What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-23 · 140 added, 102 removed, 211 unchanged (53% of the section changed)

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

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

We are a facilities-based technology and communications company that provides a broad array of integrated communications products and services to our business and mass markets customers.

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

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Products, Services and Revenue

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

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

This category also includes federal and state support payments.

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

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

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

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

We reported our revenue derived from our operations serving our mass markets customers, primarily within the first three categories listed below, and our revenue derived from our operations servicing our business customers, primarily in the 'Harvest', 'Nurture' and 'Grow' categories listed below:

• Other Broadband , under which we provide primarily lower speed broadband services to residential and small business customers utilizing our copper-based network infrastructure;

• Voice and Other, under which we derive revenues from (i) providing local and long-distance voice services, professional services, and other ancillary services, (ii) federal broadband and state support programs, and (iii) equipment, IT solutions and other services;

• Fiber Broadband , under which we provide high speed broadband services to residential and small business customers utilizing our fiber-based network infrastructure;

• Harvest , which includes our legacy services managed for cash flow, including Time Division Multiplexing ("TDM") voice, private line and other legacy services;

• Nurture , which includes our more mature offerings, including primarily ethernet;

• Grow , which includes products and services marketed to our business customers that we anticipate will grow, including dark fiber and wavelengths services;

• Affiliate Services , which are communications services that we also provide to external customers.

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

addition, we provide to our affiliates application development and support services and network support.

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

Changes in the Macroeconomic, Industry and Work Environments

Societal, governmental and macroeconomic changes have impacted us, our customers and our business in several ways since the onset of the COVID-19 pandemic in the U.S.

in March 2020.

Beginning in the second half of 2020 and continuing into 2023, we rationalized our lease footprint and ceased using seven underutilized leased property locations.

These lease cancellations resulted in accelerated lease costs, including $1 million and $3 million of such costs recognized during the years ended December 31, 2021 and 2023, respectively, but will lower our future operating costs.

We did not incur material accelerated lease costs during the year ended December 31, 2022.

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

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

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

Industry developments over the past couple years have increased fiber construction demand.

The resulting increase in construction labor rates increased the cost of enabling units to be capable of receiving our fiber broadband services.

In 2022 and 2021, we believe these factors contributed to a delay in attaining our Quantum Fiber buildout targets.

Continued inflationary pressures, supply constraints or business uncertainty could materially impact our financial results in a variety of ways, including by increasing our expenses, decreasing our revenues, further delaying our network expansion plans or otherwise interfering with our ability to deliver products and services.

For additional information on the impacts of the pandemic and the macroeconomic changes arising therefrom, see (i) the remainder of this item, including "—Liquidity and Capital Resources—Overview of Sources and Uses of Cash" and (ii) Item 1A of this report.

Trends Impacting Our Operations

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

In addition to the above-described impact of the pandemic and its aftermath, our consolidated operations have been, and will continue to be, impacted by the following company-wide trends:

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

• The increasingly digital environment and the growth in online video and gaming require robust, scalable network services.

• The increased use of digital applications, online video, gaming and artificial intelligence has substantially increased demand for robust, scalable network services.

We are continuing to enhance our product capabilities and simplify our product portfolio based on demand and profitability to enable customers to have access to greater bandwidth.

• Businesses continue to adopt distributed, large-scale operating models.

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

• Businesses continue to adopt distributed, global operating models.

We are expanding and enhancing our fiber network, connecting more buildings to our network to generate revenue opportunities and reducing our reliance upon other carriers.

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

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

• Uncertainties regarding our financial performance, leverage and the debt covenant compliance of our affiliates have caused, and may continue to cause, certain of our customers and other third parties to reduce or cease transacting business with us.

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

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

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

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

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

Impact of COVID-19 Pandemic and the Macroeconomic Environment

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

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

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

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

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

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

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

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

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

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

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

Results of Operations

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Operating expenses 6,110 3,694

Operating income 2,755 3,108

Operating (loss) income

Total other expense, net (75) (165)

Income before income taxes 2,590 2,816

(Loss) income before income taxes

Income tax expense 561 671

Net income $ 1,919 2,107

Net (loss) income

$ (831) 1,919

Operating Revenue

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

The following table summarizes our consolidated operating revenue recorded under our revenue categories described in Note 3—Revenue Recognition:

Years Ended December 31, % Change

(Dollars in millions)

Other Broadband $ 1,111 1,275 (13) %

Voice and Other 589 691 (15) %

Fiber Infrastructure 1,955 1,990 (2) %

IP and Data Services 451 473 (5) %

Fiber Broadband 470 461 2 %

Harvest 1,048 1,134 (8) %

Nurture 393 435 (10) %

Grow 145 159 (9) %

Affiliate Services 2,159 2,294 (6) %

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Total operating revenue decreased by $534 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

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

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

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

Within each product category, this decrease was primarily due to:

• Decreases in Other Broadband by $164 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to decreased subscribers to our low speed broadband services;

• Decreases in Voice and Other by $102 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily attributable to (i) a decrease of $87 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 from a decline in voice services and (ii) a decrease of $13 million related to recognition in the first quarter of 2022 of previously deferred revenue related to the CAF II program, which lapsed on December 31, 2021, impacting the year ended December 31, 2023 as compared to the year ended December 31, 2022;

• Decreases in Harvest by $86 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily attributable to declines in legacy voice services for business customers of $58 million;

• Decreases in Nurture by $42 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to declines in Ethernet services.

• Decreases in Grow by $14 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to declines in wavelengths services.

These declines were partially offset by:

• Increases in Fiber Broadband by $9 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 driven by growth in fiber customers and associated with increased rates.

Affiliate services revenue also decreased by $135 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The decreases were primarily due to (i) lower affiliate service revenues of $60 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 due to the transfer of employees to our affiliates, (which lowers our affiliate revenue under our cost allocation methodology) and (ii) decreases of $75 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to declines in the level of services provided to our affiliates.

Operating Expenses

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Operating expenses-affiliates

734 758 (3) %

Depreciation and amortization

823 860 (4) %

Goodwill impairment

Total operating expenses $ 6,110 3,694 65 %

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

These expense classifications may not be comparable to those of other companies.

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Cost of services and products (exclusive of depreciation and amortization) decreased by $38 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

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

These decreases were primarily due to reductions in allocated employee related costs of $58 million and insurance and fees of $10 million.

These decreases were partially offset by higher network expenses of $32 million.

Selling, General and Administrative

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and other selling, general and administrative expenses.

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

Selling, general and administrative expenses increased by $24 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to an increase in employee related expenses of $43 million.

This increase was partially offset by lower marketing and advertising expenses of $13 million and a decrease in bad debt expense of $4 million.

Operating Expenses-Affiliates

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

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

We incur affiliate expenses related to our use of telecommunication services, marketing and employee related support services provided by Lumen Technologies and its subsidiaries.

Operating expenses-affiliates increased by $62 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to $82 million of increased allocated corporate expense due to Lumen's 2022 ILEC divestiture, partially offset by a decrease of $20 million from lower use of affiliate services.

Depreciation and Amortization

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

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

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

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

Depreciation expense decreased by $25 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a decrease of $81 million resulting from annual rate depreciable life changes.

This decrease was partially offset by an increase of $60 million due to net growth in depreciable assets.

Amortization expense decreased by $12 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a decrease of $17 million due to net decrease in amortizable assets.

The decrease was partially offset by an increase of $4 million resulting from annual rate amortizable life changes of software for the period.

Goodwill Impairment

We are required to perform impairment tests related to our goodwill annually, which we perform as of October 31, or sooner if an indicator of impairment occurs.

During the second quarter of 2023, the Company determined circumstances existed indicating it was more likely than not that the carrying value of our reporting unit exceeded its fair value.

Given the continued erosion in Lumen's market capitalization, we determined our quantitative impairment analysis would estimate the fair value of our reporting unit using only the market approach.

When we performed the impairment test during the second quarter of 2023, we concluded the estimated fair value of our reporting unit was greater than the carrying value of equity as of our testing date.

Therefore, we concluded that goodwill was not impaired as of June 30, 2023.

When we performed an impairment test during the fourth quarter of 2023, we concluded the estimated fair value of our reporting unit was less than the carrying value of equity as of our testing date.

As a result, we recorded a non-cash, non-tax-deductible goodwill impairment charge aggregating to $2.4 billion for the year ended December 31, 2023.

When we performed our impairment tests during the fourth quarter of 2022 and 2021, we concluded the estimated fair value of our reporting unit was greater than our carrying value of equity as of our testing date.

Therefore, we concluded no impairment existed as of our annual assessment date in the fourth quarter of 2022 and 2021.

We are currently experiencing competitive, macroeconomic and financial pressures and concerns about our ability to refinance debt in the future.

In 2023, Lumen also experienced a sustained decline in their share price.

These and other factors contributed to us recognizing the above-described goodwill impairment.

If these pressures continue, we may experience additional deterioration in our projected cash flows or make significant changes to our assumptions of discount rates and market multiples.

Any of these could result in additional goodwill impairments in future quarters.

See Note 2—Goodwill and Other Intangible Assets to our consolidated financial statements in Item 8 of Part II of this report for further details on these tests and impairment charges.

Other Consolidated Results

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Interest expense $ (95) (112) (15) %

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

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

Interest income (expense) - affiliate, net

15 (60) (125) %

Other income, net

Total other expense, net

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Income tax expense $ 561 671 (16) %

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

Interest Expense

Interest expense decreased by $17 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

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

This decline was primarily due to higher capitalized interest of $25 million, which was partially offset by the increase in our average interest rate from 6.50% to 6.79%.

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

Interest Expense - Affiliate, Net

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

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

Interest expense - affiliate, net changed by $75 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

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

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

Other (Expense) Income, Net

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

Years Ended December 31,

(Dollars in millions)

Loss on debt extinguishment $ — (8)

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

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

Income Tax Expense

For the years ended December 31, 2023 and 2022, our effective income tax rate was (207.8)% and 25.9%, respectively.

The effective tax rate for the year ended December 31, 2023 includes a $505 million unfavorable aggregate impact of non-deductible goodwill impairment.

See Note 12—Income Taxes to our consolidated financial statements in Item 8 of Part II of this report and "Critical Accounting Policies and Estimates—Income Taxes" below for additional information.

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

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The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenue and expenses.

We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations related to (i) affiliate transactions and (ii) income taxes.

We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations related to (i) goodwill and other intangible assets, (ii) affiliate transactions and (iii) income taxes.

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

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

Goodwill and Other Intangible Assets

We have a significant amount of goodwill that is assessed at least annually for impairment.

At December 31, 2023, goodwill and intangible assets totaled $7.1 billion, or 43%, of our total assets.

The impairment analyses of these assets are considered critical because of their significance to us and our segments and the subjective nature of certain assumptions used to estimate fair value.

Intangible assets arising from business combinations, such as goodwill and capitalized software are initially recorded at estimated fair value.

We amortize capitalized software using the straight-line method primarily over estimated lives ranging up to 7 years.

We annually review the estimated lives and methods used to amortize our other intangible assets.

The amount of future amortization expense may differ materially from current amounts, depending on the results of our annual reviews.

Our goodwill was derived from Lumen's acquisition of us where the purchase price exceeded the fair value of the net assets acquired.

We are required to assess our goodwill for impairment annually, or more frequently if an event occurs or circumstances change that indicates it is more likely than not the fair values of any of our reporting units were less than their carrying values.

In assessing goodwill for impairment, we may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

Our annual impairment assessment date for goodwill was October 31, at which date we compared our estimated fair value of equity of our reporting unit to the carrying value of equity.

If the estimated fair value was greater than the carrying value, we concluded that no impairment exists.

If the estimated fair value was less than the carrying value, we recorded a non-cash impairment charge equal to the excess amount.

Depending on the facts and circumstances, we typically estimated the fair value by considering either or both of (i) a discounted cash flow method, which is based on the present value of projected cash flows over a discrete projection period and a terminal value, which is based on the expected normalized cash flows following the discrete projection period, and (ii) a market approach, which includes the use of multiples of publicly-traded companies whose services are comparable to ours.

With respect to our analysis using the discounted cash flow method, the timing and amount of projected cash flows under these forecasts required estimates developed from our long-range plan, which is informed by wireline industry trends, the competitive landscape, product lifecycles, operational initiatives, capital allocation plans and other company-specific and external factors that influence our business.

These projected cash flows consider recent historical results and are consistent with the Company's short-term financial forecasts and long-term business strategies.

The development of these projected cash flows, and the discount rate applied to such cash flows, is subject to inherent uncertainties, and actual results could vary significantly from such estimates.

Our determination of the discount rate was based on a weighted average cost of capital approach, which uses a market participant’s cost of equity and after-tax cost of debt and reflects certain risks inherent in the projected cash flows.

With respect to our analysis using the market approach, the fair value was estimated based upon a market multiple applied to revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA"), adjusted for an appropriate control premium based on recent market transactions.

The fair value of our reporting unit was estimated under the market approach, using revenue and EBITDA market multiples weighted depending on the characteristics of the reporting unit.

We performed sensitivity analyses that considered a range of discount rates and a range of EBITDA market multiples and we believe the estimates, judgments, assumptions and allocation methods used by us were reasonable.

For additional information on our goodwill balances and results of our impairment analyses, see Note 2—Goodwill And Other Intangible Assets for additional information.

Affiliate Transactions

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

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

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

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

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

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

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

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

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

Lumen Technologies treats our consolidated results as if we were a separate taxpayer.

We are required to pay our tax liabilities to Lumen Technologies based upon our separate return taxable income.

We are also included in the combined state tax returns filed by Lumen Technologies.

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

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

See note under "Results of Operations—Goodwill Impairment" for consideration of the potential for additional goodwill impairments in future quarters.

Capital Expenditures

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

The amount of Lumen’s consolidated capital investment, and our portion thereof, is influenced by, among other things, demand for Lumen’s services and products, cash flow generated by operating activities, cash required for other purposes, regulatory considerations (such governmentally mandated infrastructure buildout requirements), and the availability of requisite supplies, labor and permits.

The amount of Lumen’s consolidated capital investment, and our portion thereof, is influenced by, among other things, demand for Lumen’s services and products, our network requirements, cash flow generated by operating activities, cash required for debt services and other purposes, regulatory considerations (such governmentally mandated infrastructure buildout requirements), and the availability of requisite supplies, labor and permits.

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

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Debt and Other Financing Arrangements

On January 22, 2024, Lumen, Level 3 Financing and Qwest entered into an amended and restated transaction support agreement with a group of creditors representing over $12.5 billion of their combined outstanding indebtedness to, among other things, extend maturities of the debt instruments of Lumen and Level 3 Financing and provide Lumen with access to a new revolving credit facility in an amount expected to be approximately $1.0 billion.

In addition, the creditors have committed to provide $1.325 billion of financing to Lumen through new long-term debt.

The consummation of the transactions contemplated by the amended and restated transaction support agreement is subject to the satisfaction of various closing conditions.

For more information, see Note 18—Subsequent Event, to our consolidated financial statements included under Item 8 of Part II of this annual report.

As of December 31, 2023, we had a face amount of approximately $2.2 billion aggregate outstanding indebtedness (excluding finance leases, unamortized premiums, net, unamortized debt issuance costs, and Note Payable - Affiliate).

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Agency Credit Ratings

Standard & Poor's BB

Standard & Poor's B

Moody's Investors Service, Inc.

Fitch Ratings BB

Fitch Ratings B+

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

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

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

We cannot provide any assurances that we will be able to borrow additional funds on favorable terms, or at all.

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

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

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

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

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

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

Subject to market conditions, restrictions under our debt covenants, and other limitations, we may pursue similar transactions in the future to the extent feasible.

See Note 6—Long-Term Debt and Note Payable - Affiliate to our consolidated financial statements in Item 8 of Part II of this report for additional information.

Note Payable - Affiliate

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

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

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

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

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

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

and its subsidiaries.

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

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

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

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

We are permitted to borrow up to $2.0 billion from our parent Lumen Technologies under a revolving promissory note.

On September 30, 2022, we repaid all amounts owed to Lumen Technologies under this promissory note.

Since that time, we have not owed any amounts to Lumen Technologies under this promissory note.

For more information, see "Note Payable—Affiliate" in Note 6—Long-Term Debt and Note Payable - Affiliate — to the financial statements appearing elsewhere herein.

Future Contractual Obligations

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Federal Broadband Support Programs

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

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

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

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

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

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

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

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

For additional information on these programs, see "Business—Regulation" in Item 1 of Part I of this report and see "Risk Factors—Financial Risks" in Item 1A of Part I of this report.

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

In November 2021, the U.S.

In early 2020, the FCC created the Rural Digital Opportunity Fund ( the "RDOF"), which is a federal support program designed to fund broadband development in rural America.

For the first phase of this program, RDOF Phase I, the FCC ultimately awarded $6.4 billion in support payments to be paid in equal monthly installments over 10 years.

Lumen Technologies was awarded RDOF funding in several of the states in which we operate and began receiving monthly support payments during the second quarter of 2022, our share of which is not material.

For additional information on these programs, see (i) Note 3—Revenue Recognition to our consolidated financial statements in Item 8 of Part II of this report, (ii)"Business—Regulation" in Item 1 of Part I of this report and (iii) "Risk Factors—Financial Risks" in Item 1A of Part I of this report.

In late 2021, the U.S.

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

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

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

Although it remains premature to speculate on the potential impact of this legislation on us, we anticipate that the release of this funding would increase competition for broadband customers in newly-served areas.

Cash Flow Activities

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Operating Activities

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

Net cash provided by operating activities decreased by $237 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to a net loss adjusted for non-cash items and partially offset by increases related to changes in working capital.

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

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Investing Activities

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

Net cash used in investing activities decreased by $883 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to a decrease in advances to affiliates, partially offset by an increase in capital expenditures.

Financing Activities

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

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

Net cash used in financing activities increased by $650 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to an increase in dividends paid to our parent, partially offset by the timing of payments of the Note Payable - Affiliate.

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

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At December 31, 2023, we had approximately $2.0 billion (excluding finance lease and other obligations) of long-term debt outstanding which bears interest at fixed rates and is therefore not exposed to interest rate risk.

At December 31, 2022, we had $215 million floating rate debt exposed to changes in the London InterBank Offered Rate (LIBOR).

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

At December 31, 2023, we had $215 million floating rate debt exposed to changes in the Secured Overnight Financing Rate ("SOFR").

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

At December 31, 2023, we had no debt which was owed to an affiliate of our ultimate parent, Lumen Technologies, Inc under the note payable-affiliate.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis