amount, we expect to purchase $ 16 million in 2020 and $ 18 million in 2021 through 2022.

Of this amount, we expect to purchase $ 15 million in 2021 and $ 3 million in 2022.

These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we were contractually committed as of December 31, 2020.

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Total other current assets $ 122 128

Other Noncurrent Liabilities

The following table presents details of other noncurrent liabilities in our consolidated balance sheets:

As of December 31,

(Dollars in millions)

Unrecognized tax benefits $ 448 454

Deferred revenue 108 108

Noncurrent operating lease liability 76 89

Total other noncurrent liabilities $ 685 712

(18) Labor Union Contracts

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During the third quarter of 2019, we reached new agreements with the CWA and IBEW, which represented all of the above noted represented employees.

Therefore, there are no collective bargaining agreements that are scheduled to expire over the next 12 months.

Therefore, there are no collective bargaining agreements that are scheduled to expire over the 12 month period ending December 31, 2021.

We believe that relations with our employees continue to be generally good.

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It is our policy to record these asset transfers based on carrying values.

We declared the following cash dividend to QSC:

We declared and paid the following cash dividend to QSC:

Years Ended December 31,

2020 2019 2018

(Dollars in millions)

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

On March 31, 2017, we distributed our equity interest valued at $ 12 million in a limited liability company to QSC.

The limited liability company's sole asset was a building that was being utilized by an affiliate.

Dividends paid are reflected on our consolidated statement of cash flows as financing activities.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk